I suspect the real problem was the size of their discounts. Selling a 40$ bottle of wine wine for 20$ attracts far more people that buy 20$ wine than people who buy 40$ wine. So unless you can afford to keep selling at 20$ the odds of repeat bushiness is low.
Really when it comes to coupons there are three options that actually work. You can always have a sale, you can make it a pain to use, or you can limit yourself to 10 to 15% off.
That would have definitely been the much more sustainable approach. Although I have a feeling that offering discounts of 10-15% would not have resulted in the hysteria that they originally generated and thus would have limited traction. It is one of the many ironies of their story.
Well, that is the proposition. It turns out it may be false, which in fact would explain why Groupon is doing poorly.
Giving discounts may induce the most price sensitive to use your service. They will continue to be price sensitive, and stop using your service once the cost returns to normal.
If the opposite were true, and if business actually did profit from this approach, then it is likely that Groupon would be killing it.
At the end of the day, some types of retailers find ways to profit even off of the price sensitive, but it seems to be the case that the same is not true for most Groupon-trying businesses.
A hypothetical ideal business in this segment would find a way to profit off of attracting people interesting in sampling new businesses for long-term patronage rather than making its money off of the price sensitive. The idea would be that you would find a way to make the proposition most appealing to people who are looking for a new... hairstylist/florist/gym/supermarket/whatever, and either avoid targeting offers at people who are likely to sample at a low price and move on, or make the offer less appealing to them.
This has been a key part of the mailing list business for many years -- lists that target people who have recently moved, gotten pregnant or had a baby, gotten married, and so on. Special offers with unusually good deals are then offered, because the chance of converting a percentage of the recipients into long-term customers makes it worth it.
If this kind of business model has been translated to online effectively, I'm not familiar with it. Certainly some of that effect can be achieved with the right search keywords or the right websites to advertise on (e.g. baby name sites), but businesses like Groupon and Living Social have brought in many more price sensitive customers than actual long-term business prospects, which is one of the big reasons why they are not more successful.
