Why are Daily Deal sites "hard to scale'?

I read a lot that daily deal sites such as groupon and livingsocial are hard to scale from a business viewpoint.

What does this mean, and why is this so?

It's hard to scale because you have to use salespeople; either for inside sales or door-to-door. In that space, a very good sales person can average 1 sale per day and so the cost of acquisition turns out to be higher than the local businesses can often afford to spend. For instance, if a sale costs you about $500 (salesperson's commission + related sales expenses) that means you need to charge $500 to be just at break even. Imagine a store buying such service: even if he's operating at a 10% margin (most don't!) then his consideration goes like this: "in order for this $500 purchase to make sense, it would need to generate $5,000 of revenue." And most store owners don't buy that! So that's why in the local B2B space, what's working is Facebook and Twitter because a) there's no on-the-ground sales force and b) there's no cost for the business owner. These services scale virally by leveraging their brand equity and using PR. They target large corporations with a small sales force and use PR to tell small business owners "look at how our service is working for corp XYZ: it will work for your small bsuiness too". But if you don't have brand equity, then you need huge sums of money to create an army of door-to-door sales people ; and that's why it's hard to scale sites like Groupon without the 100's of millions of dollars they raised. The cheaper approach to this market is inside sales : you put 50 sales people in a room, make 1 million telemarketing phone calls to business owners and shoot for a 1% success rate to establish a beach-head in that market and start building brand equity from there. But that still takes $5 Mio and every VC knows that this brute-force approach is unlikely to succeed. Of course, the dumb approach is to combine both strategies and use both inside sales with an outside sales force because now you're compounding costs! Local B2B sales is a tough space: hard to sell and hard to scale. In fact, anytime you have a business process (such as a sales-intensive distribution strategy) that scales linearly (ie. to double the production output you ALSO need to double the inputs of production), you're going to face scalability issues that require lots of capital.

Just to add to Frenchie's great answer - building brand equity is a technique that seems to be heavily under utilized. Spend the time up front building some solid brand equity in your space and leverage that brand equity to save yourself a LOT of sales and marketing dollars.