Living Social, the Good and the Bad

What really happens...What really happens...PORTLAND, OR -- For Immediate Release --   First, a warm welcome to the 450 customers who bought our LivingSocial coupon. We've had a lot of fun meeting new customers, and helping them put together great recipes or find fun gifts (beer socks, anyone?). Portland is a super place to live for DIY food and beverage geeks and we really enjoy serving the community.

I'd like to say a couple things about LivingSocial. Like Groupon, LivingSocial promotes steeply-discounted daily deals at local businesses. It is a great deal for customers, as they get to spend $20 in our store but it only costs them $10. We did have some problems with LivingSocial, however. Read on for our full report...

LivingSocial May Leave Business Owners Unhappy

If you are a business owner thinking about doing a deal on LivingSocial (or Groupon), the key to success is to know what you are getting into. In our case, we could afford to lose money on each LivingSocial customer, in exchange for getting one new person in our store. We did the math and figured it would be worthwhile, assuming there is a limit of one voucher per person, period. We agreed on a contract that stipulated "limit one per person".

What ended up happening, is LivingSocial let people buy as many vouchers as they wanted to, whether they were gifts or not. We ended up selling over 640 vouchers, but to only 440 people. Some of these have turned out to be gifts, but a majority were people stocking up on an awesome deal.

Because LivingSocial did not enforce the one-per-person rule, we ended up paying a lot more, for fewer actual customers.

LivingSocial does not enforce their contract

The problem here is that our contract with living social says this "Limit 1 per person, additional as gifts.", and living social interprets this as "buy as many as you want for yourself, or gift multiple vouchers to one person". This is good for their sales, they take a major percentage of the deal, but it is bad for the business as they lose money multiple times for a single customer. The two images here show, on LivingSocial's own reports, multiple vouchers purchased by one person, and also multiple gifts going to one person. Both of these issues were very common.
What Happened to one per person?: Click to enlarge.What Happened to one per person?: Click to enlarge.
LivingSocial Problems 2LivingSocial Problems 2

How our Math (Didn't) Work Out

Here's what we thought we were getting into:

Revenue
440 customers buy vouchers
* $7 to us for each voucher
= $3080 to the business (us)
Store Credit Given
440 customers
* $20 store credit
= $8800
440 customers
Total loss ($1650) $3.75 loss per customer

Before approving the deal, we had crunched the numbers above (assumptions listed below), and decided we could afford to pay $3.75 to get a new customer in the door.

Here's what really happened: We took losses on 640 vouchers for--maybe--450 unique customers.

Revenue
640 customers buy vouchers
* $7 to us for each voucher
= $4480 to the business (us)
Store Credit Given
640 vouchers
* $20 store credit
= $12,800
450 actual customers
Total loss ($2400) $5.46 loss per customer

Bottom line, non-enforcement of "one per person" rule cost us about $750.

Assumptions: X% margin, $200 additional labor cost per 100 customers, $25 average sale. This is conservative; our incremental payroll expenses will probably be higher.

When you sign up for LivingSocial (or Groupon), it seems like you can do some math, based on the agreed contract, and know what to expect. But when we have "creative" or "scammy" interpretation of the rules by LivingSocial, it delivers a nasty suprise (extra $750 in losses) to the merchant.

What we like least about this situation...
..is having to say no to customers, who are surprised to learn the rules which we agreed to with LivingSocial. Some customers were polite, saying "my bad". Others have insisted on using multiple vouchers for $20 and $21 and $25 dollar purchases, racking up some losses for us.

LivingSocial's Response
We've emailed LivingSocial multiple times with our concerns, politely asking for one of two concessions to be made (either offer some refunds or pay us our difference in losses). We gave them over a week to respond and they declined to make amends. Now we feel comfortable posting this for public knowledge.

Comments, Press Inquiries?
You can contact us privately or log in and leave a comment on this page.
Originally published Jan 20, 2011.

Comments

Have you considered contacting a lawyer?

Hi everyone,

My client suffered an identical problem with Groupon and nearly destroyed her health business. She was working literally 18 hours a day, 7 days a week just to fulfils the demands of customers, who were just out for deal. She never received any new fresh clients on board.

