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There are hundreds of daily deals websites offering seemingly “too-good-to-true” deals to eager consumers. Whether it’s $20 voucher that can get you $50 worth of food at a near-by restaurant or saving more than 50 percent on a message at a neighborhood salon. Source: http://www.coleraine.seksideitti.info/p-Group_buying
Most users learn about these deals by signing up to an e-mail newsletter that they received each morning telling them the the deal of the day. The deal sites partner with business by offering a wide customer base and free advertising, in return they get a percentage of the profits - anywhere from 20 to 60 percent. Infographic from:http://www.readwriteweb.com/archives/577_million_in_daily_deals_go_unredeemed_infograph.php
The deal sites are raking in the profits. Groupon, which started the online deal craze in 2008 and was labeled at “Fastest Growing Company Ever” at the time is currently undergoing the process of becoming publicly traded by filing for an IPO - initial public offering, is estimated to be worth around $25 billion dollars. While LivingSocial is valued around $3.6 billion. Sources: http://www.forbes.com/forbes/2010/0830/entrepreneurs-groupon-facebook-twitter-next-web-phenom.html http://www.groupon.com/about http://allthingsd.com/20110606/livingsocial-worth-3-6b-yelp-561m-according-to-sharespost/ - Living Social stats http://www.bloomberg.com/news/2011-03-17/groupon-is-said-to-discuss-ipo-valuation-of-up-to-25-billion.html - Groupon stat
The way these companies are able to make such larger profits is by selling deals in bulk. It ’s a philosophy that started in the wholesale markets and has been adapted for mainstream consumers. To ensure profit, most deal sites, like Groupon, won’t let an offered deal come to fruition until a minimum number of people buy in. This idea encourages consumers to spread the word on the deal to get more people involved so they can get the benefits. http://www.groupon.com/about
Living Social takes this a step further. After you buy the deal, Living Social gives you a unique link to share. If you can get three other people to buy the deal using your link, then your deal is free. The premise is the same idea as the first teir of pyramid scheme, except for Living Social it ’s legal. http://livingsocial.com/about http://www.scamwatch.gov.au/content/index.phtml/tag/PyramidSchemes http://static.howstuffworks.com/gif/pyramid-scheme-2.gif
There has been a lot of research in both online and retail shopping as to why people snap up good deals. In a capitalistic society, if we see a quality product for a cheaper price we are almost always going to spend less. By adding a ticking-clock with the “one day only” construct and the group motivation of seeing hundreds of others benefiting from a good deal, Daily Deal websites are factories of influence when it comes to getting consumers to buy spontaneously and in droves. Sources: BID TOGETHER, BUY TOGETHER: ON THE EFFICACY OF GROUP-BUYING BUSINESS MODELS IN INTERNET-BASED SELLING - http://misrc.umn.edu/workingpapers/fullpapers/2001/0110_051601.pdf The Theory of Reasoned Action Applied to Coupon Usage - http://www.jstor.org/stable/2489069 .
For small businesses the appeal is reaching a vast customer base quickly and with little effort. The Deal sites entice with their “ no-money-upfront ” incentive, and the businesses don ’ t have to invest in more traditional forms of advertising.
While running a deal may bring in a hoard of new customers, for many small and medium-sized companies the increase in business does not always mean profits. Almost 40 percent of the customers that use daily deal coupons don ’ t spend beyond the value of the deal itself. This means after the Deal Site takes their cut, a restaurant that sells a voucher for $25 for $50 worth of food might only end up with $10 to $15 dollars, which doesn ’ t even cover operational costs. The study also found that out of customers that use a daily deal only 20% ever return to spend full price. Sources: “ How Businesses Fare with Daily Deals: A Multi-Site Analysis of Groupon, Livingsocial, Opentable, Travelzoo, and BuyWithMe Promotions - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1863466 Considering the positives first, there is emerging evidence that daily deal promotions can provide useful exposure to start-ups by showcasing their products and services in front of a broad spectrum of consumers. Furthermore, daily deal site operators argue that merchants can convert a significant number of the flood of new customers that the deal draws into relational buyers, increasing their long-term sales and profitability. In this respect, daily deals are seen as replacing advertising and direct marketing efforts which many local businesses have traditionally done through Yellow pages, direct mailers such as Valpak coupons, and community newspaper advertising. However, specific quantitative evidence supporting or refuting these conjectures is currently lacking. On the negative side, daily deals are seen as expensive and harmful for many small and medium-sized businesses. When the deep discounts offered to consumers, and payouts withheld by site operators (which typically range from 20 to 50% of revenues) are taken into consideration, the merchant is often left with insufficient revenues to cover the costs. ”
Recent studies also show that business aren ’t often able to handle the influx of customers and these online deals may even be attracting the wrong kind of customer. Customers are drawn in by the deal, not by a true desire or interest in the business. This graph shows how Yelp ratings decrease after a Groupon offer. Factors can include a lack of resources by companies to handle the drastic up tick in business, as well as dissatisfaction with regular customers, and unmet expectations by the deal buyers. http://www.launch.is/blog/running-groupon-or-living-social-deal-leads-to-10-decrease-i.html
In some cases, things can go terribly wrong. This butcher sold 21,000 $100 vouchers that could be redeemed for $400 in meat. That ’s $2.1 Million dollars, even if he only got half it’s a million dollars in profit. However, this small butcher couldn’t handle the crush of customers and ended up having to close his doors when his meat cases didn’t pass inspection for housing the large quantities or meat.. In this case the deal buyers aren’t even guaranteed to get their money back, as companies like Buytopia say they can’t reasonably refund. In this case everybody lost. Source: http://www.moneyville.ca/article/1016344--roseman-butcher-sold-21-000-coupons-can-t-meet-demand
This concept of businesses “freaking out” is not only in the extreme cases. A lot of times the massive popularity of a particular deal catches business off guard,, especially in the first few weeks when 15 to 20 percent of vouchers are redeemed. While the Daily Deal site is there during the coupon buying phase they often have little support to offer once the vouchers start getting redeemed. They’ve already made their money. Sources: Former Groupon Employee Describes High-Pressure Tactics Culture And Merchants &quot;Freaking Out ” - http://techcrunch.com/2011/06/16/groupon-sales-merchants-freaking-out/
Patrick Willard, owner of Heart in Sol a fitness training and class center in Greensboro, has successfully used Groupon and Living Social to enhance his business. After having some limited success with using a Groupon to sell his Triad Boot Camp classes, Patrick decided he needed something big to launch his Zumba offerings as he opened his first official studio space. With only one other instructor, Heart in Sol had two Zumba classes on the schedule, when they launched a LivingSocial deal in January. They were shocked to see that they sold more than 300 vouchers, they hadn ’t put a limit on the deal. The customers were lining up, but the studio space wasn’t even ready to open yet. “We were going crazy,” he said. Source: I interviewed Patrick on Oct. 4th, 2011.
