LivingSocial’s $10 Amazon deal: Who’s the real winner?

By Lauren Elizabeth Chapman

On Wednesday morning, LivingSocial released its biggest daily deal to date: a $20 Amazon gift card at a cost of only $10 to LivingSocial members. With almost 1.4 million purchases made in 24 hours across 170 markets in the U.S., the deal topped the chart for most buzz, in addition to setting the record for most purchased coupon on a daily deal site. What’s the thinking behind such a bold marketing play by both LivingSocial and Amazon?

From the start, LivingSocial has struggled to gain as much popularity and to distinguish itself from its main rival Groupon, as well as the other online group deal sites that have sprung up in the past year. Most likely, the Amazon deal was meant to compete with Groupon’s biggest deal to date, the $50 Gap deal offered for $25 in August 2010 that had almost a half million purchases.
It may have come as a surprise to many, but the partnership between LivingSocial and Amazon on this deal is not shocking. In December 2010, Amazon invested $175 million in LivingSocial, which is expected to report over $500 million in revenues this year. It makes sense that out of all online retailers, Amazon would be LivingSocial’s go-to option, as Amazon has a vested interest in LivingSocial’s success.

The more important question is which company will be taking a bigger financial hit from the discount? The deal suggests that LivingSocial purchased the gift cards directly from Amazon, rather than Amazon selling the discount through the LivingSocial site (which is how deals are typically handled). So, is LivingSocial eating the discount as a marketing expense in hopes that it will regain the sales over time from new member subscriptions? Or was Amazon willing to sell the gift cards at a discount knowing that the expense would be recouped through LivingSocial purchases on its site, which would most likely be more than $20?

With this deal, I think LivingSocial was extremely successful in its attempt to get its name more widely known and to compete with Groupon on a higher level. Not only did LivingSocial triple Groupon’s previous one-day purchase record, it also created tremendous online buzz. Members jumped on Facebook and Twitter after making their purchases to post the deal in hopes that three friends would buy–making their deal free. Now that it’s added thousands of subscribers, LivingSocial could do even more to distinguish itself by using the idea of me + 3 = free to entice purchases. Though after Wednesday’s frenzy, LivingSocial is definitely one step closer to catching up or even taking the lead in the online daily deal space.

Tell us: Did you purchase the Amazon deal Wednesday? Are daily deal sites good for consumers as well as the companies that promote their deals on the sites? And how will Google change the game once it launches Google Offers?

Lauren Elizabeth Chapman is a student in the Masters in Integrated Marketing Communications program at Northwestern University’s Medill School and can be reached at laurenchapman2011@u.northwestern.edu.