10 Things Daily Deal Sites Won't Say

1) "50% off? Not really."

Steep discounts are the cornerstone of the pitch for daily deal web sites such as Groupon and LivingSocial, which promise 50% off or better at a local restaurant, spa, fitness center or other shop if enough people sign up (and pre-pay) before the limited-time offer expires. But the discount may be much less once you factor in taxes, tip and any un-covered portion of the bill.

In February, more than 3,000 Groupon users paid $10 for a $20 FTD voucher before Valentine's Day, only to find prices at the special voucher-redemption page $5 to $10 more expensive than what other visitors to the site saw. Groupon spokeswoman Julie Mossler says the price discrepancy was unintentional, and that customers got refunds.

But critics say these kinds of price discrepancies may be an unintended consequence of the business model. Because businesses recoup so little -- often just 25% of the voucher price after fees there may be an incentive to price deals to the merchant's advantage. "We're starting to see some price manipulation going on, so the discount doesn't hurt their margins as much," says Greg Sterling, a senior analyst with Opus Research.

To avoid bill shock, check the voucher restrictions for excluded dates and any extra charges the voucher doesn't cover, and the business's site to calculate the total tab. Then ask yourself if it's still a deal, even at a higher price (or smaller discount), suggests social and behavior psychologist Matt Wallaert of digital strategy firm Churnless.

2) "Good luck cashing in."

After selling nearly 700 vouchers for fire-dancing classes, Isa Isaacs of Temple of Poi in San Francisco knows the pattern: most customers wait until a week or two before the voucher expires to redeem it. "I cap my classes at eight people -- what do you do when all the spots have already been filled?" says Isaacs, who decided to use the expiration date as the last date to schedule instead of attend. Even so, people who had trouble redeeming slammed her with negative Yelp reviews.

Problems also crop up when deals oversell, as in the case of Salon 505 in Austin, which made local headlines after it sold 5,000 half-day spa packages on LivingSocial -- more than enough to book every open appointment for the yearlong redemption period. "Sometimes a deal is so extremely popular that scheduling can be difficult," says a LivingSocial spokeswoman. The site is working with Salon 505 to accommodate buyers by extending the expiration date. Spa owner Sharon Baldeschwiler did not respond to requests for comment, but said in a statement to local media that the spa is committed to honoring the deal. ("Legal counsel has advised no further comment at this time," she wrote.)

If scheduling early doesn't help, check the refund policy. Zozi chief executive TJ Sassani says the site hasn't heard about any redemption problems from its customers, but that the broad money-back guarantee covers refunds if they are unable to cash in on a deal.

3) "We're in legal limbo."

It's unclear whether deal site offers are more coupon or gift card, says Gonzalo Mon, a partner at Kelley Drye & Warren, a Washington, D.C.-based law firm specializing in advertising law. And that leaves them in a legal netherworld. If you buy a $15 gift card, federal law requires that it can't expire for at least five years. But pay $15 for a $30 voucher, and at least part of that can disappear in as few as six months, according to deal sites' terms and conditions. The difference has led to three class-action lawsuits this year -- two against Groupon, in California and in Illinois, and another in Washington against LivingSocial -- that allege the companies' policies run afoul of federal and state gift card laws. The LivingSocial suit also alleges that the site does not adhere to Washington state law requiring cash refunds for cards valued at $5 or less. LivingSocial and Groupon say they ask merchants to honor the price paid for up to five years, in accordance with the law. All three suits are pending.

In any event, that's good reason to scroll through your "expired deals" queue, Mon says. That money is still on the table for a purchase or possibly a refund. And expect to see more retailers getting more specific, too: A recent Groupon offered $20 at Barnes & Noble (BKS) and expires mid-April, but the $10 buy-in price never expires, says John Foley, Barnes & Noble's president of e-commerce.

4) "We may not stick around."

Largely unknown before 2010, group-buying sites now number more than 600 and counting. "Without exaggeration, we hear from at least one new site a day," says Dan Hess, the founder of DealRadar.com, which aggregates local deals. Sites have expanded to smaller cities and gone after narrower, more specific audiences, including new parents, dog owners and Jewish people. The technology behind deal sites makes them easy to start, but sustaining them requires a steady stream of interested businesses and consumers, says Opus Research's Sterling. And many sites don't survive. Since Hess began tracking the space last year, sites including PriceWave and FunDailyDeal have closed, he says, while big-name sites have gobbled up more than a dozen other small competitors. Currently, just 75% of the sites Hess monitors actually have a new deal every day.

Deal sites typically offer a refund or credit if you buy a voucher from a business that folds. But if it's the deal site itself that goes under, it's largely the business' choice to honor the voucher -- or not. Most will, Sterling says. Still, the churning market is good reason to check the background of the site as well as the business when buying a big-ticket deal, Sterling says. Paying with a credit card also gives you recourse if the site goes belly-up before you use the voucher.

5) "You won't use this coupon."

Businesses say about 40% of vouchers purchased don't get redeemed. Sometimes it's as simple as buyer's remorse, says Eran Davidov, a co-founder of Lifesta, a secondary market for deal vouchers. Or it's a bad gift idea, as in the case of a liposuction voucher made out to "my darling wife," currently up for sale on the site. Or busy schedules. Or forgetfulness. In any case, consumers' wasted money is actually a selling point for the deal sites, which pitch it as an incentive for the businesses they're wooing, says Chris Treadway of Lasso, which develops software to help companies offer coupons and deals online. "It's free money for the business," he says.

The silver lining for consumers: there's a growing secondary market on sites like Lifesta, CoupRecoup and DealsGoRound, where sellers unload their unwanted deals and buyers can grab them, often at a steeper discount than the deal site originally offered. (A $300 NYC boot camp package that sold for $59 on Groupon is now $45 on CoupRecoup.) Site sellers typically pay a small fee (10% of the selling price on DealsGoRound, 99 cents plus 8% on Lifesta). But it's up to the buyer to verify that the deal is legit, and the price fair.

