Groupon fallout: What's next for daily deals?

• Daily deals business model needs to be rethought
• Companies have to make it worth it for merchants
• Customers are bored by daily e-mails

Daily deals may have ballooned to stardom, but the craze is just as quickly starting to deflate. After Groupon, a pioneer in the space, fired its founder and CEO Andrew Mason last week, several experts say daily deals companies need to seriously rethink the way they do business.

Groupon fired Mason Thursday, a day after reporting fourth-quarter earnings that missed analysts' expectations. Shares were down 25% after the report before jumping slightly on news of Mason's firing. The company has since recouped all of its losses and is trading higher Tuesday.

Groupon experienced massive growth after launching in 2008, and hired an equally massive workforce in the years that followed, but didn't bring in the revenue to justify it.

As other daily deals companies jumped into the space, the market became overcrowded, the deals redundant, and merchants grew frustrated once they realized offering a deal didn't necessarily help business.

Analysts and others won't go as far to say daily deals will fade away completely, but the space will shrink and companies such as Groupon and Living Social will have to come up with new strategies for long-term success. Here are some suggestions:

• Offer deals that stand out.

By this point, consumers are bored by the constant barrage of e-mails offering discounts on bikini waxes, hair salons and random Thai food restaurants. "The deals are for the same types of products with hardly any variations," says Tom Adams, 33, of Chesapeake, Va. Others say the quality of the deals has declined, and there's too much emphasis on selling products rather than coveted experiences.

"When the deals were more experiential they kind of piqued interest a little more," says Kait Smith, 24. "My favorite deals from the past have been ones that really enabled me to try new things." Smith recently purchased a deal through Living Social for a trip to Mexico, and says her favorite deal she ever bought was for a jet-ski rental.

Groupon and Living Social have both started offering deals on an assortment of goods from iPhone cases to blankets to curling irons, where profit margins are a lot smaller, says Kathy Gersch, executive vice president for Kotter International, which helps companies implement new strategies.

"They make less money on those deals," she says, and it means they're competing in an already-crowded space dominated by the likes of Amazon and eBay.

• Find other ways to make money.

Daily deal companies face a conundrum, and that is they can't survive solely on daily deal offerings, Gersch says.

"It's going to be difficult in such a competitive market unless they can monetize in other ways," she says, such as leveraging data they've collected from doing business or building on partnerships with merchants.

Or perhaps daily deal sites can partner with large retailers or restaurant chains on a digital couponing strategy, says Jonathan Marek, senior vice president at Applied Predictive Technologies, a company that provides software and other tools for businesses to determine how profitable their business strategies are.

"Large retailers and large restaurant chains, they do all kinds of couponing and promotional offers," Marek says. "If I were Groupon, I would be thinking about, do I have something proprietary that could actually help me help those companies to do this better."

• Realize who your customer is.

The problem with daily deals companies is that "they have a fundamental disconnect in understanding who their customers are," says Sucharita Mulpuru, a retail analyst at Forrester Research. The primary customer is not the person buying the deal.

"The customer is the merchant," she says. "And if they service that customer, they have a shot at survival and being around in 10 years."

Instead, daily deals companies have focused on offering a lightning round of new options to consumers without much regard to how it pays off financially for the merchants they do business with.

"The deep discounts don't work for their customers, meaning the businesses," Marek says. "You would need to see massive amounts of new customers come again and again in order for it to work and that just doesn't happen."

Instead, he says, places such as restaurants and spas end up drawing one-time customers looking to save money or repeat customers who otherwise would have paid full price because they already frequent the business. Either way, they lose money.

• Make it profitable for businesses, not just for you.

"You have to have a model where your customer benefits in the end economically," Marek says.

He envisions more emphasis on options like Living Social's takeout and delivery, which advertises real-time, hyper-local deals on lunch and dinner spots.

From a restaurant's perspective, it's a better way to draw new customers, Marek says. "If I flip it to, I have empty seats right now and if I can bring people in right now at a discount (who) wouldn't have come in, there's a lot more power in that."

Bottom line: Daily deals will live another day, or several years. But sites will become much more tailored.

"This is not the death of the daily deal," Mulpuru says. "It's probably going to get smaller but more profitable. Which is good for everybody."