Now, I hope your blog can help me out here. I'm looking to set up my deals type site in UK. I was thinking of around 15% commission seems pretty fair - compared to Living Social and Groupon's 50% - and taking your advice of bring able to modify the deal terms so you don't get multiple sales from bulk purchasers.

I would really appreciate your comments.

Ken

Thank you for sharing. Living Social approached me few times now for me to advertise my laser treatments on their website, but hearing all the stories and their greedy 50% approach plus card charges on already discounted treatments is just MAD to accept their offer.

It's sad to see these types of stories coming out almost regularly about businesses experience with LivingSocial, Groupon, etc. And I think you touched on the issue on their end nicely. But I say we look at this a slightly different way too.

To me (a non business owner) it speaks volumes to the mindset of the "customer". I did purchase one of these coupons. 1 and only 1. It was clearly stated on the offer that there was a limit of 1 per customer. I use these deals to try out new places all the time. Being in SE I've been stuck on 1 LHBS for years and was happy to try out the new guy and see what you had to offer (I've been back 3 or 4 times since). Sadly, anyone that does otherwise simply is just not a customer I would want to begin with. They aren't loyal and they only are concerned with themselves and what they can get away with. Especially since the majority of the offers are small, local businesses that something like this can really end up doing way more harm than good.

LivingSocial, Groupon, etc do need to do more on their end to prevent people from taking advantage of these offers.

Brian
PS: Thanks for being open on Sunday's. You saved me this past weekend when I need to get some emergency yeast!

Doesn't the voucher state the rules, though? Or, the page states them? I'd tell the customers they'll either
1. have to gift them to other people
2. contact LivingSocial for a refund.

You'll have the voucher codes and the names, so as long as you keep track, you can tell when some of the 'multiple buyers' try to redeem.

The rules are stated on the voucher, but some people were not sure what it meant. Is it one per person (one guy insisted on redeeming three of his, having his 6-year old daugher and wife pretend to be involved. "See, one per person". Others were honestly not sure if they could do multiple, but one per visit.) This situation is because LivingSocial decided to not enforce our agreement.

In contrast, consider their recent $20 Amazon Gift Card for $10 deal. They sponsored the deal to get new customers, and you could only buy one. Their site would not allow multiple purchases. They're not stupid.

Then take our deal. We specifically told them limit one per person. They asked if we'd allow gifts. We said sure. They allowed anyone to buy any number, and refused to fix it. They make money on this decision, but we lose.

We can enforce by ID'ing people and refusing multiple redemptions (and we had to do this some). We risk further harm, however, when the 5% of people who think they are entitled to as many as they want then go online and write negative reviews on our business. It is a lose-lose situation. We try to make customers happy.

To be clear, our goal with writing this is to let other businesses know what can happen despite their caution, not to make our loyal customers feel guilty. ;-) We like giving our customers the occasional killer deal.

I also have also had a bad experience with living social. It just may ruin my business. I am blogging about it. They are not in business to benefit the small business community, but for their own profit--this is why everybody's getting into the daily deal game.

I think the consumers that buy them and only spend the value either don't know that these coupons actually cost businesses money or they don't care. They just want their deal, and if they don't get it *when* they want it, they go and write negative reviews. The quality of customer is also not what we're used to.

I to am very dissapointed with the Living Social Deal I agreed to place on thier website. I was kinda hesistant to do it to begin with when I was told by the sales rep it would be a 50/50 split. I should have went with my first instinct and said thank you but no thank you. But I thought about it and decided it would be a great way to get to customers that have never heard of our business and we could count on repeat business from it. Seemed like a great idea until the day my deal went live Feb 1 2011. I have a small cupcake catering business there is only 3 of us and the deal was 1dz for $12 / 1/2dz for $7 from our Classic and Party Collection Menu with free delivery within 15 miles of our zipcode. Immediately before the deal had even run the 24hrs our phone was ringing off the hook voicemail was filling up to the point we couldnt take the msgs fast enough before our voicemail would no longer accept any more messages and we had 100's of emails requesting to redeem thier voucher. [...] I have also experienced the same issue in the comment above about the 1 per person limit and gifting. Many have stocked up on this deal. I delivered this past Saturday 4 dozen which were purchased under the same person but she gifted to 3 others which of course is only a front because they were not delivered to 4 different places. And lastly I still have not received my money from Living Social and we are now into the first week of March. We have been financing this with our own money I emailed them this past Monday which seems to be the only way to get ahold of anyone and I told them if the check does not show this week I will contact everyone that is scheduled and tell them their order is placed on hold until we receive payment from Living Social. I will never ever do this again.

