The daily deal frenzy appeared to reach a crescendo a few weeks ago when Groupon – the company most associated with the group coupon model - announced plans for an initial public offering.
Now, a new study is raising concerns about some possible pitfalls of the daily deal model of offering steep discounts, mostly from local retailers and restaurants, for a limited time.
Utpal Dholakia, an associate professor of management at Rice University, surveyed 324 businesses in 23 markets who had participated in daily deals with Groupon, LivingSocial, OpenTable, Travelzoo and BuyWithMe.
He found that the good deals for consumers weren’t always good deals for businesses.
A little more than half of the businesses Dholakia surveyed made money on the deals, while a little more than one-fourth said they lost money and the rest said they broke even.
That might not be so bad for retailers, if they thought they’d gain a new customer or make money in other ways. But the retailers said about 36 percent of users spent beyond the deal's value, and only about 20 percent of customers returned for a full-price purchase.
About half of the retailers said they’d run a deal again, while around 20 percent said they would not, according to the study. About 30 percent were unsure.
The fact that some retailers aren’t clamoring to do another deal could be a red flag for the daily deal companies, whose business model depends on companies who are willing to provide the deals.
Another potential problem: Dholakia’s survey found that more than 20 percent of the people who bought the deals never actually used them.
Groupon has impressed retail industry watchers with its astounding growth – the company has more than 80 million users, and more than 7,000 employees, even though it has been in business less than three years.
But some also have worried about how well the company can sustain its success, and make money. Groupon has lost hundreds of millions of dollars since it was founded, which is one of the arguments against investing in Groupon’s stock.
Nevertheless, an intriguing mix of deep discounting, web-based marketing and local business support has clearly touched a nerve for many people. It’s also spawned a massive influx of daily deal companies, including Living Social, Google Offers, a Facebook deal site and countless other niche players.
The crowded field appears to have few loyalists. Dholakia noted that the vast majority of the businesses who responded to his survey said they would consider doing a deal with another daily deal site, rather than sticking with the one they’d already used.
“Overall, our findings lead us to conclude that there are relatively few points of differentiation between the daily deal sites, making it harder for any one site to stand out from the others,” Dholakia wrote.