5 Fatal Flaws in the Daily Deal Business
With Groupon poised to raise $750 million in an initial public offering that would value the 3-year-old company at $30 billion -- more than Google at its IPO, notes Practical eCommerce -- it's no surprise that entrepreneurs are flocking to start competitors, while established companies like Google and Facebook also enter the arena. As Bloomberg Businessweek reports, there's even a slew of startups to help consumers dispose of daily deal coupons they can't use.
But the enthusiasm for daily deals may be misplaced, according to Utpal Dholakia, an associate professor of management at Rice University who conducted three studies of the nascent industry. In his latest, Dholakia found what he calls structural weaknesses in the concept that he believes will not only make it hard for new entries to prosper, but may spell future trouble even for the likes of Groupon. Here are five problems he sees:
1) Fewer than one in five coupon users return for a full-price purchase. With the discounts daily deal distributors demand -- typically half off list price -- new customers have to return to make a full-price purchase for the business that issued the coupon to break even. In fact, several full-price purchases may be necessary to recoup the loss leader.
2) Only about a third spend beyond the deal value. Another way issuers make money is if customers buy something not covered by the coupon. But that only happens about a third of the time, and Dholakia says it's not enough.
3) One in five deal buyers never redeem vouchers. When 21.7 percent of deal buyers don't redeem vouchers they've paid for, issuers gain no new customers. Since that's the purpose, it means the daily deal was a bust for shoppers and issuers alike.
4) Fewer than half of businesses would do daily deals again. While a slight minority (48.1 percent) of businesses Dholakia surveyed would do a daily deal promotion again, almost one in five (19.8 percent) indicated it was their last time, and another 32.1 percent were uncertain. Unless daily dealers can turn this around, their market is going to shrink.
5) Little differentiation separates daily deal sites. This is a problem for daily deal distributors rather than businesses, but it is a big one. Dholakia found nearly three of four (72.8 percent) of businesses would consider using a different daily deal site than one they'd previously patronized, indicating the businesses perceived a high degree of sameness among the sites.
A study isn't reality. Dholakia examined five major sites in 23 U.S. markets, including a survey of 324 businesses that ran deals between August 2009 and March 2011. It's possible that deal businesses will tweak their offerings to make them more effective, that consumers will come to appreciate them more, or that his research just got it wrong. But it's not good news either.
"All of these findings point to the same conclusion," Dholakia writes. "Over the next few years, it is likely that daily deal sites will 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."
Mark Henricks is an Austin, Texas, freelance journalist whose reporting on business, technology and other topics has appeared in The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications. Learn more about him at The Article Authority. Follow him on Twitter @bizmyths.
Image courtesy of Flickr user Groupon, CC2.0