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Why Daily Deal Sites are Doomed

Unsatisfied small business owners are abandoning daily deal sites such as Groupon, LivingSocial, Travelzoo and BuyWithMe and won’t return in sufficient numbers to sustain such sites long term.   That’s one key take-away from the most exhaustive study yet done on the daily deals phenomenon. The study by Rice University business school professor Utpal Dholakia –probably the nation’s top expert on this topic – analyzed the performance of daily deals offered through five major deal sites in 23 U.S. markets. The study examined the results that businesses achieved on deals offered over an 18-month period ending in March 2011.

Overall, the picture isn’t pretty.  Most small businesses that have been making discount offers on Groupon, LivingSocial and other sites either don’t track the actual financial results of their offer, or have a distorted view of what’s really happening. Results from three Rice University studies and some 500 businesses surveyed show that most offers are not producing anything close to the financial successes for participating small businesses that a few claim to be having.  In short, daily deal sites may in fact be doomed.  

As small business owners look closer at the bottom line results of offering deep discount deals online, two things will happen:  1) the daily deal websites will have trouble attracting enough local businesses to fill their deal pipeline; and 2) business owners will be able to demand a higher revenue share, lower fees and more services.

If your business has made or considered a deep discount offer on Groupon, LivingSocial or any of the hundred or so copy-cat sites that have sprung up, first consider why many small businesses aren’t coming back.  Some of the study’s findings seem rather positive.  While 27% of businesses said they lost money, and 18% broke even, 55% said they made money.  About 80% of deal buyers are new customers (a good thing); and a stunning 1-in-5 consumers who buy a deal never redeem the voucher they’ve already paid for.  While this may actually be the primary way many businesses are turning a profit on their offers, it’s not much of a business model.

As BizBest recently wrote (see:  How to Create a Profitable Coupon Offer), crafting a discount deal that actually benefits your business long term is tricky. Most small businesses don’t get it right.  And the Rice University study uncovered a number of troubling red flags that point to structural weaknesses in the daily deals business model in general.  For example, two big things that local businesses bank on when deciding to offer a discount via Groupon or elsewhere are:

1)      That deal buyers will spend at least a little money beyond the deal value itself; and,

2)      That a goodly portion of the deal buyer customers will return at some point for a full price purchase.

But things aren’t working out that way on either count.  According to the research, just 1-in-3 buyers (35.9%) spends anything beyond the basis discount deal price. Even worse, fewer than 1-in-5 (19.9%) return later to make a full-price purchase.

Salons, spas, bars and restaurants – the bread-and-butter businesses for Groupon – seem particularly disillusioned with offering online daily deals.  Only 35.9 percent of bar and restaurant owners said they’d do it again, while 41.5% of salon owners would run another such promotion in the future.

If you do plan to proceed with a daily deal offer, here is BizBest’s advice on making it work:

  • To increase your chances of a profitable promotion, consider offering a daily deal of relatively high face value (say, $50 or more) with a shallow discount (at most 25% off face value), a short redemption period (90 days or less), and a limit on the number of deal vouchers consumers can buy.
  • Among industries, health care, professional services and special events have been the most successful at using daily deals; more than 70% of them made money on the promotion. However, two of the largest industries – restaurants/bars and salons/spas – don’t perform as well. Only 43.6% of restaurants surveyed earned a profit from the daily deal promotion, while 53.7% of salons and spas made money.  
  • Most importantly, don’t cut your other advertising and marketing spending to do daily deals. “Many local businesses that are spending their marketing dollars on daily deal sites have dramatically cut their advertising budgets,” Dholakia says. “This is a problem because they’re not building their brand when they offer discounted prices for their products and services. Only about 20% of customers using daily deals return to businesses to buy at full price, but customers acquired through other programs typically have much higher rates of full-price repurchases.”

