BrainTrust Query: Is the (Daily) Deal Finally Done?

Discussion
Feb 02, 2012

Through a special arrangement, presented here for discussion is a summary of a current article from the Retail Prophet Consulting blog.

One short year ago, the hype around daily deals was electric. In the analyst community, you could barely get through a day without hearing something about players like Groupon, which happened to be growing at a meteoric pace.

While consumers appeared to be prepared to jump on deals, many wondered what the actual redemption rates on deals were at retail. More importantly, statistics began to show that deals as a long-term customer acquisition tool were weak.

My take at the time was regarded as somewhat contrarian. I felt that "deals" were not and never would become a self-sustaining business, but rather that deals, discounts and promotions were and always had been mere marketing tactics. I felt that players like Groupon and Living Social, to name just a couple, had not invented a new business model but simply digitized an old tactic — the price cut — that had existed since the beginning of time.

If there was anything impressive about deal sites, it was perhaps the massive uptake they could achieve with their offers. When Gap ran a $50.00 gift card offer for $25.00, they sold half a million of them. It was like the difference between putting coupons on car windshield and dropping them from an airplane. But the degree to which an offer like this actually paid off for Gap is still unknown.

On Jan. 19, Techcrunch reported that in the last half of 2011 alone an unbelievable 798 daily deal sites folded. By the end of 2011, Groupon’s share price had slipped below its IPO level as the company was plagued with accounting questions and reported retailer acquisition troubles.

What lies ahead for daily deal sites is unknown. More may be born and, almost certainly, more will die. A few might innovate and create real value propositions. My guess, however, is that eventually the surviving deal sites will simply be swallowed up into larger online entities. Every major player, including Amazon, Google and Facebook, will have a daily deal arrow in its quiver but they will be reduced to being nothing more than one of many marketing tactics available — not businesses unto themselves.

Discussion Questions: What do you see as the future of daily deal services? Do you see them providing value for retailers as the market matures?

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30 Comments on "BrainTrust Query: Is the (Daily) Deal Finally Done?"


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Dan Berthiaume
Guest
Dan Berthiaume
10 years 3 months ago

Daily deals are evolving like any other new technology — there were dozens and dozens of US car manufacturers in the first half of the 20th century, which shrunk to 3 by the 1980s. The same Darwinian process is occurring in the daily deals market, at a much faster pace. A few key leaders will survive and move forward.

Mel Kleiman
Guest
10 years 3 months ago

The answer to the first question is that this article is dead-on when it comes to the future of daily deal sites. As for whether or not they provide value to retailers, the answer I get from some of the retailers I work with is yes, if you look at them as another method of getting brand awareness. In many cases they expose your business to many people who have never heard of you and would have never tried what you have to offer.

In my own case, I got an offer from one of the sites for a local Kayak trip. Did not know the group existed. Bought the trip, used it, and became involved with the group. Talking to the operator, it was wildly successful. They made no money from the offer, it cost them money, the exposure was worth it.

If you are going to use one of the sites to build your business, realize that the real value is in building your list.

Ronnie Perchik
Guest
Ronnie Perchik
10 years 3 months ago
The key here, as mentioned, is that daily deal sites aren’t necessarily offering something new; but rather, they’re offering something that consumers have always taken interest in — discounts. But there are some inherent issues. Undoubtedly, the fact that they don’t necessarily provide a solution for merchants to drive repeat business is a problem. But, isn’t that up to the vendor? The great thing about a daily deal, like with any discount, is that you are potentially getting new eyes on your brand. The ball is then in your court to provide the customer with enough of a valuable experience to drive return. Another key issue happens to be an internal one, within the Groupons and LivingSocials: they’ve grown to the extent that they can’t handle the logistics of the vendor relationships they’ve signed. And as a result, these merchants are becoming increasingly turned off. Some key problems are unclear contracts, delay in campaign launch, etc. They just seem to be overloaded. If the daily deal sites can get their act together, and couple efficiency… Read more »
Charles P. Walsh
Guest
Charles P. Walsh
10 years 3 months ago

We simply don’t have enough information on the real numbers. What have those companies/services who’ve advertised deals on the daily deal sites experienced? What percent of daily deal advertisers repeated, made money, lost money, increased traffic, built awareness?

It is my gut that the daily deal sites don’t really help the majority of companies who advertise their products on them, consumers are “cherry pickers” at heart and this is just a better way of cherry picking deals for them. If it doesn’t build loyalty (as loyalty cards do through rewards), if it isn’t very profitable (after the splits with the deal site), then it is hard to believe that the model is sustainable.

