If there is one business trend that can officially be labeled as saturated in 2011, it is the rise of “daily deals” websites. Companies like Groupon, LivingSocial, Bloomspot, AppSumo, Gilt Man, Travelzoo, BuyWithMe and many, many others use different variations of the daily-deal model in an attempt to secure sales for their customers. Most of these customers are small business owners looking for ways to attract new buyers as efficiently as possible on limited marketing budgets.
Daily deals are eating into other forms of marketing expenditures
Small business owners that participate in daily deals do so at the expense of other forms of marketing. Participating companies spent nearly one quarter of their entire marketing budgets on daily deals—more than on any other type of marketing. For the most part, this isn’t new money; instead it's cannibalizing other forms of marketing spend. If the programs aren’t having the intended result, then the overall marketing ROI suffers.
There have been many articles both praising and criticizing the use of daily deals as an effective means to grow your business over the long term. Much of this information has been based on anecdotal evidence, featuring both success and horror stories. This isn’t surprising considering this industry is so new. Recently, however, new research has been published which does take a more systematic review of daily deals from the point of view of the small business owner.
A closer look at the return on investment of daily deals
Utpal M. Dholakia is the William S. Mackey and Verne F. Simons Distinguished Associate Professor of Management at Rice University. Dholakia has been following the daily deal phenomenon for some time and has conducted extensive research on the topic. His research has been published in several scholarly papers. The most recent paper "How Businesses Fare With Daily Deals: A Multi-Site Analysis of Groupon, LivingSocial, OpenTable, Travelzoo, and BuyWithMe Promotions" takes a closer look at how companies benefited (or did not) from participating in daily deal promotions. The study looks at 324 companies that conducted daily deal promotions between August 2009 and March 2011. The conclusions are sobering.
Only around half of businesses made money on daily deals
Fifty-five percent of companies that participated in the survey made money on their daily deals promotions. This is quite a significant achievement considering the cost of the discount as well as the fees charged by the daily deal company. But it calls into question the use of daily deals for companies that lose money. Nearly 27 percent lost money and 17.9 percent broke even. These numbers were more or less consistent across the five daily deal companies analyzed in the study.
Only one-third of users spent money beyond the daily deal value
Eight out of every 10 daily deal users were new customers for the participating business. That’s certainly good. But the overwhelming majority were only interested in one thing: the deal. Sixty-six percent did not spend a single dollar beyond the daily deal offer.
Less than one in five users returned to make a full-price purchase
The purpose of participating in a daily deal is to attract new, repeat business. In this regard, the deals don’t appear to be working very well. Only 19.9 percent of daily deal users returned to the participant business to make a full-price purchase.
Best practices for daily deals
Some industries, such as health, services and special events outperform when it comes to running profitable daily deals. Others, like restaurant, bars, salons and spas lose money in the majority of cases.
Beyond that, the study does provide some clarity around the characteristics of daily deals that do turn out to be more profitable:
- Offer daily deals with high face values (above $50)
- Don’t offer a discount of more than 25 percent off of face value
- Limit the redemption period to three months or less
- Place a cap on the maximum number of deal vouchers that can be bought by consumers
- Offer an “item” promotion where the discount targets a specific product or service, instead of a “dollar” promotion where the user gets “$40 worth of spending for $20”
As more research shows what works and what doesn’t work with daily deals, companies offering this service will adapt and results should improve for participant companies. For now, business owners should take a skeptical approach before spending a quarter of their marketing budgets on a strategy that may not deliver as promised.