The Daily Deal competitive landscape is an extremely intense land grab for email subscribers. Here we review some of the fastest growing new entrants, and explore the keys to their continued growth.
How To Grow A Daily Deal Site
For the most part, daily deal services grow by acquiring users through various online advertising channels. The most important determinant is the Annual Revenue Per Subscriber (ARPS), which drives the Cost Per Acquisition (CPA) each service can afford to pay when acquiring new subscribers. The higher the Lifetime Value, the higher the CPA, the more users the service can buy and the faster the service will grow.
ARPS is determined by the following formula:
Avg Deal Price * Avg Commission % * Deals Per Year * Conversion % Per Deal * (1 – Annual Churn) = ARPS
Ignoring profitability (fierce competition), Cost Per Acqusition is determined by:
ARPS / (1 – Viral Coefficient) = Max CPA
Making simplifying assumptions about the cohorts / quality of users, Daily Deal services grow by spending as much as possible within their Max CPA.
A remaining factor is the cities in which a service operates. The number of cities functions as a multiplier to the subscribers a service can add (more cities means more people). More importantly, the cost to acquire users varies by city. Cities with less daily deal competition have a lower average CPA, thus services can grow there more quickly.
How These New Services Are Succeeding
The challengers are focusing on various components of these formulas to drive their growth:
Avg Deal Price. All else being equal, a higher average deal price translates into a higher CPA. Tippr offers the highest average deal price of the group, at $51, followed by DealOn at $43.
Conversion %. While a higher deal price means more revenue per deal, on the other hand, a low pricepoint may drive more conversions. KGB Deals has perhaps been the most aggressive, with deals including $4 for a $12.50 Movie Ticket at any AMC theatre.
Viral Coefficient. The higher the viral coefficient, the higher effective CPA a service can afford to spend. GigaOm’s Liz Gannes wrote a thorough review of the viral levers HomeRun is building into its product.
Cities: DealOn, Tippr and KGB Deals have been aggressively expanding to new markets.
Disadvantages For The Challengers
While we believe the daily deal space will grow increasingly fragmented, there are some returns to scale favouring the larger players.
Deals per Year. The sales, customer service and content costs for creating a new and exciting offer every day can be time consuming, especially across multiple cities.
Commission %. While Groupon’s commission typically range from 30-50%, newer players with smaller distribution may experience margin compression as competition amongst the daily deal sites increase.