I tend to agree that the concept will continue but that as a unique business model its momentum will slow.

Bob Phibbs
Guest
10 years 3 months ago

If we have heard anything from pundits it is that shoppers will only buy on “deals” or sales. While the mania seems to subside, the deal sites prey on small business owners’ hope. Hoping they can attract new customer. Hoping they can be a successful store.

Except of course, the odds are slim, as we saw yesterday. Hope will keep these deal sites alive.

I wrote about this phenomenon 18 months ago that Groupon and the rest are the worst way to market your retail business.

As Alexander Pope said 250 years ago, “Hope springs eternal” For that reason, I don’t think they are done.

Tony Orlando
Guest
10 years 3 months ago

If they offered something besides one half off at the local tattoo parlor, than maybe more folks would buy. Don’t forget that most folks want the really good deals, which seem to be almost non existent these days, so it will continue to slide in sales unless a half price gift card to a major player is involved.

Dr. Emmanuel Probst
Guest
Dr. Emmanuel Probst
10 years 3 months ago

I’m questioning the sustainability of the daily deals model, for both retailers and players like Groupon. On one hand, customers’ inboxes are getting flooded with daily offers. There is less urgency around services such as massage or sushi restaurants, for example. Even if you miss today’s once in a lifetime offer for a massage at 50% off, chances are that LivingSocial will advertise a massage at 51% off by the end of the week. On the other hand, retailers see the limitations of such marketing coup. These customers don’t necessarily come back, the retailer makes a very small profit, if any, on the coupon, and many get overwhelmed with the sudden increase in demand.

Adrian Weidmann
Guest
10 years 3 months ago

As digitally empowered shoppers seek deals on the products and services, they are seeking on their own terms. I completely agree with Doug. These daily deals are just a tactic to discount a product or service, not a sustainable business model in and of itself. As with any tactic, it may serve a purpose to move inventory quickly, get a quick influx of cash and/or get a brief surge in the social network, but there is very little, if any, loyalty established using this tactic. Brands are simply reducing the perceived and real value of their brand.

The other challenge is the issue of managing this type of business as noted with Groupon’s issue with accounting and retailer acquisition challenges. As this landscape continues to mature, brands and retailers alike must design and activate meaningful cross-channel communication solutions that are both relevant and personal on their customer’s terms. Those that innovate and cross this chasm will become valued brands and their revenue (and margins) will grow.

Verlin Youd
Guest
10 years 3 months ago

The market loves competition, and that will remain true for daily deals sites, however, the number of competitors will continue to drop to a point where those left will have a well defined target market, value proposition, relevance, and convenience of use. I wouldn’t be surprised to see a two-tier market emerge, with three to four major players dominating the market (Google and Amazon included) with a host of smaller providers targeted at very specific market segments and niches.

Gene Hoffman
Guest
Gene Hoffman
10 years 3 months ago

Has the Daily Deal lost its appeal?
Will it slowly die or have a repeal?
Hope, the medicine for deals and sin,
Might energize daily deals again.

But that practice like many others
Has spawned better retailing drothers.
As the market becomes more mature
Few fads are permanently secure.

W. Frank Dell II, CMC
Guest
10 years 3 months ago

Technology continues to move us to a connected 24/7 world. Daily deals provide an advantage over weekly deals for the overly connected consumer. The problem appears to be in the deals themselves. To create interest and get above the clutter, they have to be unbelievable. This is not a sustainable business model and this causes the failure. The answer is a greater number of deals to expand potential consumers, but realistic values. Additionally, one-day deals could be too short a time period.

Jonathan Marek
Guest
10 years 3 months ago

It isn’t at all surprising there has been a shakeout. That always happens, even in great businesses like search and social, where the respective leaders have created massive value. The fact that lots of also-rans couldn’t cut it doesn’t mean much.

The bigger question is what happens at the top — with Groupon in particular. Is there actually a business there? My bet is on “no,” given the poor economics of a typical Groupon, but I may be overly influenced by the clear negative value to large network retailers. For mom and pops, and especially service-oriented mom and pops, there may still be a play for a couple of leaders to survive (though at fairly low valuations compared to the hype).

Matt Schmitt
Guest
10 years 3 months ago

I think the small local retailers are the ones who benefit most from these platforms. They get valuable awareness and an introduction to new customers, whereas bigger brands tend to already have the awareness and are just using daily deals as a tactic to generate more frequency in visits.

