Yelp CEO: 50 Percent Deal Margins Unsustainable

Following the elimination of daily deals (though not check-in deals) from Facebook’s lineup of products, Yelp followed suit this week by scaling back its daily deals program. Many people incorrectly interpreted the news, presented in a Bloomberg article, as Yelp’s total exit from the space.

Some have also seen it as an indication that the segment as a whole is beginning to collapse. One person remarked to me today, “The bottom is starting to fall out isn’t it?”

Neither interpretation is correct. Deals are alive and (mostly) well and Yelp is still in the game. Here’s what Yelp CEO Jeremy Stoppelman said today in a blog post about Yelp’s decision to reduce the size of its dedicated deals salesforce:

We did take a 30 person team that was selling daily deals and local ads and made it a 15 person team focused solely on daily deals (note: no salespeople were harmed in the making of this announcement. All are still doing great as part of our 400+ member sales team). We’ll continue to email out any amazing Deals we find; rest assured when it comes to quality vs quantity, we’ll choose quality every time.

Yelp will continue to offer merchants the ability to post deals and offers themselves in addition to selling deals to business owners over the phone. However Stoppelman sees the deep discounting (50 percent off) as problematic for the sustainability of the new market:

We’ve also heard consistently from certain categories of businesses (very popular ones I’m afraid) that daily deals are uneconomic for them, which does raise questions around the sustainability of “50% off” daily deals for these types of businesses.

Most analysts and observers agree: the current deep discounting so appealing to consumers, with “50 percent margins” to deal vendors, is unsustainable. Many people, including me, also believe that more “balance” and merchant-friendly policies will inevitably come about. Indeed it’s already happening as some deals programs begin to focus more on loyalty than new customer acquisition.

Make no mistake, the model as a whole isn’t going away. But we will see increasing consolidation as well as many failures in the next 12 months. Beyond the familiar names (e.g., Groupon, LivingSocial), winners and losers will start to emerge.

If you’re going to SMX East next month you might want to check out a session I’ll be moderating called “Doing Offers Right,” which will offer best practices and how to tactically use deals in your marketing mix. The panel features AT&T Interactive, Local Offer Network, Local.com and AdLift.com.

Postscript: Deal aggregator Yipit contends that “the real reason” Yelp scaled back its daily deals effort is because its deal revenue had started going down amid intense competition.