After months of drama, Groupon finally had its IPO last week, concluding perhaps the most anticipated event in the daily deals space.  Now, however, is the even bigger challenge of actually proving out its valuation. The obstacles aren’t small and we lay them out in a report out today called Myths and Truths About Daily Deals. We define daily deals as both the purveyors of prepaid vouchers like Groupon and Living Social as well as the flash sale sites like Gilt Groupe and Woot. Two of the biggest challenges for prepaid voucher companies are the following:

• Little incrementality especially for core Groupon businesses like restaurants or even national retailer deals. The majority of consumers who redeem prepaid vouchers (80% in the case of clothing or shoe stores, for instance) were already customers of the brand, and more than half say they would have purchased anyway without the voucher. 
• Email won’t drive growth moving forward. While Groupon vaunts the size of its “subscriber base” (i.e., email addresses), all evidence points to the medium becoming less important. A significant portion of people who once subscribed to these emails no longer do, and many simply don’t want to because they have no need for more clutter in their inboxes. On the other hand, we’ve heard anecdotally that revenues for these sites are increasingly coming from organic traffic, which can be good so long as a daily deal company can continue to keep its brand top-of-mind for consumers. Marketing and sales, however, are two of the expenses that Groupon has loudly vowed to reduce.

That said, the daily deals companies do have some big advantages. The consumers who do subscribe to these sites (especially the younger shoppers) all love to discover new products, brands or offers.  And at the heart of all of these businesses, particularly the prepaid voucher space, are fundamentally profitable concepts.  Groupon’s model of discounted offers that are presold and require no inventory investment could actually be very profitable. But it would also require being a significantly smaller company that would contradict the narrative that’s positioned it as the world’s fastest growing company. Here are the paths to profitability for the players in prepaid voucher space:

• Enable merchants and brands to “cherry pick” which shoppers/consumers get their offers. For all the data that these daily deals companies purport to have, very little of it appears to be used to benefit their merchant partners. 
• Allow merchants to provide more restrictions around voucher redemptions.  This is the idea behind Groupon Now and Living Social Instant, but it also makes sense for the core offer products.
• Reduce redemption time periods for offers. Already we see some merchants providing offers that expire in a few weeks. That makes much more sense than year-long redemption cycles which create customer service challenges for merchants.
• Pivot to new businesses.  Expect to see more full-price selling, similar to what Gilt Groupe has already introduced with brands like Park & Bond. New products are one option, but these companies also need to take advantage of the assets they do have. For small, unknown and untested merchants, Groupon’s customer file is a potentially attractive customer acquisition tool that could be a revenue opportunity in itself. 

Net-net, Groupon will stick around and eventually get to profitability. It’ll get there with far less interesting deals for shoppers and probably as a smaller company.