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DRAFT – NOT FOR RELEASE

The Daily Deal Phenomenon: A Year in Review

March 2011

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Local Offer Network The Daily Deal Phenomenon: A Year in Review

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Contents
Executive Summary ............................................................................................................................ 4 Industry Revenue: A Staggering Growth Story .............................................................................. 5 Site Introductions and Expansion: The Land Grab......................................................................... 5 Deal Flow: “One Deal a Day” a Distant Memory ........................................................................... 6 Category Trends: From Burgers to Botox, and Everything in Between ...................................... 6 Prices: Rising Along with Category Diversification ....................................................................... 7 Discounts: Merchants Invest, Consumers Win Big......................................................................... 7 Multi-Voucher Purchases: Sometimes You Can’t Eat Just One .................................................... 8 Market Growth: Now Coming to a Hamlet Near You ................................................................... 8 Deal Duration: You Snooze, You Lose. Sort Of. .............................................................................. 9 Conclusion: Business Models Will Evolve, Momentum Will Continue ...................................... 9

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Executive Summary
Social commerce, group buying, daily deals, flash sales. No matter which term or variation is used, the trend triggered by Groupon, LivingSocial, Gilt Groupe and hundreds of other sites is unrivaled in its meteoric growth. Driven by a dramatic increase in both the number of deal services, the volume of new offers hitting the market and consumers’ insatiable demand for quality products and services and great prices, the daily deal market is one of the most intriguing and dynamic segments online. Groupon’s success – highlighted by its spurning a rumored $6B acquisition offer from Google and its expected IPO – is well-publicized. Yet to date there have been few comprehensive reports of the detailed dynamics of the market in 2010 and expectations for 2011. Local Offer Network is a leading provider of technology and services to the fast-growing market for group buying services., The Local Offer Nework Deal Engine™ aggregates more than 2,000 group buying offers per day from websites in 97 markets worldwide. As one of the first and only companies to monitor nearly every deal across the web, Local Offer Network has unmatched insight into how this market is evolving and key trends that will shape its future. Key findings from the report include:  The group buying industry will expand by 138% to $2.66B in 2011  More than 63,000 deals were published in 2010, and nearly 40,000 in Q12011 alone.  As a wider variety of merchants join the group buying movement, new entrants from luxury and higher priced categories are moving average transactions higher in step. While dining, spa and health-related deals still abound, group buying now cuts across nearly every consumer category.  Geographic expansion has been a major growth driver, with deal sites now in 80 markets across the country compared to just 48 in 1Q 2010. Methodological note: The results in this report cover activity from January 2010 through March 2011, and incorporate analysis and projections based upon:    a database of more than 90,000 offers collected and classified via the LON Deal Engine actual consumer purchases recorded across a broad spectrum of LON partner sites financial data provided by group buying sites

Specifically excluded from this report are:  Sites monitored by LON in Canada, the UK and Australia  National “private sale” sites For more information, please contact Local Offer Network via contact@localoffernetwork.com.

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Industry Revenue: A Staggering Growth Story
Local Offer Network estimates that groupbuying industry revenue totaled $1.12B in 2010, and projects that the market will grow to approximately $2.67B in 2011. This 138% growth expectation underscores the exceptional consumer appeal of this phenomenon – and explains the rush of competition behind it.
US Group Buying/Daily Deal Market Industry Revenue (Gross)
Source: Local Offer Network Estimates

$2.67B

$1.12B

2010

2011

Site Introductions and Expansion: The Land Grab
The past year has brought an influx of deal providers, with well-funded national brands joined by local market entries, vertical market specialists and legacy publisher-branded products. The past six months in particular have seen a major surge, as sites that were in planning and development earlier in the year made their debut. To date, LON has monitored more than 320 sites offering local daily deals in the US. In addition, approximately 70 sites in the US exclusively offer national daily deals. LON has observed site churn of approximately 25%, driven partially by acquisitions but moreso due to business failure or unexplained dormancy. While such losses are unfortunate, they are in line with expected overall failure rates for startup businesses.
US Group Buying/Daily Deal Market New Deal Sites Tracked 322
Source: Local Offer Network

New Cumulative 97 61 61 36 2Q10 25 3Q10 122 83

205 117

1Q10

4Q10

1Q11

The average US deal site operates in more than 10 markets; however, the 24% of sites that operate in 3 or more markets provide deals to an average of 19 markets per site. This is driven by both expansion of well-funded sites with local presence and several sites that publish national or broad multi-market deals

