LivingSocial and the Future of Local Group-Buying

Right now, Groupon-style group buying is more or less just coupons that get sent to you via email to entice you to sign up. What if you could look at a real-time, auction-style exchange of local offers from merchants or retailers or restaurants in your vicinity — maybe even on your mobile device — and pick the offer you wanted for dinner that evening? You can’t do that now, but that’s one vision of where the local group-buying phenomenon is headed in the future, according to Don Rainey, a partner with Grotech Ventures and an investor in LivingSocial, the number two player in the U.S. group-buying market next to Groupon.

Rainey said he sees a day when merchants and potential customers interact through a kind of real-time exchange — like a stock exchange, with buyers and sellers, but for local offers on meals or other goods. “I can see local retailers and consumers bidding in a real-time system for where that consumer is going to go for dinner,” says Rainey. If a merchant is having a slow night, they can put an offer into the system and users can choose between that and multiple other offers, based on location and the time they want to go out. As someone who is constantly looking for new options for places to eat in my local area, this sounds like a winner to me.

Groupon gets all the press when it comes to group buying, primarily because it’s the largest player in that market by far; it has raised more than $165 million in venture financing and has sales that are approaching $500 million. However, LivingSocial is a strong number two in that expanding space, and in some regional markets, it’s a larger player than Groupon, according to Rainey. Like its larger competitor, the company makes most of its money by taking a cut of the deals that are offered through its system

Echoing comments made by founder and CEO Tim O’Shaughnessy in a number of interviews, Rainey said that LivingSocial takes a somewhat different approach to the group-buying market than Groupon does. While the larger company is acquiring foreign competitors in Japan and Russia and trying to grow to national or international scale, LivingSocial is more focused on local markets, the VC says — it sees itself as partnering with local merchants, and helping them market themselves and understand how group offers work. “LivingSocial fields a local sales force in every city in which it does business,” he said, unlike Groupon, which often relies on phone support.

[inline-pro-content] In terms of the competitive landscape, although Groupon is much larger than LivingSocial, it’s not clear that the market is a zero-sum game. LivingSocial and other competitors (some of whom Liz described in a recent piece on “Groupon Wannabees”) could carve out some local market share for themselves, particularly through partnerships like the one LivingSocial has with the Washington Post, where the newspaper uses its local reach to publicize the company’s latest deals to its readers. Rainey said newspapers in particular need help grasping the idea of “cost per action” deals such as group buying, because they are so used to thinking of display advertising as the only option (Groupon has similar partnerships with some media outlets).

If anything, in fact, the group buying market looks like it could continue to expand beyond Groupon and LivingSocial. In one glimpse of where it could be going, Walmart (s wmt) recently announced it’s experimenting with a form of group buying through a Facebook offering called CrowdSaver; if enough potential shoppers click the “like” button on a proposed discount, Walmart goes ahead with it. If anyone has national and international reach when it comes to shopping, it’s Walmart, and the entry of the giant retailer and its ilk could make the space even more competitive in the future, and put pressure on both Groupon and LivingSocial to continue innovating.

LivingSocial raised a Series C round of $14 million in April from new investor Lightspeed Venture Partners and a group of other financial backers that included U.S. Venture Partners, Grotech and Revolution Capital. The company also raised a $25 million Series B round in March and a $5 million Series A-1 round in January.

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