The Achilles’ Heel of Groupon and LivingSocial?

As Groupon and LivingSocial continue their ascent towards Fortune 500 status, an internal weakness may have started to surface; are Groupon and LivingSocial now too big to cater to local markets?

The problem with being too big in the localized Group Buy market is that the capacity of the local vendor is usually capped. In other words, most local vendors cannot meet the demand for their products/services after doing a Group Buy deal with a big Group Buy site. There are numerous accounts of vendors turning away voucher holders simply because too many were sold. In some cases, it became a national problem like with Groupon in Japan .

So the simple and obvious solution would be, why don’t Group Buy sites set a maximum quantity on each deal? The problem with this (from a Group Buy site’s perspective), is that Group Buy sites make a commission on each voucher sold, thus allowing a maximum quantity on each deal would mean capping the total commission received on each deal.

Luckily, for vendors there are alternatives. Instead of doing a Group Buy deal with one of the BIG group buy sites, it may be worthwhile to go with one of the smaller Group Buy sites to prevent overselling of vouchers. It is easier to go from small to big, than big to small, and starting with a small Group Buy site is a great way to test how people respond to a specific deal. Also, there are Group Buy sites out there that allow vendors to set maximum sales quantities.  Finally, there is nothing stopping vendors from using multiple Group Buy sites.

So what does this mean for Groupon and LivingSocial? As they get bigger they will continue to be the go-to website for big brand name deals (remember Groupon’s GAP deal?) and will lead the industry in innovation, while the smaller Group Buys sites will gain market share of the smaller localized vendors.

In the end, it will be a shift in vendor selection for Groupon and LivingSocial from local vendors to more lucrative national vendors.