I wrote last year questioning whether the Groupon bubble was about to burst. At the time, the evidence seemed quite conclusive. After all, they had received a record number of complaints, and 70% of small companies confessed to hating the site.
Alas, a new study suggests that far from waning popularity with small businesses, daily deal sites such as Groupon are holding firm in the marketplace.
The study surveyed nearly 650 small and medium sized companies throughout 2011 and 2012, and the results were generally very positive.
“Overall, the results find little or no evidence of deterioration in the performance of daily deal promotions over the past year or as the business operator runs multiple daily deals,” says Utpal Dholakia, professor of management at Rice University’s Jones Graduate School of Business. “Rather, there is improvement on some metrics.”
There were some key standouts from the research:
- The likelihood of enjoying profitable promotions is associated positively with the business’s experience; while less than half of the businesses running their first daily deal report profitable promotions, three-quarters of those running seven or more deals report profits from these promotions. The percentage of businesses making money jumped by about 6 percentage points in the May 2012 sample—from 55.5 percent (spring 2011) to 61.5 percent.
- Daily deals are just as likely to be successful for both businesses that don’t do any marketing and those that spend heavily on marketing.
- Almost 80 percent of daily deal patrons are new customers, even for businesses running their seventh (or higher) daily deal, and businesses continue to see equally stable conversion rates for both repeat purchasing and spending beyond deal value.
- Daily deals appear to be sustainable programs for approximately 30 percent of businesses. Newer and relatively smaller businesses have even higher sustainability rates of close to 40 percent.
- Photographers (with a 75 percent rate of profitable daily deals), health and fitness services (69.3 percent), tourism-related services (68 percent), and doctors and dentists (66.7 percent) have significantly higher rates of daily deal success, while cleaning services (27.3 percent), restaurants and bars (44.2 percent), and retailers (50 percent) fare relatively poorly.
- Daily deals appear to be more sustainable for newer and smaller businesses. Businesses founded within the past six years had a 39 percent retention rate after seven deals compared with a 23 percent retention rate for older, well-established businesses. Smaller businesses with annual revenue below $500,000 enjoyed a 41 percent retention rate compared with larger businesses, which had a 15 percent retention rate.
“These findings indicate that daily deal promotions appear to be sustainable marketing programs for about one-third of the businesses that try them,” Dholakia says.
“The challenge for the daily deal sites in the coming months will be to find these businesses and earn a greater share of their business.”
The research team produced the following video to support their research.
Well Adi, I am telling you ahead of time – I will be using this blog post (and the video) as inspiration for an upcoming post on my blog, since daily deals are also a marketing tool I have been monitoring for a while… 😉
The one thing that's not covered in here, nor in the video, are the margins retailers are taking through Groupon and other daily deal sites. My understanding is that the 50% commission is becoming less prevalent, which perhaps explains why they are still around and (somewhat) thriving. Many daily deal sites now only ask for 30%, sometimes even 20% commission on the public price, preferring to make profits on volume, rather than per unit sale.
Food for thought…
Cheers,
Frederic
Use away Frederic. The economics are interesting though aren't they? I think originally the deals sites would market their services as a loss leader type activity that would allow retailers to buy a customer, with profit then coming from future purchases. The problem with that is that customers weren't showing any kind of loyalty to the retailer and so repeat custom was very thin on the ground, with the result being many retailers having quite severe financial heartache from their dealings with Groupon et al.
If it's forced a shift in their business model then it's no bad thing imo.
Interesting indeed. Adaptation is the key to survival, so yup! I believe this shift in the business model is what can partly explain why they are still thriving. The other reason is, well, we are all suckers for a good deal, aren't we… 😉
FG
Well in theory it should be a no brainer as it's guaranteed custom for retailers, and a good deal for consumers. They just need to figure out the finances so that everyone wins. I'm sure the model will continue, it'll just be tinkered with until someone cracks it.
I've pretty much given up on these sites now as nearly all of the deals are the same sort of thing. You can only have so many spa weekends lol
If I was a business I'd be incredibly wary of using these sites. The only value from loss leaders comes if customers then purchase from you repeatedly after that. That's fine if the purchase is something you will buy often, but for spa weekends and the like it seems more like a one off than anything and only likely to encourage bargain hunters.
I'll pass thanks.
Adi,
Great post!
My neighbor moved to Chi-town just b-4 the IPO as general counsel. House is on the market so I guess it worked out for him?
cheers,
Pete
Or maybe not, as they have just seen their stock hammered.
http://www.google.com/hostednews/ap/article/ALeqM…