Daily-Deal Study: Good for Customers, Bad for Businesses
Get the working capital your business needs from Entrepreneur Lending, powered by CAN Capital. Learn More »If you haven't turned on a computer lately, the hottest thing in online marketing is the daily deal. Mega-successful company Groupon started this trend, and a million imitators have sprouted. Another daily-deal startup, Woot, was recently snapped up by Amazon.com for more than $100 million.
So the business of being a daily-deal company is great. But how are those daily deals working out for the businesses that offer them? A new study says: Not so hot.
For the uninitiated, a business that offers a daily deal through one of these sites must provide a substantial discount -- often 50 percent off. Then, a minimum number of customers must buy the deal, prepaying up-front and getting a coupon they present to the company. If not enough customers buy into the deal, it's cancelled. The tradeoff is a guarantee of a large volume of new-customer traffic in exchange for the discount.
The study, conducted at Rice University's Jesse H. Jones Graduate School of Business by associate professor Utpal Dholakia, polled 150 businesses that did Groupon deal offers in the past year. The results: About one-third of participating businesses said their daily-deal offers were unprofitable.
More than 40 percent said they wouldn't do a daily deal again. Business owners who were unhappy with their deal experience reported Groupon deal users didn't buy additional items beyond the deal offer. They also reported the Groupon customers tended to be one-time visitors and didn't become repeat customers.
Some of the study's recommendations on how to make a Groupon promotion successful:
- Design your deal so that it will appeal to new customers and not cannibalize sales to existing customers.
- Know whether your business type is well-suited to benefit from a daily deal -- the study found restaurants and education companies fared the worst, while salons and spas were the most successful.
- Offer the deal on merchandise you're looking to unload or underutilized services you want to grow
- Design your deal to build a customer relationship. Make it good for $20 off on each of your next three visits instead of $60 off the customer can spend all at once.
- Avoid offering a discount off the total bill -- you may end up giving away too much margin, as you aren't in control of the size of your discount.