Why Daily Deal Sites May be Doomed

Daniel Kehrer provides a greater understanding of the pros and cons to using daily deal sites.

By Daniel Kehrer
Founder, BizBest.com

Unsatisfied business owners are starting to abandon daily deal sites such as Groupon, LivingSocial, Travelzoo and BuyWithMe and may not return in sufficient numbers to sustain such sites in the future.  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 analyzed the performance of daily deals offered through five major sites in 23 U.S. markets. It examined the results local businesses achieved on the deals they offered over an 18-month period.

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.  Several Rice University studies show that most offers are not producing great results.  

As small business owners look closer at how deep discount deals offered online are affecting profits, two things may 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.  

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 be the primary way many businesses are turning a profit on their offers, it’s not much of a business model.

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 post a deal are these:

  1. That deal buyers will spend at least a little money beyond the deal value itself; and,
  2. That many of the deal-buying customers will return at some point for a full price purchase.

But things aren’t quite working out that way on either count.  According to the research, just one buyer out of every three spends anything beyond the basic discount deal price.  Even worse, less 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, are some things to consider:

  • Try 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 most successful; more than 70% made money. 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 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 ad budgets," Dholakia says. "This is a problem because they're not building their brand when they discount their products and services. Only about 20% of customers using daily deals return to buy at full price, but customers acquired through other programs typically have much higher rates of full-price repurchases."

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Daniel Kehrer is Founder & Editor of BizBest (www.bizbest.com), a free and independent information service for small business. Twitter: @BizBest  © 2011 BizBest Media®

About the Author

Daniel Kehrer, headshotDaniel Kehrer, Founder & Managing Director of BizBest Media Corp., is a nationally-known, award-winning expert on small and local business, start-ups, content marketing, entrepreneurship and social media, with an MBA from UCLA/Anderson. Read more of Daniel's tips at www.BizBest.com, follow him at www.twitter.com/140Main and connect on LinkedIn at www.linkedin.com/in/danielkehrer.
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