What went wrong with daily deals?

By Rob Go, contributor

Like many people, I’ve been watching the meteoric rise of Groupon as well as some of the negative press we’ve been seeing the last several weeks. I am not privy to any private information about the company, but I’ve said publicly that I admire the founders and the kind of business they have been able to build so quickly.

For the record, I think that Groupon is much more than a deal-of-the-day mailing list. The long-term $20 billion+ potential for this business is not really a mystery — it’s as a performance marketing solution for small businesses. The company should get to the point where they can give small businesses the tools to make very targeted offers to consumers based on demographics, location, past purchase behavior, and other targeting options. You essentially offer the small business yield management and somewhat dynamic pricing. All of these are big deals and are win-win for businesses and consumers.

The price of admission into this opportunity is consumers engagement. Groupon and its competitors embarked on a land grab, amassing as large a list as possible in as many regions as possible. In theory, the larger the list, the better the opportunity for targeting and yield management.

But, something has gone wrong in this market. And I suspect this is a case where the best companies in this space are victims of the model’s success. As a result, Groupon, LivingSocial and others have been able to raise monstrous amounts of capital. The general press (enabled by services like Yipit) is able to track with pretty good accuracy what the scale is of the various competitors and their relative growth rates. This puts massive pressure to continue to grow lists and grow revenue. And the best way to do that is to call on brand new businesses, convince them to offer massive discounts, sell as many coupons as possible, and move on.

My armchair observer’s view of this business is that there is a massive and truly enduring company here. But it would look a little different. Net revenue / Gross Revenue would be in the 15% range, as opposed to the 30-40% range that is currently enjoyed by the market. This is a rational amount that is consistent with other affiliate marketing programs. It also allows the small business to potentially make money on the sale, or to increase the average value of the coupon to make it more enticing. I think you’d also see smaller discounts and much more targeted offers.

Merchants would also have much more controls and receive more guidance to getting the most out of their relationship with these companies.

Finally, consumers would have multiple ways to engage with the service vs. just a daily email. You’d see great content around local businesses, there would be an excellent mobile experience, you’d have the option to have your purchases tracked to provide better offers, etc. This company probably would have had slower top-line growth than Groupon or LivingSocial, but would have built a stronger foundation for an enduring company.

The sad thing is that there are so many companies doing pieces of this. But it’s going to be hard for anyone to really nail it without the massive consumer scale that Groupon and LivingSocial have. And, to make matters worse, both SMBs and consumers is now extremely fatigued with deal services, making it ever harder to win anyone’s attention.

I think in another time, when there wasn’t so much money foolishly piling into late stage internet companies, the leaders in this space would have grown more carefully, and built a service that merchants and consumers would love for a long time. Sadly, that is not the state of the world today. Maybe one of the market leaders will become the company I have described above and will be enduring. Or maybe they will be the Lycos and Alta Vista heralding a future Google. Time will tell – but a Google does exist here.

Rob Go is co-founder of NextView Ventures, a seed-stage investment firm focused on Internet-enabled innovation. He previously was with Spark Capital, and blogs over at www.robgo.org