October 1, 2012, 12:00 AM

Quick fix

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Both sites have buyer teams that search for items that they think their customers will like, and often those are items that are slightly quirky, like Kalorik's indoor/outdoor grill, or simply a good item at a good price, such as a recent Goods offer of a $449 Rosetta Stone language learning set for $269.

When the sites' buyers find products they think their customers will find interesting they approach retailers like Beachbody and Kalorik to see if they can negotiate a deal. Manufacturers and retailers can also apply to have their products featured.

Because it has limited space, LivingSocial can be picky about which products it selects, says Emily King, director of LivingSocial Shop. "We want to have items that inspire people to get out and be social," she says.

LivingSocial tests every product featured in Shop, which is why those seeking to sell a product on the site are told to send a sample to the company's New York office. "We focus on the quality of the individual products," she says. "Before any item is sold, we've sent it home with people to test it out."

More to come

Though Groupon currently has limited space for its deals, that may be changing. The daily deal operator is planning to create a conduit for retailers and vendors to feed product listing information to the site, Masud says. It is unclear how Groupon will decide what products are offered. "We're looking to improve the selection," he says. "Ultimately we want to serve up as much good inventory as possible." Even so, the majority of those items would be limited-quantity items, he says.

In fact, the daily deal operator is already testing the effect of having more items on its site than it features in its e-mails. On its Australian site, its e-mails may feature a dozen or so items. But Grouponshop.com.au showcases far more offers—sometimes up to thousands. "It's an outlet mall of sorts," says ChannelAdvisor's Wingo.

That approach might enable retailers like Beachbody to move even more items and acquire more customers. The retailer has already leveraged the daily deal operator's U.S. platform to sell "significantly" more than 5,000 seven-DVD sets of Shaun T's Rockin Body workout videos.

And while these sales produce profits lower than normal, they introduce the merchant to consumers it might not otherwise reach. "We have to factor into the equation the access to Groupon's customer base," says Beachbody's Weiderman. She is still assessing how many new and repeat customers she garnered with the deal. Regardless of those results, she's happy with the offer because Beachbody turned a profit on the deal, which means it worked as a sales channel.

If Groupon and LivingSocial members prove as willing to buy overstock goods as they are spa and restaurant vouchers, those deal operators could find themselves with a lucrative auxiliary business as providers of liquidation services to retailers and consumer goods manufacturers.



All revenue is not equal

Groupon is selling a lot of products via Groupon Goods. But some investment analysts are concerned that the growth of Goods makes Groupon's business look more profitable than it is.

By taking inventory on the vast majority of products sold through Groupon Goods, the daily deal operator can account for the items on a gross, rather than net, basis. That means that it can record the whole sale as revenue, rather than the revenue that Groupon collects from the sale. That stands in contrast to the way it accounts for its sales of vouchers. When Groupon collects a 40% commission on the sale of a $10 voucher, for example, it can only claim that $4 take as net revenue.

That means that not all of its revenue is equal, says Abe Garver, principal at the Focus investment banking firm. "Unlike a Groupon coupon where Groupon may be only able to say that it generated $2 from a $10 coupon, with Goods that it owns it can record a $10 widget as $10 of revenue even though the item may have cost Groupon $9.90 to buy," he says.

Goods accounted for 12% of the Groupon's gross billings in the second quarter, according to daily deal industry tracker Yipit, up from 10% in the first quarter and 6% in the 2011's fourth quarter. As Goods grows and takes up a larger portion Groupon's total gross billings, it is making Groupon's revenue increasingly difficult to understand because the daily deal operator doesn't break out revenue from its different divisions, Garver says. With a significant portion of its revenue coming from its lower-margin business, Groupon's revenue figures may appear misleadingly high because of Goods' higher gross sales, he says.

Regardless of the accounting implications, Groupon's Faisal Masud, vice president of Groupon Goods, says that taking possession of the items it sells makes sense because that approach affords Groupon higher margins than when it sold on commission. "Those margins are very high," he says. "Obviously they aren't as high as the coupon business, but not every business can have a 50% margin. [Groupon Goods'] business model is different and our bottom line is very strong."

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