Online bargain companies continue to explode in popularity. Amazon.com, the godfather of internet retailing, is now rumored as a financial source for LivingSocial—a provider of daily-deal specials.
LivingSocial is a startup based in Washington, D.C., that is already backed by several venture capital sources and angel investors. But the investment contemplated from Amazon is estimated at $100,000,000. That’s a big leap for LivingSocial, which is planning to match the popularity of its rival Groupon.
Daily-deal companies provide deep discounts on deals with local merchants. This permits the local retailers to reach new customers with online marketing. LivingSocial and Groupon are not based upon sophisticated computer algorithms that provide geographically directed advertising. Instead, they use a more old-fashioned approach. That is, they use local salespeople to solicit deals from local merchants seeking to increase their customer bases. Then, writers are deployed to provide well-written e-mail messages that attract buyers.
This varies from other uses of social networks for spreading consumer offerings. Professional copywriting is more likely to entice new customers. The internet is simply deployed as an efficient means for disbursing the messages.
Amazon actually owns a minor venture in the daily-deal industry—Woot.com. However, Woot mostly provides discounted electronics. Reselling packaged deals of local merchants—like Groupon and LivingSocial provide—offers far larger profit margins than liquidating electronic equipment. Acquiring new customers is such a challenge for the merchants that they can deeply discount their products and services. That leaves plenty of profit for LivingSocial and Groupon.
The success of LivingSocial simply means more investment capital permits the company to expand into new cities. Groupon is also reportedly raising funds for expansion. The reported pricing of the Groupon investment places a $3 billion value on the company, which is higher than the market value of Yahoo.
Both Groupon and LivingSocial have conveyed large backlogs of merchants wanting their deals offered. LivingSocial forecasts 2010 revenue of $500,000,000. A connection to Amazon for additional capital certainly provides a powerful avenue for expansion by LivingSocial.
Success requires more than a connection to raising money. In the case of LivingSocial this extra element is the recent hiring of a new CFO who was previously involved in a company backed by the same venture capitalists that funded Amazon back in the 1990s.