The Math of Daily Deals: Can Businesses Profit From Groupons?

http://blog.rushrez.com/post/10205052405/the-math-of-daily-deals-could-groupons-actually-be

by jdavidson • 15 years ago

52 20 15 years ago

blog.rushrez.com

dmk23• 15 years ago

The problem with the current daily deals market is over-saturation with companies that "invest to acquire customers". Consumers are getting unsustainable and unprofitable discounts and this will go on until the investment mania in this sector cools down. After the shake-out the remaining players should be able to tune their models to run profitably.

This is not so different from what happened to original e-retailing back in the nineties.

gamble• 15 years ago

I'm sure you're right. I'll always remember fondly the amazing deals I often got in the late nineties, before most of the dotcoms offering them went bankrupt.

drinkzima3• 15 years ago

We definitely agree that the market for daily deals is over-saturated, and there will be tons of failures/exits (see Facebook, Yelp). That said, the doesn't really change the calculations for small businesses. They are either being helped by the current structure of daily deals or they aren't.

It is obvious that the model needs to be tweaked if these companies actually want to help local businesses. Things like Groupon Now are trying to do that, but the factors we discuss in this post hopefully lay out what small businesses need to be thinking about before they sign up for deal. Opportunity cost is a real cost.

Omnipresent• 15 years ago

A month back we were planning to launch a deal site, to be different than others out there, we changed our business model drastically. So much so that we weren't going to make a lot of profit, however, we still wanted to pursue the business. Our model involved giving the deal to the user for free, customer pays the business directly. We charge the business one time flat fee for running the deal OR charge the business 10% comission based on how many coupons actually got used. This way, no one was holding the businesses money and the customers were out of a buyers remorse.

Well, while talking to a few businesses we've now found that scoutmob is already doing this. and As others have said, this is a sales heavy businesses that requires you to spend the money in order to get a user base. For example, scoutmob recently partnered with budweiser and sponsored FREE happy hours. I've mentioned our first day journey to local merchants in a separate HN post: http://news.ycombinator.com/item?id=2994673

The local businesses will continue to suffer from daily deal sites until the sites stop competing to get the customers.

We are still going to continue our business model of charging the business only a one time flat fee, however, since we are new, we are getting a lot of BLOCK from businesses as they would much rather go with someone who has a huge user base.

TylerE• 15 years ago

The fundamental problem with daily deal sites is that by large and large the customer profile they attract are the LEAST attractive to local merchants.

Who wants a customer who only buys things that are on sale and has no loyalty?

The only time i really see it making sense is if the profit margin is huge that even after the discount and fees, the deal is still profitable. (Imagine something like a portrait photographer with lots of empty appointments...where even a fraction of the normal fee is still better than nothing, and where there is potential to upsell at full margin.)

BrandonM• 15 years ago

>The fundamental problem with daily deal sites is that by large and large the customer profile they attract are the LEAST attractive to local merchants.

>Who wants a customer who only buys things that are on sale and has no loyalty?

I see this assertion a lot. I am on GroupOn. My girlfriend is on GroupOn. We are a DINK (double-income, no-kids) household, the most desirable to any seller. I have numerous peers on GroupOn. Several of them are also DINKs.

A lot of people are on GroupOn because they are looking for interesting things to do that are outside the ordinary. Sure, sometimes we use a GroupOn and never go back. Other times, when we like the experience, we don't hesitate to do it again at full price. That's the whole point of the service.

I'm the first to point out the problems and shortcomings with the daily deals model, but the oft-repeated notion that the only people on such sites are troublesome cheapskates is simply not true.

veyron• 15 years ago

Are there any real empirical estimates for retention rate? No offense, but the 10% itself seems high.

drinkzima3• 15 years ago

We have not seen any good numbers, so we stuck with the assumption nytimes uses. 10% does seem generous.

tryitnow3• 15 years ago

The following study suggests repeat buyers range from 18% to 30% with an average of 19.9% (depending on the deal site). Loads of other interesting data are in this study.

"How Businesses Fare With Daily Deals: A Multi-Site Analysis of Groupon, LivingSocial, OpenTable, Travelzoo, and BuyWithMe Promotions"

Source: http://www.ruf.rice.edu/~dholakia/

However, I would apply a haircut since this is based on merchant perceptions, which may be overly positive (people are likely to think more highly of something they've spent money on).

magsafe2• 15 years ago

What most of these negative articles are neglecting to mention is 2 things:

1) Businesses that exist solely because of daily deal sites

2) Businesses that have successfully leveraged daily deal sites but won't share their stories

#1 is a lot more common than you realize. I know a photographer who makes 6 figures teaching workshops that would have been impossible to market without daily deals. He essentially created a business based on his deals. There's an old woman in SF's Chinatown who gives "ghost tours" of the neighborhood by selling $25 Groupons. Before the daily deal sites came along, she was a waitress...now she pulls $70-$80k a year setting her own schedule and doing something she loves. Again, impossible to market such a thing without Groupons. I recently attended a class on coffee/tea appreciation. Hugely successful for the owner, and lots of fun for attendees. He told me this was only possible because of daily deals...he had no notion of "regular customers" or "full price" customers before the deal sites came along. His business simply didn't exist.