Bill Bittner
Guest
Bill Bittner
10 years 3 months ago

The whole daily deal thing has also puzzled me. The promoter (the deal site) has no skin in the game. Their fee to the retailer simply amounts to a very expensive advertising cost. They are not trying to promote a product which would either spin off future sales or support service revenue. They are not trying to build a franchise with customers to sell other products. The deal site is only looking for fees on the current deal.

From the business’s perspective, this might make sense if you have moved into a new area and need a splashy promotion program to make your presence known. But without any incentives from the manufacturer or some other way to reduce costs, this whole thing simply does not make sense.

Ralph Jacobson
Guest
10 years 3 months ago

There will be aspects of these sites that not only survive, but get further integrated into established retailers. The question is, can these sites create compelling reasons to stand alone, or will they all end up getting purchased by retailers, like PayPal did?

Dan Frechtling
Guest
10 years 3 months ago

What’s so unique about daily deal companies is the spectacular growth and spectacular losses. The lucky ones:

*Groupon, which lost $238MM during the first 9 months of its fiscal year. Fortunately, it still has $240MM cash on hand from its IPO.
*LivingSocial, which lost $558MM in 2011 on $245MM in sales. Fortunately, it is 31% owned by Amazon, which manages for the long term.
*Woot, acquired by Amazon in 2010

Not lucky:

*BuyWithMe, the former #3 deal site, which was dubbed LaidOffWithMe after it shut down last October
*GiltCity, another top 5 deal site, which laid off 90 employees this month.

Groupon has a good shot at surviving as a standalone if it accepts future margins will be lower and flexes infrastructure costs accordingly. The rest will ultimately be bought or will disappear.

Mark Price
Guest
Mark Price
10 years 3 months ago

The greatest issue for retailers revolves less around the redemption rates of the offers, and more around the types of customers that were attracted to those sites, and hence those offers. Research showed that consumers who are heavy Groupon users are much less likely to return and be loyal than consumers who are acquired in almost any other way. As a result, retail organizations faced short-term issues in customer service due to the barrage of price-sensitive customers, knowing full well that most of those customers would not return in the long term either.

The combination of those 2 factors make daily deal sites a pretty poor deal for participating retailers.

Tim Henderson
Guest
Tim Henderson
10 years 3 months ago

I can see offering limited-time, daily deal promos built around key selling seasons — something like the “12 Days of Christmas.” But being bombarded with multiple deals every day from multiple retailers and others was bound to wear thin — especially when most of the deals are on things the consumer doesn’t really want.

James Tenser
Guest
10 years 3 months ago

Daily deal is a tactic, not a business model. The fact that 798 startups have tried and failed is proof that these sites could be set up by the average 14-year-old. But to sell deals on a sustained basis takes real savvy, a commodity in much shorter supply.

I figure it’s a matter of months before some clever coder will deliver daily deal plug-ins for Facebook and WordPress that will allow anyone with an e-commerce site to add deals to their business with a few clicks. Groupon and LivingSocial may survive on the strength of their subscriber bases, but I’d bet that merchants will push back hard on their margin structure soon as they see more economical alternatives.

Doug Fleener
Guest
10 years 3 months ago

I believe we’ll continue to see consolidation in this industry, but there are too many businesses that want or need the quick cash and traffic for them to go away.

I recently met a restaurant owner the other day when using my 50% off coupon. (Hey, if you’re willing to give me deals, I’ll take them.) He was moaning how the coupons were killing him. Of course I asked him why he did them. His reply: “Where else am I going to come up with a quick $5,000?” There is a way to speed up your demise.

Lisa Bradner
Guest
Lisa Bradner
10 years 3 months ago

Doug, I guess that’s why you’re the retail prophet — I think you called it. There was never a whole lot new about this business model and the fad has worn thin. If I were sitting in Groupon’s headquarters, I’d be trying to figure out how do I monetize the database and the relationships differently, but now that consumers are addicted to half-off deals, it’s going to be a challenge. Predictions: more consolidations, more fading usage and only companies like Google who can leverage daily deals into a bigger portfolio will have anything to offer in the space.