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Deal Flow: “One Deal a Day” a Distant Memory
A total of more than 63,000 offers were published in the US in 2010 (N.B. An additional 15,000+ offers were published in Canada, the UK and Australia). The industry growth explosion will have Americans see an estimated 40,000 offers in 1Q 2011 alone, driven by new deal brands and an increasing number of sites publishing multiple offers per day. Note slower growth during the holiday season; in December consumers still spent on traditional gifts, softening growth in the category.
US Group Buying/Daily Deal Market Total Offers Published
Source: Local Offer Network 39,993

22,163 19,676 14,462 6,895

2010-1Q

2010-2Q

2010-3Q

2010-4Q 2011-1Q (E)

Category Trends: From Burgers to Botox, and Everything in Between
Food and Drink offers have always been the leader in this market, though the category’s lead is slipping as more diverse categories enter the mix. Note that home products and services (e.g. Angie’s List) and Clothing and Accessories – categories that a year ago might not have been considered a natural fit – are gaining importance.
US Group Buying/Daily Deal Market Offer Distribution by Category
Source: Local Offer Network

20101Q
1 2 3 4 5 6 7 8 9 10 Food & Drink Beauty, Spa & Massage Fitness & Nutrition Sports & Recreation Home Products & Services Health, Medical & Dental Clothing & Accessories Arts & Entertainment Photography & Photo Services Kids All Other 31% 20% 6% 11% 2% 3% 2% 5% 2% 1% 16%

20102Q
29% 19% 7% 9% 2% 3% 2% 4% 2% 1% 20%

20103Q
28% 20% 7% 9% 3% 3% 2% 3% 2% 2% 21%

20104Q
26% 20% 7% 5% 6% 5% 4% 3% 4% 2% 17%

20111Q
24% 19% 7% 4% 8% 4% 6% 3% 4% 4% 18%

Grand Total
27% 19% 7% 7% 5% 4% 4% 3% 3% 2% 18%

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Prices: Rising Along with Category Diversification
Prices began edging up noticeably later in the year, coincident with increased competitive activity in the aforementioned luxury and higher-priced categories.
US Group Buying/Daily Deal Market Average Price per Deal Voucher - By Category
Source: Local Offer Network

US Group Buying/Daily Deal Market Average Price per Deal Voucher All Categories
Source: Local Offer Network

$42.45

Health, Medical & Dental Home Products & Services Beauty, Spa & Massage Photography & Photo Services

$60.41 $52.78 $48.67 $48.61 $39.38 $38.81 $36.70 $35.64 $34.14 $31.15 $25.72

$38.04 $36.86 $37.34 $36.86

Fitness & Nutrition All-Category Average Kids Sports & Recreation Clothing & Accessories Arts & Entertainment Food & Drink

2010-1Q

2010-2Q

2010-3Q

2010-4Q

2011-1Q

Discounts: Merchants Invest, Consumers Win Big
The average discount per offer (price of voucher vs. stated value of services) has stayed relatively steady over the past year at 53%. Higher-priced services such as medical/dental, home products/services and photo offers provided the greatest relative discounts, in order to come within reach of the broadest range of consumers.
US Group Buying/Daily Deal Market Average Reported Discount per Offer
Source: Local Offer Network

-62% -61% -58% -58% -55% -53%

Health, Medical & Dental Photography & Photo Services Home Products & Services Fitness & Nutrition Beauty, Spa & Massage Clothing & Accessories

No question consumers win in this business, Arts & Entertainment -53% Food & Drink saving an estimated $1.26B over the course of -52% Kids 2010 and looking forward to $3.0B in savings in -52% Sports & Recreation -50% 2011. The flip side: merchants have invested Total - All Categories -53% heavily to bring about this outcome with $1.76B in forfeit revenue (net of discounts and deal site revenue share). It stands to reason that other local advertising and promotion methods will in turn pay a price, underscoring the need for legacy companies in local advertising to determine how they will play in this market if they have not already set a strategy.