#2 Businesses who successfully leverage the deals model aren't going to go blog about it or tell you exactly how to replicate their success. They're afraid that if competitors find out their little secret, they'll lose their advantage, formula, etc. The truth is there are lots more businesses who've been successful with this model than there are "victims". You just don't read about them because successfully leveraging daily deals is almost a trade secret of our time.

drinkzima3• 15 years ago

Thanks for the reply. I agree that there are indeed cases where daily deals do make sense. We actually highlight zero fixed cost businesses as being an excellent candidate for daily deals, which is almost exactly the walking tour you highlight.

We don't mean to infer deals do not work, but rather opportunity costs are very important to consider.

tryitnow3• 15 years ago

I think (1) is pretty interesting, do you have any more information on this phenomenon? Have there been any articles written?

Very cool, thanks for bringing it up.

magsafe2• 15 years ago

I doubt any articles have been written about this. Because the people who successfully pull this off are smiling to themselves everytime they read these negative articles thinking "if only they knew.....".

killion2• 15 years ago

I think impossible to market without daily deals is hyperbolic. Ghost tours of SF's China town have been around and successful for decades if not more without Groupon. Along with classes on tea appreciation, Red Blossom does great ones.

JoachimSchipper• 15 years ago

(Note that rushrez is in a related market, selling Facebook/Google/Yahoo/smartphone ads for restaurants etc when the businesses need more customers.)

pbreit• 15 years ago

Overall a better analysis than much of what we've seen previously. However the author still makes the mistake of stilting the data in his favor. For example, I've rarely seen a restaurant offer greater than 50% savings. Further, not only does the 40% "regular" rate sound high, it ignores that the Groupon might have produced an extra or quicker visit. The turnaway rate is probably closer to zero given that at-capacity restaurants are unlikely to run these deals. While the redemption rate is not ultimately factored in, it should be pointed out that Groupon has cleverly finessed the issue by making "expired" Groupons worth their paid value.

Finally, we should begin to take into account that deal economics are beginning to change in the merchant's favor. Savings rates are going down (ie 40% savings) and merchants no longer need to pay Groupon 50% of the difference.

browser411• 15 years ago

We (B2brev.com, a YC company) surveyed 2500 merchants that used Groupon, LivingSocial and 18 other daily deal sites. Our data shows that overall, 75%+ would use Groupon and LivingSocial again. This is a decent indications that there are a large number of success stories out there (to magsafe's point).

To address 3 additional points with some data:

* REPEAT CUSTOMERS: We asked a 5-scale question of "How many repeat customers did you get?" with answers being None / Few / Moderate / Many / Tons / Not sure. About 15% of respondent said that Groupon and LivingSocial provided "Many" or "Tons". Anecdotally, many mentioned that a repeat rate of over 10% was very good compared to their expectations. About 18% were "Not sure"

* BARGAIN HUNTING CUSTOMERS: We read and categorized every single open-ended comment (160k words!), and 14% of respondents complained about Groupon/L.S. drawing the bargain hunters. In our opinion, this was lower than expected

* ADVERTISING BENEFIT: Local businesses definitely see a benefit to the daily deals beyond the direct sales. Again, based on the open-ended responses, it was the #2 most mentioned benefit. Anecdotally, many mentioned that they spend money to generate awareness anyway and that it was a very acceptable marketing cost

There is one caveat that many commenters here touched upon, which is that running a successful daily deal really depends on the type of business. For instance, of Restaurants and Shopping businesses, only about 50% would do the daily deal again--and there are wide ranges of satisfaction even within these category buckets.

In a nutshell, there are millions of local businesses and a lot of nuanced marketing needs (i.e., lots of nice opportunities to be addressed).

Link to our blog here to see some charts/tables: http://blog.b2brev.com/daily-deals-the-merchant-perspective

You can also buy our research report to get a the most comprehensive picture :).

killion2• 15 years ago

This is a very well balanced look at daily deals. I think it goes to show that there will be a place for daily deals in the future but that it's not going to change how everyone does business. The businesses that it does help will continue to use them, and the others will tail off. Which jives with the stabilization of growth that we are seeing.

tryitnow3• 15 years ago

For those who don't have the time to read the article, the authors conclude that the following types of businesses are most likely to benefit from running daily deals:

1) New businesses 2) Zero variable cost businesses 3) Under the radar businesses.

One reason I think the daily deal business is so fascinating is because it can really help business (1) and (3) to gain traction - which might just facilitate more local entrepreneurship (new businesses can quickly gain traction - IF they're good) and competition (under the radar businesses can finally get the credit they deserve - again IF they're good).

InclinedPlane• 15 years ago

The thing that makes me skeptical of daily deals sites is that apparently a company like groupon takes in the same revenue as all of the stores when running a groupon. Yet despite the fact that running a coupon site should have lower overhead and much higher margins than, say, a restaurant, seemingly they still can't turn a profit. Maybe there's something I'm missing, but this sort of thing sets off some giant alarm bells for me.

The Math of Daily Deals: Can Businesses Profit From Groupons?

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