David Slavick
Guest
David Slavick
10 years 3 months ago

Of the 798 who folded, how many were just pure copycats seeking a quick buck? Many of them is my suspicion. Comments shared are spot on as it relates to who will survive and evolve over time. No surprises here; those with a vision and substantial funding to improve the service mix and — I totally agree — leverage the data/insights to support the retailer, will survive. For those retailers that don’t have a back-end process for capturing new customers who shopped or dined or used the service through a daily deal — STOP! Don’t do it, because you are just giving it away and ruining your business in the process. They aren’t going to come back until the next deal or maybe never — too many alternative options for same product/service/dining experience.

I agree with comments shared that it will remain a viable channel, especially attractive to those that don’t have the resources to advertise on their own to a mass audience.

Craig Sundstrom
Guest
10 years 3 months ago

My goodness, something connected with the web over hyped and poorly understood … I’m shocked, SHOCKED! Next we’re going to hear that analysts who just couldn’t say enough good things about these infant sites somehow benefited from their enthusiasm, but I won’t believe it … it’s just a lucky coincidence.

Herb Sorensen, Ph.D.
Guest
10 years 3 months ago

Coupons, daily deals — the whole mess is based on the mistaken assumption that lowering the price raises sales. It can. But raising prices can increase sales, too. There is a reason P&G made a serious attempt to discontinue coupons years ago. (“No, the Customer is NOT Always Right“) The only people excited about giving money away, are the people who are promoting giving other people’s money away. Shoppers don’t care that much.

Christopher Krywulak
Guest
Christopher Krywulak
10 years 3 months ago

“Statistics began to show that deals as a long-term customer acquisition tool were weak.” Therein lies the flaw in the daily deal business model. Indeed, deal sites have been successful in generating first-time business for retailers. After that initial visit, however, it’s up to the retailer to convert the sale into a viable returning customer (long-term). So the retailer is the master of its own domain. Meanwhile, Groupon and other deal sites are left peddling (spamming) more of the same short-term deals. And consumers are tired of it.

Robert DiPietro
Guest
10 years 3 months ago

Daily deals have a value for retailers if there is a way to get stickiness with the customer. The deal has to come with an addition CRM component to help identify and market additional items to the customer. If done correctly, it can win new customers and drive additional trips with existing customers.

Too many sites and customers suffer from deal fatigue and that will help industry consolidation … I only need one 50% manicure.

Ed Dennis
Guest
Ed Dennis
10 years 3 months ago

The daily deal is well. You are looking at a phenomenon that often happens in a free economy. One business is successful and breeds imitators. Soon the market becomes saturated and some of the businesses fail or re-purpose their resources. However, the core business continues but at a transaction level below its peak. This has happened with virtually every industry in America.

We have the freedom to imitate, we have the freedom to invest and we have the freedom to fail. Fortunately the government has not had to step in and bail out the daily deal providers.

Ronald Stack
Guest
Ronald Stack
10 years 3 months ago

The daily deal has to change or die. Hundreds of undifferentiated sites that offer little value to merchants is not a good model. Two ways to add value are: (1) feed data back to the merchant so the deal can be rationally evaluated and deal purchasers can be effectively targeted; and (2) broaden the focus from acquisition-only to include recognition, retention and reward.

Marc Ginsberg
Guest
Marc Ginsberg
10 years 3 months ago
The daily deal is not dead! Most advertisers would tell you there are 1.6 billion reasons. The truth is that local and regional merchants don’t know where to turn to drive traffic into their stores. Newspaper circulation continues to plummet. Merchants are paying more for less and don’t know what it is actually doing for them. They don’t see noticeable increases in traffic from search advertising. It is more of a cost of doing business and there is a reluctance to spend more. TV, print, and radio continue to fragment. Retailers continue to invest because they ‘always have’. 20% of local advertising dollars are spent on newspaper advertising, yet only 8% of people media consumption is via newspapers. It is out of whack. Of the $141B spent on local advertising last year, barely $2B was spent on daily deals. While it is not ideal, local retailers continue to search for a place to invest marketing dollars that will drive results. At least daily deal sites like Groupon and LivingSocial drive traffic, albeit at a great… Read more »
Edward Li
Guest
Edward Li
10 years 3 months ago

There are so many discussions around if daily deals really drive new customers into stores and whether they revisit to make a full priced purchase thereafter. One thing no one could question is that this is a pay-by-performance marketing channel. If we look at it from this perspective, more marketing budget will definitely go to measurable channels. In that case, larger retailers will increase their allocation to use daily deal sites as an alternate marketing vehicle, while mom and pop stores may not always be able to afford 75% off ticket price. Consolidation in this proliferating business will not only happen to the daily deal sites, but to their clients.

Some more thoughts around this topic in my blog.

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