I’m guessing you’ve heard the news, given that the deal has garnered a ton of hype in the press and social media world, but LivingSocial subscribers can sign up to receive $20 worth of Whole Foods groceries for $10.

Sound familiar? Possibly because LivingSocial pulled a similar move earlier with financial backer Amazon. And just like 1.4 million people flocked to Amazon with a daily deal voucher in tow, similar numbers seem like a forgone conclusion for this Whole Foods offer.

But what’s really going on here from a business standpoint? As we all know, free lunches don’t exist, and as such there must be a calculated exercise going on behind the scenes. Let’s try to break it down.

The standard daily deals model adopted by providers like LivingSocial and Groupon is to demand a 50% off coupon from a participating merchant and then take 50% of the proceeds from that coupon in exchange for marketing the deal to a database of email subscribers (in case you missed our webinar on the topic this week, we’ll be publishing the video recording shortly).

So the brand is essentially selling a certain number of "units" at 25%. Skeptics are questioning the business model, but businesses justify the investment as they either stand to gain long-term customers or customers are apt to spend significantly more (Whole Foods anyone?) than the c(gr)oupon value.

But thats’ the standard case. To me, this LivingSocial/Whole Foods deal looks like it has a much different flavor. Consider the following (NB- I have no validation on these assumptions, but for argument's sake let take them as true for now):

• Whole Foods is most likely NOT paying Living Social to run this promotion. Instead, Whole Foods is absorbing 50% of the redeemable value  (1M coupons @ $10 of free money = $10M dollars) or $5M.


• Living Social is in fact PAYING Whole Foods the other $5M.


• 10% of the coupons will be lost or not redeemed, reducing the exposure to $4M on both sides.


• After the promotion runs, LivingSocial will end up with a host of new subscribers and tons of free PR and social media buzz. For simplicity sake, let’s say 50% of the Whole Foods deal purchasers are new to LivingSocial, resulting in the addition of 500K subscriber emails to LivingSocial’s database.


• 20% of these new subscribers will be "real" in the sense that they are not those who only joined for the one Whole Foods coupon and never plan on redeeming another daily deal.

Taking these assumptions as given (or some numbers close), you could calculate that LivingSocial just paid $4M for 120K new subscribers. This works out to roughly $33 per new customer.  Now add into the equation the PR/Social Media Buzz they are getting along with the fact that I am writing and you are reading this, and that cost per new customer acquisition should decrease a good bit.

To put that figure into context, some Superbowl spots are going for $3.5M this year. If you are in a cutthroat space like group buying and have to focus on scale, there’s one answer: do it quickly if you want to survive. As a result, this type of a promotion starts looking pretty attractive. Never mind the fact that you are beating the little players in the space senseless with your deep pockets and making it virtually impossible for them to keep up. Securing a competitive foothold is the name of the game.