LivingSocial takes Andrew Mason's advice with new targeting tech from Custora. But is it too late?

By Erin Griffith , written on April 1, 2013

From The News Desk

The daily deals fad has been out of vogue for many months now. Blame market saturation and daily deal "fatigue." Blame an impossibly fast rise, coupled with a lack of targeting and low quality deals. When Andrew Mason left his post as Groupon's CEO last month, he cited one big regret: not using data to give the customers what they wanted.

From his infamous parting letter:

My biggest regrets are the moments that I let a lack of data override my intuition on what's best for our customers.
It appears Groupon competitor LivingSocial, which has ridden out the daily deals backlash as a private company, is taking Mason's advice.

LivingSocial has teamed up with Custora, a Y Combinator-backed customer retention startup in New York, to help it better understand which users are worth paying for and how to keep them shopping.

Despite blood in the water, LivingSocial still has a massive customer base of 70 million. So even as the company loses its co-founding CTO, and raises emergency capital, and lays off hundreds, the company would like to retain those precious remaining customers and keep them buying. Presumably the company's investors, which have poured $918 million into the company, would like LivingSocial to keep its customers happy too, given the odds of a $1 billion exit that avoids a messy equity cram-down, as Sarah Lacy argued recently, are looking increasingly tough.

Custora's algorithm is already used by emerging tech stars like, Birchbox, and Etsy. LivingSocial is the largest and perhaps most critical-condition client to sign on. But the demands of a daily deals client aren't that dissimilar to that of a regular commerce client, CEO Corey Pierson says. They all just want to find more high value customers, and know as quickly as possible when new customers are high value.

"High value customers are worth ten times more than the people who are one deal and then out," Pierson says. The big criticism of Groupon around the time of its IPO was that the company was paying an obscene amount of money to acquire its customers -- up to $6 or $8 per customer. Living Social's work with Custora was not meant to lower customer acquisition costs per se, but to spend that capital acquiring the most valuable customers. "They never came saying, 'We need to lower the cost of acquisition," says Pierson. "It was more about how we can quickly get you accurate long term valuations on customers and can be more long-term oriented and smarter for the long run."

Custora offers "persona analysis" that models customer behavior by comparing it to past behavior from other customers with a similar buying pattern. Given that 20 percent of a company's customers often bring in 80 percent of the revenue, Custora's goal is to help businesses more quickly identify those 20 percenters and serve them what they want. The company, which graduated from Y Combinator in 2011, raised an $850,000 seed round from SV Angel, Founder Collective, High Line Venture Partners, Valhalla Partners and angel investors.

LivingSocial and its daily deals peers are no doubt adjusting to the reality that their core business -- the group coupon -- is a much smaller business than it appeared to be in 2009. That's why Living Social has since tried to expand into food delivery, experiences, vacations, and shopping. The daily deals fad is over, but until its leaders come up with a bigger, better business to replace it, they'll be struggling to hold onto the customers they still have.