Daily deal sites are now a multi-billion-dollar industry, and new sites in an ever increasing number of niches are popping up every day. But a new Rice University study on how businesses fare when they participate in Groupon, LivingSocial, OpenTable, Travelzoo, and BuyWithMe promotions uncovered some bad news for the daily deal industry as a whole.
Most businesses don’t feel any loyalty toward a particular daily deal site, and over the next few years, the report concludes, daily deal sites will likely “have to settle for lower shares of revenues from businesses compared to their current levels, and it will be harder and more expensive for them to find viable candidates to fill their pipelines of daily deals.”
Here are some findings from the study, which was conducted by Utpal M. Dohlakia, an associate professor of management at Rice University’s business school.
— The study surveyed 324 businesses across 23 U.S. markets that participated in daily deal promotions between August 2009 and March 2011. 55.5 percent of those businesses reported making money on the deal, 26.6 percent lost money, and 17.9 percent broke even.
— The health, services, and special event industries made out the best: 70 percent of them made money on their promotions. But only 43.6 percent of restaurants surveyed, and 53.7 percent of salons and spas, made money from their promotions.
–“Item promotions,” where consumer get a deal on a specific product, service, or bundle (example: 25 percent off a spa service) worked better than “dollar promotions” ($10 for $20 worth of food). 59 percent of “item promotions” were profitable, while 47 percent of “dollar promotions” were profitable. 79 percent of the businesses that ran item promotions said they would run another daily deal; 58 percent of the business running dollar promotions said they would run another deal.
— On average, nearly 80 percent of deal users were new customers for the business, but just 35.9 percent of them spent more than the deal’s face value. 19.9 percent returned to the business to make a full-priced purchase. OpenTable does better with repeat customers: 51.9 percent of OpenTable deal users were new customers, and 30 percent of OpenTable deal users came to the restaurant again.
— 21.7 percent of deal buyers never actually redeemed the deals they purchased. On the one hand, that’s a good thing for the business offering the daily deal: Non-redemption makes the deal more profitable for them. On the other hand, when deal buyers don’t redeem the deal, businesses don’t get the exposure they sought in the first place. The report recommends, “To increase the likelihood of a profitable promotion, businesses should consider offering a daily deal of relatively high face value ($50 or more), with a shallow discount (at most 25% off face value), a short redemption period (three months or less), and place a maximum limit on number of deal vouchers that consumers can buy.”
— 48.1 percent of businesses surveyed said they would run another daily deal promotion, 19.8 percent said they would not, and 32.1 percent said they weren’t sure. “An industry which is able to convert less than half of the customers who try its service into certain second-time buyers is likely to run into trouble finding enough merchants to sustain itself at some point in the not-too-distant future,” the report notes.
— Daily deal sites have not been successful at differentiating themselves from one another. The study found no statistically significant differences between the sites in terms of how profitable or unprofitable their deals turned out to be.
— 72.8 percent of the businesses surveyed said that they would consider a different daily deal site to run their next promotion. The report’s authors conclude that daily deal sites will have to take smaller revenue cuts (they currently take between 20 and 50 percent) in order to retain merchants and sign up new ones. “I’ve learned a lot and now can see that I can cherry pick who to work with to give me the cut and the percentage off that works for me,” said a bar owner in Los Angeles.