Internet Daily-Deals Bad Value as Advertising Tool: Study raises red flags over effectiveness

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Study raises red flags about value of daily deal sites

BY DAVID NICKLAUS
post-dispatch.com
June 16, 2011
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Even as Pandora becomes the latest red-hot Internet IPO, investors are looking ahead to an even bigger offering by Groupon. As I mentioned in a recent column, folks are talking about a valuation of $20 billion or more for the big daily-deals website.
Investors might temper their enthusiasm, however, if they read a newstudy by Utpal Dholakia, a professor of management at Rice University. Dholakia, relying on a surveys of nearly 500 businesses that ran daily-deals promotions, says the deals haven't proven their value as an advertising tool. Just 36 percent of customers spent any money beyond the amount of the discounted voucher, and only 20 percent returned to make a full-price purchase at the featured merchant.

By their very nature, daily deal promotions appear to be limited in their abilities to attract free-spending consumers, and to convert deal-users into repeat buyers with the propensity to be relational with, and loyal to, the business afterwards.

Just 48 percent of the businesses said they would run a daily-deal promotion again, which Dholakia reads as a warning sign:

An industry which is able to convert less than half of the customers who try its service into certain second-time buyers is likely to run into trouble finding enough merchants to sustain itself at some point in the not-too-distant future.

He says competition will probably force Groupon and other sites to continue spending heavily on marketing, and may erode the high level of revenue sharing -- up to 50 percent -- that the firms demand from merchants. Dholakia concludes:

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.

The study looks at promotions run by Groupon, LivingSocial, OpenTable, Travelzoo and BuyWithMe and finds "relatively few points of differentiation" among them. To me, that sounds like reason enough to avoid Groupon's IPO when it comes out at what's likely to be a frothy valuation.

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