Here's a serious deal: The discount website Living Social is selling $20 Amazon (AMZN) gift cards for $10 a piece, already pushing out more than 180,000 since early this morning. Like its competitor Groupon, however, Living Social's long-term plan risks sinking the very businesses it says it promotes.
Amazon Doesn't Count
When it comes to measuring the popularity of Living Social, Amazon is an awful user case for its success. First, Amazon actually invested $175 million into the company last month, so the deep discounts offered by the gift card deal can be considered further investment.
Second, while Amazon is reportedly not supplementing the discount directly, the millions invested by it last month make it easier for Living Social to take the hit. As of this writing, Living Social has sold about 110,000 cards, which means about $1.1 million lost for Living Social -- small relative to $175 million.
The Amazon gift card discount is putting Living Social on the map -- obviously, because it's being written about here -- but it shouldn't be viewed as proof of a successful business model.
The Groupon Pitfalls
If Living Social sounds familiar, it's because it uses a model very similar to Groupon. While Groupon rejected a $6 billion offer from Google (GOOG), many critics, including here at BNET, said that the discounts actually hurt the companies it tries to promote:
- The offers are not targeted well, so only a fraction of the large audience the coupons reach will actually be interested in them
- Those campaigns that are too popular can demand too many resources from a company, as it did with the financially unstable American Apparel (APP) last fall
But the price of admission for merchants is not cheap. Not only do they have to offer huge discounts to get into the Groupon system, but they also rebate some of their revenues back to Groupon. Another problem: Your existing customers, who pay regular prices, could nail your profit margin if they purchase multiplevouchers from the service.
There are already reports on how customers can buy multiple gift cards from Living Social by creating fake email addresses.
Amazon and Living Social are doing a good job creating buzz for the new website, but it's hard to believe that its approach is much smarter than the already skewered Groupon model.
Photo courtesy of Living Social