Experienced Daily Deal Merchants Diversify, See More Profitability

July 13, 2012

rice-daily-deal-loyalty-by-no-of-deals-july-2012.pngBusinesses that run daily deals have proved that they are not loyal to any one site: 54% of SMBs that have run 2 deals have run them through a single daily deal site, while of those businesses that have run 3 or 4 daily deals, just 19.4% use one daily deal site, and of those that have run 5 or 6 deals, just 18.2% stick with one daily deal site. On average, 36.3% of SMBs that run daily deals use a single site, according to [pdf] a Rice University study.

Merchants will return where they have found success. Yipit, a daily deal aggregator, reported that 41% of merchants running Groupon promotions were repeat merchants in Q1 2012, up from 31% in Q3 2011, and those merchants accounted for 56% of Groupon’s North American gross billings in Q1 2012, up?from just 33% six months earlier. But with 46% of companies splitting their first two deals between two sites, merchants prove themselves open to finding the best return.

Interestingly, while merchants may not be all that loyal to particular daily deal sites, daily deal customers appear to be quite loyal to merchants. According to ForeSee survey results released in March 2012, roughly 9 in 10 daily deal shoppers say that after redeeming their most recent offer they either made another transaction with the same company (44%) or plan to do so (47%).

Daily Deals Prove Fruitful Source of New Business

The RICE University researchers examined performance of daily deals using survey data from 641 small- and medium-sized businesses obtained during the time periods April-May 2011; October 2011; and May 2012. They found that the incidence of profitable promotions has remained stable over the study’s duration (between 55% and 61%), but, the likelihood of profitable promotions is proportional to the operator’s experience with them. Less than 50% of businesses running their first daily deal report profitable promotions, versus more than 75% of those that have run 7 or more deals.

Those businesses more experienced with daily deal promotions attract close to 80% of their new customers using daily deals, and see equally stable conversion rates for repeat purchasing and spending beyond deal value.

The daily deal sites’ share of revenue increased marginally from 42.5% in October 2011 to 45% in May 2012.

Verticals Achieve Varying Success

The dropout rates of businesses that do not intend to run daily deals again in the future indicates that daily deals prove sustainable for 30% of businesses, and that newer and smaller businesses have even higher sustainability rates of close to 40%.

Some verticals skew far higher than others. Photographers report a 75% rate of profitability via daily deals, while health and fitness services report 69.3%, tourism-related services 68%, and doctors and dentists 66.7%. By contrast, cleaning services report a below-average profitability of 27.3%, with restaurants and bars at 44.2%, and retailers at 50%.

Other Findings:

  • The smallest businesses (earning under $100,000 annually, and less than 60.1% profitable) and the largest ones (earning more than $5 million and 76.7 % profitable) fare relatively better than mid-sized businesses.
  • 42% of businesses dropped out after running one deal in October 2011, and by the time they had run 7+ deals, 30% remained to run more deals in the future. As of May 2012, 35% dropped out after the first deal, and 33% remained after 7+ deals.
  • These findings (compared to June 2011) indicate little or no evidence of deterioration in the performance of daily deal promotions for small and medium-sized businesses.
  • While hundreds of daily deal sites have been launched, the market leaders have demonstrated continued growth (e.g., Groupon, which reported an increase of 75% in its North American revenue during Q1 2012 and enjoys some 61% of US market share; and LivingSocial, which reported 2011 revenue of $245 million and Q1 revenue growth rate of 170% over Q1 2011, with26% of market share).

About The Data: The study is based on a total of 641 surveys and interviews with owners/operators of small- and medium-sized US-based businesses: 321 businesses from Spring 2011, 154 businesses from October 2011 and 166 businesses from May 2012. In each case, the researchers identified US-based businesses that had completed daily deals in the past using one of the major daily deal sites such as Groupon, LivingSocial, Google Offers, Amazon Local, OpenTable, Travelzoo Local Deals, etc. A total of 45 different cities nationwide were covered across the three time periods, and the researchers included different samples of businesses each time, to avoid overlap in respondents.

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