Are Daily Deals Worth It For Marketers?

Bad backs (and lazy gym habits) run in my family and the pain usually requires more attention than just your average rub down. After months of stress and poor posture, I was able to find relief under the miraculous hands of a masseuse named Gregory. As he worked out the knots in my upper thoracic, my mind had only one thought: “Thank you, LivingSocial!”

LivingSocial and Groupon are at the center of a major controversy for marketers. The two leaders in the daily deals category are challenged with constantly finding enticing offerings, but merchants are questioning the value of participation. Critics are quick to point out that merchants are not benefiting from these promotions – merchants take a hit of about 75% on revenue on each deal sold. Repeat purchase numbers are low. Potential brand devaluation is high. But according to my research, the jury is still out on potential damage to brand value, and lack of repeat business does not mean that merchants shouldn’t participate in a daily deal promotion.

WHY DO DEAL SITES MATTER?
The daily deals website category has become undeniable. Revenues grew from $873 million in 2010 to $1.25 billion in 2011, and they are projected to reach $4 billion by 2015. Digital coupons are currently outselling print coupons by ten to one, and 48% of all online consumers will redeem at least one digital coupon this year. Groupon and my beloved LivingSocial currently control over 70% of the market. There are countless start-ups trying to follow the trail they’ve blazed- not to mention attempts to enter the space by internet giants Facebook, Google, Amazon, and PayPal. It’s not hard to see why: Groupon went public in early November at a valuation of $13 billion, at the ripe old age of three.

So, how successful are these deal sites, anyway? Groupon currently has around 70 million members and LivingSocial has about 28 million. Roughly 60% of subscribers on each deal site have made a purchase within the last 90 days, and an impressive 60% of subscribers in the 18-34 age group access the deal emails at least once a day. Research group Lab42 discovered that restaurant deals are twice as popular as all other deal categories (even more popular than my beloved spas).

WHAT ARE MERCHANTS WORRIED ABOUT?
Although daily deal sites have a starring role on the eCommerce stage, there are several obvious concerns that merchants face when participating in a deal site. Loss of brand equity is one, and poor ROI is the other. Because daily deal sites have only been around for a few years (LivingSocial and Groupon launched in 2007 and 2008, respectively) there is limited longitudinal data on customer behavior after purchase. Four out of five merchants report being unsatisfied with repeat purchase sales after participating in a promotion. (For more data, check out this infographic by BuySellAds on the Hubspot blog.)

The good news for merchants is that 31% of deals are purchased by new customers and 26% of survey respondents said they’d made a true impulse purchase – something that they hadn’t planned to buy. 82% of respondents claimed to have returned to at least one business whose deal they purchased online.

WHAT DOES THIS MEAN FOR MERCHANTS?
For merchants concerned about the value of their brand, one solution might be to change the deal promotion. Instead of offering a 50% off coupon for regular merchandise, giving customers access to something “off the menu” would generate the same foot traffic without lowering expectations for the value of the product. (Consumer psychology is often surprising, as MIT professor Renee Richardson Gosline showed in her research on brand loyalty and sales data for people who had purchased counterfeit goods.)

If a merchant is hesitant to participate in a promotion because they fear a negative ROI for repeat purchase sales, they might take a few more variables into account. The revenue hit could be made up by decreasing marketing spend in other areas. Capturing emails for a customer contact program could bring the number of repeat purchasers up. Exit surveys could help refine an offering and help a merchant understand what they do best and what they need to change. Training staff to ask happy customers for reviews on Yelp (maybe on an iPad that’s standing by checkout?) would boost the number of reviews and also give merchants more insight into how customers view their offerings. All of these tactics could increase revenue, albeit indirectly.

As for me, I’ve found something truly phenomenal thanks to daily deals and you had better believe that I’ll be going back to see Gregory again.

*Sources: Hubspot, Mashable, Mother Jones, Tech Crunch, Wall Street Journal, Forrester Research, MediaBistro, SmallBizTrends.com

Whitney Braunstein is a Senior Digital Strategist at OgilvyOne.

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