Daily deal publishers such as Groupon and LivingSocial are a hot topic in local business marketing, but do they really work? We culled research on the topic, looking for answers to some of the questions that determine deal success or failure. We found a number of excellent studies that shed light on these questions, from the point of view of real businesses and consumers.
Does offering a deal attract new customers? Yes.
A poll of consumers by customer satisfaction firm Foresee Results found that 31% of deal shoppers were new customers. Respondents to the Foresee poll described themselves as:
- Frequent Customers – 38%
- Infrequent Customers – 27%
- Former Customers – 4%
- New Customers – 31%
In another study of businesses by Utpal M. Dholakia of Rice University, respondents indicated that fully 80% of deal buyers were new. Perhaps the discrepancy is one of perception, Dholakia’s study polled businesses, while Foresee polled consumers. Business owners may perceive all but the most frequent of customers as new, while in fact the number of deal buyers that have never tried a business before is much lower. Either way, the majority of deal buyers are not regular customers, and a solid percentage are brand new.
After purchasing a deal, do consumers come back? Not really.
Businesses, according to Dholakia’s study, say that only 20% of consumers return to a business after cashing in on a deal. On the other hand, consumers say that they will return. In a survey of consumers by Lightspeed Research, 65% of deal buyers said they had returned to businesses. The discrepancy can be explained by the fact that consumers return to some of the businesses they visit, but not all. Factors such as quality of service, location and price presumably influence their likelihood to return.
Does my target customer purchase deals? Probably not.
According to the Foresee study, deal purchasers are reasonably distributed across age ranges and income levels, with a skew towards women (59%). But a recent AdWeek/Harris Poll broad sample of all consumers found that 20% of respondents had purchased deals on occasion, and only 4% had purchased deals frequently. 48% knew about daily deals, but hadn’t purchased one. This points to the fact that deal shoppers are a small subset of consumers overall. Deals are a good (perhaps necessary) way to reach that subset, but most of your target market doesn’t buy deals.
How will offering a deal affect my bottom line? Positively, if you do your homework.
Dholakia’s study found that 56% of businesses made money when offering a deal. That means they not only gained some new, long-term customers and built awareness, but they actually made money in the process. The factors contributing to success or failure vary widely by industry and the particulars of a deal being offered, but we’ve tried to identify some of the more important ones below.
So, do daily deals work? It’s a coin toss.
In the minds of businesses who’ve done daily deals, it’s pretty divided. A MerchantCircle study found that 77% of businesses who’ve tried deals plan to offer one again, while only 48% of Dholakia’s respondents answered such. MerchantCircle members tend to be online-savvy, while Dholokia took pains to gather a broad sample, which may explain the difference.
It’s early days yet for daily deals, but on the whole businesses’ experiences have been neutral or positive. Merchants are still learning how deals fit in to their marketing, and how to structure deals so they don’t break the bank. There is also more competition between deal providers, which will be good for both consumers and businesses in the long run. It is worth noting that consumers have no particular loyalty to Groupon or LivingSocial, and many local or niche deal providers are offering better terms to businesses. For now, Groupon and LivingSocial will reach more consumers, but you may actually be better off starting out with a deal vendor that has less reach. The worst horror stories tend to involve massive numbers of deals being redeemed at unprofitable rates. It is a good idea not to bet the farm on your first deal, as you are likely to learn valuable lessons that will help you structure and target future deals.
Here are some of the factors that lead to deal success:
- Give consumers a reason to come back. Provide great service, great products and/or an innovative new offering and they are likely to come back again and again, and pay full price.
- Tie a deal to a new product or service. Since many deal purchasers will already be familiar with your business, this is a way to get more value from them as well as new customers.
- Time your deal in the off season. If your business experiences seasonal ups and downs, do a deal when you are likely to break even or lose money anyway.
- Structure your offer so that consumers are likely to spend a lot more than the value of a deal. The economics get a lot better for you if people end up purchasing 2X or 3X the face value of the coupon.
- Fixed costs are high. Businesses who have high fixed costs and low incremental costs per customer are finding deals very effective.
Some good articles/resources on the topic:
- Doing the Math on a Groupon Deal, Jay Goltz, New York Times. Describes in detail the economic factors that determine deal success, with examples.
- Grouponomics, Felix Salmon, Reuters. Discusses the business model of Groupon as well as its effectiveness for merchants.
- How Businesses Fare With Daily Deals: A Multi-Site Analysis of Groupon, LivingSocial, OpenTable, Travelzoo, and BuyWithMe Promotions, Utpal M. Dholakia, Rice University. This is an absolute must-read for anyone looking to understand deal economics for businesses.
- Is Groupon Bad for Small Business?, Vinicius Vacanti, TechCrunch – a level-headed view of deal economics, with tips for how to structure deals.
- Daily Deal Calculator – great tool for calculating deal profitability, from deal aggregator Yipit.
Nico Brooks is a data geek who struggles to get his head around marketing problems, but he always enjoys the struggle. Two Octobers is an internet marketing company that provides marketing services and strategic consulting to businesses selling to local markets. We wrote this because we are in the business of helping marketers make prioritization decisions based on data. We hope it is helpful and would love to hear your comments!