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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.”

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