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Multi-Voucher Purchases: Sometimes You Can’t Eat Just One
Whether because of purchasing as gifts, multiple uses or just on irresistible impulse, 14% of transactions included multiple vouchers for the same deal; 10% included 2 vouchers and 4% included 3 or more.
US Group Buying/Daily Deal Market Average Vouchers Per Purchase
Source: Dealradar.com/Local Offer Network

3 or more: 4% 2: 10% 1: 86%

Market Growth: Now Coming to a Hamlet Near You
Chicago remains the birthplace and still the leader in the group buying phenomenon. However, there are now deal sites in 80 markets across the country, compared to just 48 in 1Q 2010. There is still huge headroom in untapped markets, though a market must have critical mass of buyers in order to sustain a site that offers frequent, truly local offers. This means that smaller markets can expect sites to provide deals with longer duration and/or national offers such as for online retailers. Note: LON research shows that smaller markets have a disproportionate skew toward online retail offers, highlighting the challenge of building a deal business in such markets.

US Group Buying/Daily Deal Market % Offers Published by Market
Source: Local Offer Network Chicago New York City San Francisco Boston Los Angeles San Diego Washington DC Atlanta Minneapolis Austin Seattle

7% 5% 5% 4% 4% 3% 3% 3% 2% 2% 2%

8% 6% 4% 2% 0%

US Group Buying/Daily Deal Market % Offers Published by Market
Source: Local Offer Network

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Deal Duration: You Snooze, You Lose. Sort Of.
The concept of “one deal, one day” has long since gone by the wayside, to the benefit of consumers and, in some cases, merchants who want more time to get in on the action. While the average offer was available for less than two days a year ago, that window of opportunity for savings has jumped to more than three days, driven by some offers that remain active for as long as a week or more. In some cases, the tradeoff in urgency is balanced by scarcity – e.g. Gilt City which offers unusual products and experiences in limited quantity but for more than one day.
US Group Buying/Daily Deal Market Average Offer Duration (Days) Source: Local Offer Network 3.1 1.9 2.2 1.8

1.9

2010-1Q

2010-2Q

2010-3Q

2010-4Q

2011-1Q

Conclusion: Business Models Will Evolve, Momentum Will Continue
Followers of the group buying industry often ask “is this evolution or revolution?” The market trends highlighted in this report indicate that both are occurring. A critical mass of online shoppers – who are online virtually 24/7 – created a perfect storm to connect online and offline commerce in a revolutionary way. Yet group buying concepts long predate the current wave of deal sites and even the digital age, and new deal site models continue to evolve. Local Offer Network projects that in 2011, more than $2.5 billion in transactions will occur via group buying sites in the US alone – a striking level of volume for a group of websites that did not exist only three years ago. As the market continues to expand, the number and variety of deals offered will increase significantly, and a wider range of sites publishers will deliver promotions to their audiences. While market consolidation and attrition will occur, Local Offer Network predicts that the overall number of competitors will continue to grow. In turn:   Consumers will enjoy access to thousands of deals a day, bought directly from sites of all sizes, and cia convenient tools such as deal aggregators and personalized deal feeds. Merchants will be better-equipped than ever to measure the relative cost of consumer acquisition from various channels, and will optimize their spending accordingly. Legacy advertising methods will feel the pinch. Multi-channel and online publishers of all sizes will be driven to participate in this market – if they are not already – to protect and grow their advertising revenue. Increasingly, these companies will create and sell their own branded deal products and channels to preserve their market relevance.

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Well-funded, top-tier deal providers will continue to increase the cost of competitive entry by driving up cost of consumer acquisition. This will in turn force smaller sites to differentiate their products and find creative and cost-effective ways to create scale. Geographic expansion will continue. Somewhat ironically, national online retailers may enjoy the greatest advantage in smaller cities and towns because of the challenge of gaining critical mass in these markets.

For the foreseeable future, the group buying movement will continue to grow unabated. And consumers will continue to win, through access to products, services and experiences that may not otherwise have been within reach.

About Local Offer Network Local Offer Network (LON) is a leading provider of technology and services to the fast-growing market for group buying services. Launched in early 2010, the LON Deal Engine™ aggregates more than 2,000 group buying offers per day from group buying websites in 97 markets worldwide. LON products and services include the LON Deal Wire™, a web-wide distribution network that allows group buying sites to achieve instant audience scale and publishers to tap new revenue streams by syndicating offers from those sites; VoucherPro™, an offer creation platform that enables the creation new daily deal advertising products; and Dealradar.com, a convenient deal-shopping tool for consumers in the US, Canada, UK and Australia.

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