6) "The 'deals' may be dwindling."

Even with all those unredeemed vouchers floating around out there, running a Groupon promotion was unprofitable for a third of businesses in a 2010 study from Rice University, though Groupon says 95% of merchants who have worked with them once would do so again, or recommend it to another merchant. As companies get used to the daily deal model -- and get tired of losing money -- consumers may see more limits on the number of vouchers that can be purchased. Businesses did best when they sold between 600 and 1,000, says Utpal Dholakia, an associate professor of management at Rice University, who conducted the study. They might also restrict deals to new customers, target the promotion to push a specific product (say, a new spa service) or pull in business during slow times (weekday morning yoga classes instead of an all-access pass). Groupon's Mossler says the site lets merchants make such restrictions when necessary, but tries to limit them so that subscribers get "a great deal without 'gotchas.'" Both Groupon and the business must agree on a deal's terms for it to run.

With more fine print to trip you up, be sure to check exclusions and limitations, like first-time customers or Tuesday nights only, before you buy, Dholakia says. That extra fine print could make a deal decidedly less convenient.

7) "You're a cheapskate "

Each day, The Fresh Diet delivers three meals and two snacks to thousands of customers on monthly plans, says chief executive Zalmi Duchman. But company customer service reps spend a surprising amount of time coddling deal-site customers who have bought a one-day trial. "The customers are definitely more difficult to deal with," he says. "They don't listen to the rules." Consumers often buy a deal running in one city to redeem in another, or buy more than the three-voucher maximum, despite rules listed in the deal that prohibit doing either. Some call in to complain, trying to finagle an extra day or two of free food. And they rarely come back retention rates average 12%, compared with 40% or better on the company's more targeted promotions, Duchman says. (But the potential to gain new customers makes the hassle worthwhile, he says. The Fresh Diet has offered more than 60 city-specific offers on Groupon alone since 2009.)

Dholakia from Rice University says such gripes are common. "Price-sensitive people are going to gravitate to these promotions," he says. They are unlikely to spend more than the voucher amount if at all possible, and tend to be stingy on tips. They're also unlikely to come back, thwarting the business' goal of attracting repeat customers. Groupon, LivingSocial, Zozi and other sites say they remind users to tip on the full amount, but there's no requirement that they do so. In the future, deals may include a mandatory tip, Dholakia says. (The terms of every deal must be agreed to by the merchant and the deal site.) Corner Burger in Brooklyn, N.Y., added a 20% gratuity to the bills of consumers who took advantage of its recent Groupon charging $8 for $16 worth of food.

8) " but you're still overspending."

San Francisco magician Dan Chan leads a daredevil's life, piloting planes, taking glider lessons, skydiving indoors and out, and even spending time in a sensory deprivation tank. "It's a half-off economy right now, and they're irresistible offers," says Chan, who has spent more than $500 on 40-odd deals in the past two years. That's exactly the problem for many consumers, who end up with a queue of expensive experiences and purchases made on impulse, says behavioral psychologist Wallaert. Single deals with a limited time frame force consumers to constantly assess whether they want to buy. They also introduce consumers to experiences they might not otherwise consider if they weren't deeply discounted. "There's a reason you haven't signed up for a pole-dancing class, and it's not usually cost," he says. "But when you make it about money, like these deal sites do, it makes you think you haven't done it because price was a factor." Consumers also tend to focus on the savings, which makes the purchase price seem more reasonable.

9) "Limited-time offer? Not really."

Miss out on the latest daily deal? "You can get a similar level of discounts if you dig for it," says Jack Vonder Heide, the president of Technology Briefing Centers, which tracks daily deal sites. Odds are good the exact same offer, or one like it, will soon turn up on a competing daily deal site or the secondary market, or both. Fire-dancer Isaacs, for example, took her introductory class deal ($15 for a $30 class) from Groupon to SocialBuy, Zozi, Savvy Avenue, LivingSocial, Joffer and a handful of other sites. Sites typically restrict how soon a business can offer a similar deal at one of their competitors, but the lag time can be as short as a few weeks -- and doesn't usually prevent them from offering a similar deal on their own site, Facebook page or Twitter feed immediately after.

10) "Our merchant checks aren't foolproof."

The $65 price for a one-hour photo shoot and extras, valued at $500, from Atlanta studio Dana Dawes Photography seemed like a steal -- until a handful of Groupon users, including other photographers, began alleging that the photographer was claiming others' photographs as her own. Groupon cancelled the deal, and issued refunds to all buyers. "It's not our place to determine whether she stole the images," says Groupon's Mossler. "What's important is that our customers didn't feel confident purchasing the deal and we felt it was necessary to cancel it." Dawes did not respond to requests for comment.

Businesses with a bad rep are a pitfall all deal sites face as their numbers grow and they hunt for companies to feature, says consultant Treadway. "There's a finite number of interesting businesses in any market," he says, leaving each site to weigh negative reviews or other problems against the need for a deal to run tomorrow. Deal sites say they put businesses through a rigorous check Groupon says it turns away seven for every one it accepts but it's still worth checking Yelp and the Better Business Bureau for reviews and complaints before buying. Sites may offer a refund if you had a bad experience.

Correction: This article and its headline have been updated. An earlier version incorrectly implied that the "10 things daily deal sites won't say" referred exclusively to Groupon. In addition, other details have been added and language has been changed in the article to clarify how certain deal sites operate. Also, a previous version of this story incorrectly reported the expiration date on a recent Groupon offered at Barnes & Noble.

Thanks to Kelli B. Grant / Smart Money
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