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.

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About the Author:

Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.

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  1. Jonathan H says:

    I think most people refer to Daily Deal Sites in the wrong fashion. The original Daily Deal Site model is that of selling a PRODUCT for 24 Hours at the lowest price on the web. Groupon and Living Social sell services primarily, while taking absolute advantage of their partners. Good traditional Daily Deal Sites sell quality merchandise at a profit which in my opinion is a model that will always be sustainable.

  2. Jonathan H says:

    Some fine examples include the orginator http://www.woot.com and time sensitive hybrid models such as http://www.sharkstores.com

  3. Jeff Petrosillo says:

    Great article! However, the use of the term ‘Daily Deals’ to describe this type of coupon site isn’t 100% accurate. A more appropriate term to describe this business model would be ‘Daily Coupon’ Sites.

    The original ‘Daily Deal’ website model, also referred to as ‘Deal a Day’ or ‘Deal of the Day’, is that of selling a single PRODUCT for 24 Hours at the lowest price on the web. This differs drastically from sites like Groupon and Living social who only focus on selling COUPONS rather than PHYSICAL MERCHANDISE.

    To see the difference between ‘Daily Deal’ and ‘Daily Coupon’ sites compare a site like http://www.Groupon.com to either the orginator of Deal of the Day sites, http://www.woot.com, PUBLIC time sensitive Daily Deal hybrids such as http://www.sharkstores.com, or PRIVATE time sensitive Daily Deal hybrids such as http://www.gilt.com

  4. John Johnson says:

    The new wave of “deal sites” will take advantage of social media and social influence to offer better deals to more influential people. The reason organizations want to give celebrities free products is because it just makes good business sense. Word of mouth marketing has real value especially when you’re a local merchant. Take a look at a new venture called SocialLadder http://www.socialladderapp.com. The model is unique in that merchants can dynamically price their deals based on how influential the consumer is… this is where its going.

  5. Jerry says:

    Lots of great advice for small business owners considering a Groupon, Living Social or deal of the Day Marketing Campaign. Trying to get customers based on price can be lethal to many small business owners. If a small business thinks they just can pick a product or service and be successful, they are setting themselves up for failure.

    Businesses with high profit margins on a product or service are best for this kind of promotion. If you want to be successful, it takes a lot of planning and work even before your groupon marketing campaign starts.

    You need to pick the right product or service and know which days to run it. In addition, the limits you need to set for your vouchers. Also, you must have a creative plan to get the contact info from the groupon customers and how to use that information wisely. The employees need to be trained on how to handle this promotion and don’t forget about your loyal customers. What are you going to do for them.

    Marketing on groupon can bring a lot of cash to a small business without having to pay upfront. However, Groupon marketing is not a long-term marketing strategy.

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