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

Join the Local Group Buying Game with Caution

Offering great group buying deals online is the hottest thing going for local business.  By posting their deals on sites such as Groupon and LivingSocial, legions of local businesses (and some national brands, too) are attracting new customers, boosting sales, and augmenting their email lists.  The front runners in this exploding marketplace – Groupon and LivingSocial – have been making big headlines.  Groupon, for example, recently thumbed its nose at Google’s offer to buy it for nearly $6 billion.  Meanwhile, LivingSocial made a national splash offering $20 Amazon.com gifts cards for $10, and moving 1.3 million of them within 24 hours. And Google may soon launch its own version called Google Offers.

But hype and headlines aside, are Groupon and Groupon-like promotions worth it? According to a new study from the Jones Graduate School of Business at Rice University, the answer is only “maybe.” According to the study, Groupon promotions were profitable for 66% of the local businesses surveyed — and unprofitable for 32 percent. And despite the sites’ own testimonials, more than 40% of respondents to the Rice study said they would not do it again.  (The study covered 150 businesses in 19 U.S. cities and 13 product or service categories.)

Daily deals offered online have been wildly popular with customers, and the roster of U.S. and Canadian cities, regions or metros covered by the two leaders – about 125 for LivingSocial and some 190 for Groupon – is growing rapidly.  But the Rice B-school study showed that the discount offered and the number of deals sold did NOT predict profitability; nor did the percentage of users who purchased something in addition to the deal offered, or purchased again at full price.

The key was this:  “Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal,” says Utpal Dholakia, author of the study and a professor of marketing at Rice. “Employees must be prepared for this type of customer and the sheer volume that might come through.

“The social promotion industry reminds me of the Internet boom’s heyday. We are in the midst of a dynamic and exuberant period, and once the dust has settled the industry will look vastly different than it does today, with consolidation and savvier small-business customers.”.

Here are four things you should know:

  1. Groupon promotions offer the most benefit for businesses in which the promotion does not cannibalize sales to existing customers.
  2. Among the service businesses (restaurants, educational services, tourism and salons), restaurants fared the worst and salons and spas were the most successful.
  3. Businesses with unprofitable promotions reported low rates of spending by Groupon users beyond the Groupon’s face value and low rates of return to the business again at full price.
  4. Respondents indicated they had largely negative perceptions of Groupon’s competitors.

So far, it looks like the Groupons of the world  need to put more emphasis on creating positive outcomes for local businesses, and stop tilting the equation so much toward consumers.

Still, two in three local businesses report a positive outcome, so it’s worth trying it out. A great way to get a feel for how it works, who’s participating (both buyers and sellers), and whether your small business should give it a go is to check out some of the sample offers (Groupon here; LivingSocial here), detailed case studies and other details on the LivingSocial and Groupon websites.  The Groupon video here on BizBest is also helpful.

Both sites offer a full range of local merchant services. At Groupon, most things are done by phone or online, while LivingSocial maintains small customer service teams in the cities it works in.  They’ll help you devise and structure a deal specifically for your business that delivers on your performance goals.

Since a minimum number of people must buy the deal for the offer to be valid, you are guaranteed paying customers.  There are no up-front costs (other than your time) to create and run a deal.  Groupon, LivingSocial and other copy-cat type sites make money by taking a small piece of each deal sold.

Biz owners who’ve had success don’t try to target customers looking for “the perfect deal.”  Rather the way the system works – offering consumers a handy way to make new local discoveries – you get customers looking for an excuse to try something new.  The deal you devise gets them in the door, and it’s up to you to keep them coming back.

From a demographic viewpoint, the Groupon audience tends to skew younger, toward people looking for great stuff or experiences they’ve never tried, or maybe never heard about, right in their own backyard.  But with thousands more people subscribing daily in the cities covered (and more cities being added all the time), the customer range is widening .

Ask for help with “redemption cycle planning,” so your business isn’t overwhelmed by a large response it can’t handle – especially in the first 30 days following the offer. Groupon offers checklists and hosts webinars to help with the planning.  As part of the deal creation and planning process, the services will also work with you to calculate the optimal number of customer’s you’ll want to generate by an online deal, relative to your existing customer base, and the capacity or staffing issues of your particular type of business.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.