LivingSocial, Groupon’s closest competitor, recently launched a group deal offering $20 Amazon gift cards at $10 apiece. This group deal ended up being the best-selling group deal of all time and came shortly after it was reported that Amazon invested $175 million in LivingSocial (you can be the judge and link those two things together). Certainly, there are some things that we can learn from LivingSocial’s (and Amazon’s) spectacular success. We ourselves also have our speculations about how and why the group deal succeeded:

1. The deal sells a discount, not a discounted product. Perhaps the biggest reason that the deal succeeded is that, all things being equal, consumers like taking advantage of savings per se more than savings tied to a specific product. Selling a general discount thus made the deal more relevant to everyone at large. After all, as suggested by its logo, Amazon sells everything from A to Z.

2. Gift cards serve as common gifts. It is no secret that gift cards are commonly seen as gifts; they even have the word “gift” in it. Consumers buy in a slightly different frame of mind when it comes to shopping for gifts. They tend to have greater willingness and urgency to make a purchase, and the core concern is usually “fit” – whether the gift suits the recipient. Gift cards are an excellent choice for gifts, since it transfers the cognitive costs of choosing a specific item to the recipient herself. Alas, handing over cash is still too crude for Western culture (though it is a very common practice in Eastern cultures), so gift cards are conceived as a convenient intermediary that nonetheless captures the equivalent value of the gift that the giver is willing to give.

3. It’s Amazon. Most people are already willing to pay full Amazon price for anything Amazon. Running a group deal for anything Amazon is, in economic terms, plainly surrendering consumer surplus to consumers and more. Most things on Amazon already sell like hot cakes on Amazon, and giving a discount when people are already sold is like proposing to a girl and giving her a jet plane in addition to the diamond ring that already made her said “yes” earlier on.

4. It’s Amazon. Most online retailers know that Amazon is quite a different animal compared to themselves, not that they have no good reason for thinking that. Simply put, Amazon can afford to lose $10 per customer (on the surface) but will make it up over time based on brand loyalty and customer lifetime value. $13 million is pocket change to Amazon, an expendable marketing cost, if it means that they can convert a boatload of people who have never shopped online into regular online shoppers. That is where the untapped market lies for them anyway.

Clearly, there are many more reasons as to why LivingSocial and Amazon succeeded with this one, and we could all speculate till the cows come home. Unfortunately, we believe that the tactics that we shortlisted are not that easily replicable for the average online retailer. Sure, we all can sell a general discount for our custom jewelry store, but consumers must want what we sell in the first place. Also, your competitors are going to sell a discount as well at your first sign of success, setting the stage for fierce price wars. Any fool can drop prices, but it takes wisdom to drop prices and make it profitable in the long run. In other words, it is easy to reel the fish in (get people to give a hoot first), but it is much harder to cook the fish (convert them into loyal, repeat, evangelizing customers).