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Wednesday, January 19, 2011

How does Living Social make money from the Amazon gift certifcate?

On Wednesday, January 19, 2011, offered a $20 gift certificate for only $10. As of this writing (4:02pm EST), 767,975 gift certificates have been sold. That's $7,679,750 in sales in a little over 8 hours since this deal was listed. I imagine that over 1,000,000 gift certificates will be sold before the deal expires. So, how does LivingSocial make money from selling an gift certificate worth double the amount paid for it? Someone has to foot the bill, right?

First off, let's get to the fine the text of the deal, it says " is not a sponsor of this promotion." This statement tells me that probably has no part in this promotion. Perhaps LivingSocial decided to spend a cool $10-$15 million in hopes of gaining some advertising exposure by linking their site with one of the biggest online retailers out there? Perhaps. I mean, $15 million is not that much for a company who's expected to bring in $500 million revenues next year. Not to mention the $175 million that Amazon invested in LivingSocial, valuing their company at $1 billion. Then again, why would LivingSocial do that?

Fifteen million is still roughly 3% of their gross revenues...that's no chump change. At the same time, it's not unheard of for a company to spend $15 million dollars on one advertising campaign. I mean, just look at Anheuser Busch on Superbowl day. Then again, Anheuser Busch has a market cap of 67 billion euros ($90 billion USD); that's about 90 times the valuation of LivingSocial. So, my first theory is that this just a marketing expense for them.

My second theory is that LivingSocial has some sort of affiliate deal with Amazon where they get a certain percentage back based on the number of gift certificates purchased. Amazon routinely pays affiliates up to 8.5% of purchased items, including gift certificates, through their Amazon Associates program. At 8.5%, they get roughly $1.70 back from each $20 gift certificate purchased, which $1.7 million assuming 1,000,000 gift certificates are sold. This is another theory.

Or perhaps LivingSocial and split the cost? LivingSocial gets free advertising by linking itself to one of the biggest brands and Amazon gets guaranteed spending, along with the effects of viral marketing, which I've seen a lot of, from this deal. I mean, it's all over twitter / facebook. This deal is everywhere. I heard it on the radio on WTOP. And this marketing is from zero actual ad dollars spent; 100% viral marketing.