“ In the beginning it didn’t feel like we had enough to handle the demand,” Patrick said. The deal customers wanted immediate gratification and some didn’t have patience for the limitations of a small business. “They expect you to operate like McDonalds,” he said. Lucky for Patrick, he was able to quickly implement an online reservation system and prevent “people from lining up outside with torches.” As a tool to launch his studio, the LivingSocial deal was a great success. They went from offering 2 to 8 classes, hired two more Zumba instructors and maxed out the 35 person classes.
The success from the first deal, led Patrick to try again over the summer. This time 750 vouchers were sold for a 20 class pass for $20. Patrick was prepared for the influx of customers and had upgraded the reservation system to allow for the wave. Overall he is thrilled with the success and says the deals have translated into bigger word of mouth. Many of the deal redeemers were one-timers, and a lot of them wait for the next deal. The primary take away from the LivingSocial deal was the contact list of 750 names. Patrick can send out his own smaller deals to that list and usually gets a response of 30-50 purchasers each time. For a small business that is huge.
Without having opportunities like LivingSocial and Groupon, Patrick says he would have need a lot more planning and start up funds to do more traditional advertising and opening events. As it happened, he never even had a grand opening. The crush of the LivingSocial customers really pushed him to “go at it like gangbusters” and push his limits as a business. He also thinks he wouldn’t be able to offer as deep price breaks if he didn’t have the online buying support. As a Daily Deal purchaser himself, Patrick admits to seeing flaws in the system for more established businesses or more commodity driven formats like Brick’s Pizza. “I only ever go there when I have a deal,” he said. His advice for other small businesses thinking about entering the Daily Deal game is to 1) be prepared and 2) “make sure to take advantage of who comes through the door” - use the contacts to your advantage, email newsletter and correspondence. For his next LivingSocial deal, which is in the planning stages now, Patrick has learned one thing. He’s using a limit this time, 750 new customers is more than enough for this small business.
Source: Rice University Study: “ By their very nature, daily deal promotions appear to be limited in their abilities to: (1) attract free-spending consumers, and (2) to convert deal-users into repeat buyers with the propensity to be relational with, and loyal to, the business afterwards . We can call this a structural weakness of the daily deal model in the sense that it is inherent to a marketing program that is based primarily on deep discounting, and thus it is common to all daily deal sites and all daily deal marketing programs. “ “ Our findings also uncovered a number of red flags regarding the industry as a whole: (1) the relatively low percentages of deal users spending beyond the deal value (35.9%) and returning for a full-price purchase (19.9%) are symptomatic of a structural weakness in the daily deal business model, (2) less than half of the businesses indicated enthusiasm about running another daily deal in the future, (3) fully 72.8% indicated openness to considering a different daily deal site for another promotion, and (4) only 35.9% of restaurants/ bars and 41.5% of salons and spas that had run a daily deal asserted they would run another such promotion in the future. All of these findings point to the same conclusion:”
Sources: Why Groupon Is Poised For Collapse - http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/
Sources: Rice University Study: “ To summarize, a daily deal does accomplish exposure, but it draws in consumers to the business for the wrong reason: not because the business sells something the consumer truly wants or is interested in, but because the business is selling it at a very low price. Coupled with the escalating number of deals available to consumers within a given product category at any one time, the chances of any future loyalty or relational behavior become even smaller, as our results indicated. “ http://www.guysgab.com/wp-content/uploads/2011/05/daily-deal-sites.jpg
It might be a signal of the end, a new explosion of online deal sites that resell unwanted deals for a deal. Playing off the idea of buyers remorse, these sites allow customers to get mileage out a deal they might have bought a little too spontaneous. Patrick Williard says as many as 50 percent of his Zumba vouchers went unclaimed. The question is when does the oversaturation and the novelty wear off, when do consumers simply stop buying and businesses stop participating.
I am interested in this topic because I am interested in helping small businesses and independent artists establish and maintain an online presence. I wanted to learn more about these services and find out whether or not they were viable options when planning a marketing strategy on a small scale. The answer is yes and no, while there are instances where running a deal promotion can mean big things for businesses, a lot of times they are just flash in the plans and not long term solutions. With the future of this industry influx, it seems unlikely that daily deals will be a viable option for much longer. If something feels too good to be true, it likely is, and the online daily deal feels a lot like the housing boom. There is a ceiling somewhere and it feels like we might be reaching it sooner than we think.