I too have had a very similar experience with the living social customers. I went into this thinking that it would be a great way to get my newly started cupcake business out into the public eye and to get some great exposure. Boy was I wrong, if anything this living social deal has greatly hurt my company's image. People get extremely upset and say negative things about my company. [...] Well as soon as this living social voucher hit the net things got crazy fast, everyone wanted their cupcakes at that moment and it was like the world ended when I said I was booked for orders. 90% of the voucher holders feel as though the world should revolve around them and that I am a horrible person because I can't give them their dozen cupcakes at that moment, like I don't have other customers to tend to? [...] Anyway, think before enter into an agreement with living social. Make sure you have an organized business with structure, EMPLOYEES to help with the over flow of business & clearly state your rules.

I had a similar situation with Living Social and the other I used name Cudo and I should have learned but I thought I'd get money upfront to assist my new business. How wrong I was. NEVER again will I use a deals voucher system to get new customers because they're not new customers. Most of this customers are only after cheap eats. my deal was 4 plates shared plus 2 drinks. They said that if you have that and in big groups they would obviously order more food and drinks. WRONG! 60%+ plus come in for what they paid for and leave without any extra purchases and not even a tip. I recall one person who came in the first day with two friends to use the voucher and whilst I was happy to book her in for another day, they left with insults and posted rubbish on a few websites. The worst thing of all is the last few days when a great percentage remember they bought these vouchers, thank to L/S for reminding them and they all want to beat the rush. By then all the money they sent you has gone and now your serving customers at your own cost waiting for that final payment to help you get through. They even botched up the first payment and took over a month after they went on sale. I am waiting for the final payment which I think they will come up with excuse about refunding customers who I couldn't fit in though I haven't heard of any refunds but I'm sure that they will provide that information on final payment. My advise to other businesses, DON"T DO ANY deals and run your operation on your own.

I've been playing with the calculation of whether a deal like this is worthwhile and there are certainly a lot of variables. I came up with a calculator that tries to take them all into account http://evaluatingdeals.com/ . This is one I had not considered so I'll have to add a note to those who use it to include multiples purchased by a single person as an existing customer.

Firstly I have only been in business for a little under 6 months and thought this would be the perfect opportunity to gain customers boy, was I wrong? The customer's we're rude and demanded things that weren't even in the package and when I said NO they would post very negative reviews. Then, to top it off they first said that my money would arrive on the 11th because it took 7 to 10 business days to process the money and now they are saying that it will take an additional 2-5 days, am I mixed up or are they just playing with small family owned companies. I will never fall into this kind of trap again! Living Social not only takes 50% but additional funds for credit card processing and I am afraid now that my business may go under before I even get it good and started. To anyone thinking of doing business with them, please turn the other way because you will be the one left looking around wondering if your company will survive! All they care about it getting the bigger share of your money when all they do is sit back and collect while you do all the work!!!

We ran a deal and lost thousands of dollars, period.
Just do the math, ask around to other small businesses.
We were ripped off royally and would never run one again.
Our living social deal ends in two days and we only barely made it. We only opened our doors 8 months ago and if it was not for the charity of good friends and family we would have lost everything.
DON'T DO IT!

I started my catering business in May when LivingSocial contacted me to run a voucher with them. They told me that they targeted MAINLY businesses - which is what my company was looking for - they also promised that only an average of 10 vouchers were sold on the average. They wanted me to offer $200 for $99. I turned them down numerous times but each call they reassured how GREAT this offer would be for me to attract new businesses - and stupidly I finally caved to the high pressure sales. Needless to say, it was a disaster as soon as the ad ran. Not ONE business purchased a voucher - only customers that wanted free food - many wanting dishes to stock up their freezers, etc. Thirty vouchers were sold and it has cost me thousands of dollars to fill all these cheap customers orders who will never order again. I finished my last order yesterday and we celebrated the end of the LivingSocial Nightmare! I have been contacted so many times by LivingSocial to run the ad again I have tagged them as spam in my emails and blocked them from my cell phone. They are parasites for businesses.