After obsessing over the SteepAndCheap and Woot business models last year (and let’s not forget the insane and terrifying Swoopo), this year has given us something new to chew on: GroupOn and its group buying clones (this spreadsheet lists a ton of them).

These are great businesses. Clear value proposition: deep discounts. Kept simple: one deal a day (basically). And they’re making money hand over fist. Love it. Naturally, my entrepreneurial friends and have been asking: Should we start a clone—doing something that improves on the original concept?

One of our earlier complaints was that it became tedious and irrelevant to constantly be presented with salon/waxing/facial deals. As a guy, I got tired of seeing so many deals and business that clearly cater to women’s grooming needs. But the category is starting to get broader and smarter. Some now let you opt-in to deal channels—you select what kind deals to see, and they’re delivered to your inbox. YipIt aggregates deals from multiple sites—a great time savings.

Great deals. Add aggregation. Add filtering. A good UX evolution. And I believe there’s room for more innovation on the user experience side of things. I may delve into that specifically in a future post, after I decide the answer is “no” to the question I posed: should we start a clone? (Hey, I might need to use my ideas in a business!)

Why this question today? Because I awoke to this headline in the New York Daily News: “6 things you should NEVER pay full price for”

This is great news for consumers.

Uh oh.

While it’s great for consumers, and the deal sites are scooping up the cash, businesses have unwittingly found themselves in a race to the bottom of the pricing barrel. They may drown there.

Sure it’s been nice for them to generate new leads. And who knows—some of these “coupon customers” might become regular customers paying full price for goods and services. That’s the goal, right?

Let’s look at how else have these businesses benefited:

  • They’ve been able to focus advertising dollars on one place that is sure to bust the doors down. That makes advertising a lot easier, more effective, and more trackable;
  • I’m assuming they’ve earned a small purse on breakage (customers who paid but didn’t redeem their certificates in time). You don’t get that from the Entertainment Book, something these sites are sometimes compared to;
  • In a tough economy, they’ve filled excess capacity that was costing them even more money or was threatening their business. Even if they’re not profiting on these deals in the short or long term, cash is flowing to cover expenses and potentially reduce staff layoffs; and,
  • They’ve scored a little awareness. Maybe next time someone’s thinking about Business X, they’ll remember the kicky write-up from GroupOn, the logo, the name of a massage service they really want to get someday.

But can the good times last?

Here’s what I think the Daily News article unknowingly portends for these discount sites:

Deal quality declines
$5 for $10 worth of rolled sandwiches at Roly Poly (Groupon, Birmingham, AL, May 18)? $9 for $20 worth of food at Atomic Wings (BuyWithMe.com, New York, May 18)? Okay. But Restaurant.com regularly offers up to 90% off dining (promotional price, appearing regularly in my inbox) at participating restaurants, and I’m not sure how well that’s going (see next section). In other categories, existing customers are going to start using these coupons and destroy profitability for the businesses unless measures are put in place to stem repeat use.

The implication: once the deal value falls, consumers will lose interest and the coupon sites will be competing for less revenue. Granted, by then there will be a whole lot more cities covered by these businesses, and a larger pool of customers…but how long will people stick around for a few bucks at a place they don’t really want to go to anyway?

Businesses back out
My wife and I have bought some of those Restaurant.com gift certificates. Here’s what I don’t understand: if we keep buying and using $25 gift certificates for $2 each for our local sushi place, how will they ever make money? The more Restaurant.com is used, the less they make. Logically, the sushi place stopped accepting the vouchers.) And in the last two weeks, two other restaurants we had Restaurant.com gift certificates for went out of business. Is it any surprise?

The implication: a decline in quality and variety of businesses participating will lead to customer attrition.

Participating businesses will be more obscure
Bull riding.

Shooting ranges.

Harbor cruises.

Sailing lessons.

Vibration training? Here’s a new one: “Does a full-body workout in just 30 minutes sound too good to be true? Then you’ve got to try a Power Plate class at Station Fitness, a vibration-training studio in the Meatpacking District. Exercising on these machines boosts your strength, circulation and metabolism — no wonder Madonna’s a fan.” (Gilt City, New York, May 18—Join Gilt Groupe with my referral link for access.) Right.

Look, this might be a really good idea for these obscure, niche products and services—things you just don’t do regularly because, well, why would you? That prevents coupon over-use from any one person. Although bets are now being taken on how long vibration training will last.

The implication: you know, this just might work. But if the “not everyday” kind of businesses take over this space, consumer attention will fall…until they want to do that something special…then they’ll know to look here for a coupon before booking (and isn’t this a double edged sword for the business?).

Participation becomes more strategic
Avoid losing your shirt to repeated coupon users by providing discounts on more unique items. DelPosto restaurant is offering 61% off their 10-person private dining room. (Gilt City, New York, May 18—Join Gilt Groupe with my referral link for access.) That’s smart. The private room doesn’t get used every night. This is a clever way to increase total volume without eroding the day-to-day business. And it’s a great way to simply advertise their private space. Less coupon abuse. And now I know, even if I don’t take the deal, that DelPosto has a great private room for 10. I might consider it for a small event.

The implication: the appeal may be reduced for consumers, but using this business model for things like the private room may help keep at least some of the coupon sites in business, and will keep businesses content.

Value further down the CRM chain must be created
If the coupon sites are smart, while the going’s still good they’ll look for opportunities to shore up the back end of the customer relationship chain. They’ll find ways to help these businesses keep the customers they’re driving through the doors with these profit-eroding deals. And they’ll find ways to keep customers coming back without a half price coupon in hand every time. Maybe turn to customer referral programs—you have to bring someone else with you to get the deal? Keep getting your deals if you bring us a steady supply of new customers? This area looks ready for innovation. Foursquare tie-in anyone?

The implication: if they can keep these businesses thriving over the long term, more of them will stay in the coupon sites’ programs, which will help keep consumers’ attention and ultimately keep the coupon sites’ registers ringing.

The battle of the aggregators must be won
After all the other business challenges are met, how does any one of the coupon sites beat the aggregators? If this whole business is built and marketed to consumers on the premise of them saving money, why would someone waste time with GroupOn when they could get GroupOn’s deals and dozens more (and only the types of deals they choose to be notified about) through YipIt? Each coupon site has to develop a unique value proposition to win the hearts and minds of consumers. Either that, or capitalize the hell out of themselves and hope to withstand the onslaught of the clones. So far, GroupOn is doing just that. But how long is that strategy sustainable? Not very long in light of the other challenges it needs to spend its money on as well.

The implication: people become loyal to brands that deliver value to them on an ongoing basis. The aggregators right now seem to deliver the most value for time spent. If any given coupon site wants to make it, it must match and/or exceed that value.

We hold these truths to be self evident:

  • People will always want a deal (and they’ll work and scheme a little to get a good one).
  • Businesses always want new customers.
  • Businesses always want to keep the customers they have.

Local businesses are also starved for time, and often lack expertise and bags of money in advertising and marketing.

So far, these truths have fueled very successful start-ups in the group buying space. As this space heats up (it is currently burning like jet fuel) the competition for consumers will be intense. Victory will be hard earned—and expensive.

So, should we start a clone? Yes, if we can bend the arc of the current business model to provide real, sustainable value to businesses and consumers. That, and $50 million in venture money, will surely lead to success.