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The question hanging over the daily deals business is whether it is a short-term fad or a big long-term business. New, scholarly research conducted by Utpal Dholakia, a professor of marketing at the Rice University School of Business in Dallas, provides a number of surprising insights into the long-term viability of the daily deals business model — not all of them positive.
According to Dholakia’s report, the daily deals category has been enjoying a bubble for the past two years, and that bubble is set to burst.
“Daily deals have become so popular for a few reasons,” said Dholakia. “In the last two or three years, because of the recession, consumers have looked for ways to save money, to pay down credit, etc. These sites have catered to the need that people have to make smart buying decisions.”
For his research, Dholakia looked at five deal distributors in 23 US markets. He conducted surveys with 324 businesses that had run at least one promotion between August 2009 and March 2011. According to his findings, no matter which daily deal distributor merchants used, the rate of success — defined as profitability — was the same. Slightly more than 55 percent of businesses reported making money using a daily deal. Slightly less than 18 percent broke even. And 26.6 percent of merchants reported losing money.
Whether a business can make money on a daily deals seems to depend, in part, on the type of business. According to the research, 70 percent of deals in the health and services vertical and in the special events category were profitable. But two of the most popular verticals fared notably worse. Only 43.6 percent of deals redeemed at restaurants and bars made money for their businesses. Not surprisingly, only slightly more than a third of those businesses were interested in offering another similar promotion. A little more than half of spas that offered a daily deal found the promotion profitable, and only 41.5 percent of participating spas would be willing to offer another daily deal in the future.
Dholakia said that most of the more than 500 merchants he has interviewed about their participation in a daily deals program hope to create new customers. His research showed that close to 80 percent of deal users were new customers, but only 19.9 percent of consumers who purchased a daily deal became subsequent, full-price paying customers.
Additionally, when Dholakia compared daily deals, in which consumers can spend a certain amount of money on anything they want, to promotions in which a specific item is given away or bundled with another item, the item-based promotions were significantly more likely to be profitable for merchants, and merchants were, as a result, significantly more inclined to repeat item-based promotions.
Dholakia said that although there are several things about daily deals that merchants like — there are no upfront costs and they bring new faces into businesses — his research demonstrates that merchants are “no longer lining up to participate” in daily deals. In fact, Dholakia says that the growth that the business has experienced is unsustainable.
“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,” his report states.
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