Just a few years back, Groupon and similar services were the toast of the Internet. Groupon spurned a $6 billion buyout offer from Google. Amazon invested $150 million in a similar site, LivingSocial. Imitators sprouted up everywhere. The sites, along with “flash sites” like Gilt Groupe, seemed emblematic of a new “discount culture.” 

But now, things aren’t looking so hot. Groupon’s IPO has had its issues. And there have been a slew of articles asking if consumers are “already over” Groupon and its imitators. So what went wrong? 

There are many obvious culprits: Groupon spawned too many copycats—some of which, like the highly promoted Facebook Deals, have already died. But some also point to a fundamental problem with the model behind these sites.

The “group deal” concept was set up as a win-win-win. Consumers got a fabulous discount at a reputable local (and sometimes national) company. Retailers got publicity and access to a treasure trove of new customers. And, of course, the sites got a cut.

But as it turned out, retailers weren’t always sure they were landing in the “win” column. Not only were they cajoled to offer steep discounts (50 percent or more), but Groupon generally took a 50 percent cut of what was paid for the coupon. So, while businesses may have been offering half off, when it came to their bottom lines, they were really getting 75 percent less than usual. Many began wondering if it might just make sense to offer a straight 50 percent off sale, and keep the money for themselves.

What’s more, the greatest strength of Groupon for retailers—it drove a huge amount of traffic—could sometimes also be its greatest weakness. The steep discounts, along with the site’s cut, meant that retailers were often losing money on every sale. Which is okay for a few sales, but can be perilous for several hundred. Groupon always argued the deals shouldn’t necessarily be viewed as profitable in themselves, but as a “marketing expense.” And yet, these deals on occasion hurt the retailers’ image. Some businesses became overwhelmed, and were forced to offer substandard service. Indeed, one study showed that businesses that offered Groupons took a hit on Yelp reviews. In addition, studies showed that “group deals” didn’t necessarily bring in new or repeat customers.

All in all, according to one survey, only half of businesses that used a “group deal” service would definitely do it again.

This great post raises some things these sites could do to help make the offers more profitable for retailers, but concludes:

The core problem is the interests of the deal companies are directly opposed to the interests of the business. The deal companies want to sell as many deals as possible to all comers. Not only does this generate more revenue, it’s more operationally efficient. (It’s much easier to write one description for 2,000 coupons than 20 descriptions for deals of 100 each.) 

Others are developing new models that could work in the retailer’s favor: 

In March, [Seth] Priebatsch, the founder and CEO of location-based startup SCVNGR, launched LevelUp … The current iteration is a free rewards service that links to a customers’ credit or debit card and works through their phone. Merchants use it to give customers a small discount on their first buy, then reward repeat customers with instant credit toward each future purchase …

So far, Priebatsch says he’s seen LevelUp customers return to participating businesses 45 percent of the time. 

In theory, jewelers should welcome “group deal” sites: They target, and drive traffic to, small local businesses. Instead, there is a lot of mistrust. And while group deal sites are far from dead, if they are to thrive, they have to re-think how they deal with their real customer—the local small businesses—and insure they don’t get the short end of the stick.

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