From the July 2011 issue of Entrepreneur

What are you feeling now? Are you hungry? Are you bored? With the answers to those questions, you've probably covered 50 percent of the basic emotions experienced daily by Americans. Add in "feeling frisky" and "hopeful the Cubs will take it all this year" and maybe you're up to 95 percent. (OK, the Cubs are a disorder localized to Chicago.)

But deal-a-day powerhouse Groupon thinks it can help its users and the merchants who want to reach them by asking customers what they want right here and right now. Currently the company is testing a feature addition to its standard smartphone app called Groupon Now. When users (so far, just Chicago-based users) open the app, they confront two statements: "I'm hungry" and "I'm bored." If they click on either, they are taken to a map of Groupon restaurant or entertainment/attraction deals that are available right then--but only for a short window. Users will buy the deals via their smartphones, then go to the merchant's site to redeem them that day.

The setup is different from the deal discovery and redemption process that has helped Groupon grow into a dominant force with 6,000 employees and a looming IPO with a $25 billion valuation. Up to now, Groupon buyers have found their deals mostly via daily e-mails or by visiting the website, and the coupons they buy can be redeemed months after purchase.

But the deep-discount space is becoming crowded with hundreds of other players, all trying to reach consumers who could be motivated by a hefty rebate to switch merchants for things they usually buy, or to spend on a special-occasion purchase in the face of a good price. You may only go sky diving once in your life, but for 50 to 60 percent off, you just may decide that time is now, and the place is your local airport.

Groupon stats
The company has worked with close to 50,000 businesses in north america, most of which are small businesses

10 percent of deals are redeemed within the first 10 days of purchase

More than 70 million subscribers worldwide

Groupons are sold in more than 170 markets in north america

More than 400 deals per day are run in north america

40 million Groupons have been sold in north america

Groupon has saved buyers in north america more than $1.9 billion
 

A recent study by BIA/Kelsey predicts that U.S. spending on daily deals will grow from $873 million in 2010 to $3.9 billion in 2015. If companies like Groupon and LivingSocial continue to roll their local deals out to more metro areas, Kelsey forecasts that annual U.S. spend on daily deals could reach as high as $6.1 billion in 2015.

For Groupon and LivingSocial, continued expansion means more than just adding cities--it also means increasing ad inventory. The one-deal, one-metro setup means only one merchant can get the spotlight every 24 hours, and that has created a bottleneck of potential advertisers. Hence the efforts to grow into a new but related type of dealing: showing users a roster of merchant offers when they're out on the street, mobile phone in hand.

Washington, D.C.-based LivingSocial technically beat Groupon into this space with a slew of instant-deal offers for $1 lunches in its hometown on April 15. Those who opened the LivingSocial smartphone app to Instant Deals on that day found cheap eats from 100 participating merchants operating within a half mile of their location--deals redeemable via phone screen and good only from 11 a.m. to 2 p.m. that day.

These tests of real-time sales and redemption (because they are still tests) offer a way for Groupon and LivingSocial to rise above the slew of daily-deal clones and coupon-scraping aggregators and to build deeper engagement with their users. It also lets them compete more effectively with anything thrown their way by Google and Facebook--brands that already see strong mobile use and are piloting daily-deal platforms of their own.

For merchants, this real-time dealing opens up a lot of new opportunities, as long as they go in with their eyes open to the potential problems. No longer do restaurants or salons have to position daily-deal coupons and then worry that they'll get redeemed months later during a busy period or after a cost hike, further eating into margins. Instead, they can use these short-term bargain rates to drive traffic during traditionally slow periods, making good use of inventory--whether perishable food, empty room nights or unused stylist chairs--that would simply go to waste anyway.

Calibrating the magnitude and length of a standard daily offer has always been a challenge for merchants using these platforms. Capping the coupon maximum too high can swamp a business in low-revenue sales, while letting the deal last too long muddies the metrics of evaluating its success. (Has a deal worked if 10 percent redeem it in the first week and 60 percent redeem it in the fourth?) Both Groupon and LivingSocial work with merchants to control these factors and manage their expectations, but a badly planned daily deal can still result in long waits, overwhelmed staff and poor service.

By shortening the redemption window, these mobile deals should make real-time couponing a more feasible prospect with less downside for small to midsize businesses. Of course, if even a three-hour deal is good enough, businesses still have to make sure they're ready for the customer stream. Many of the restaurants taking part in the $1 lunch LivingSocial promotion saw lines out the block, and LivingSocial wound up refunding some of those buyers' dollars. That's why these are still tests. But they're certainly tests worth watching.