Reports of the imminent demise of daily deal sites such as Groupon are greatly exaggerated it appears. New research shows that these companies are more popular than ever among consumers. The lion's share of the daily deal limelight shines on Groupon, a pioneer in this space.
Small businesses that have used Groupon's daily deals to gain visibility and boost business say the accolades are well deserved. First-mover advantage has matured into long-term loyalty on the part of merchants and consumers alike.
Here's how Groupon and other daily deal services work: A merchant offers products or services at a significant discount and Groupon sends an email with the offering to its members in the merchant's marketing area. The offering is also posted on Groupon.com. When enough people sign up to buy, the deal is on and buyers receive a certificate for their purchase by email.
Groupon takes its slice of the purchase price, typically half, and the merchants see a spike in visibility and sales that they hope will translate into repeat business. Groupon, which plans to go public later this year, offers daily deals in 175 North American markets and 45 countries worldwide.
The Groupon calculus
That calculus worked for Monique Joustra, spa director at Sweetgrass Spa in downtown Toronto. Sweetgrass faced two issues — awareness and ginning up business. The spa is one of the public faces of Verity, a private professional club for women. Many potential patrons, Joustra told BusinessNewsDaily, thought that the spa, although open to the public, was restricted to club members. And the club membership was not large enough to support a high-end facility such as Sweetgrass.
"A membership of 800 cannot support a 15,000-square-foot spa," Joustra said. "The place speaks for itself. We just need people to come in the door."
She learned about Groupon from a friend visiting from the U.S., did some online research and contacted the Chicago-based company just before its launch in Canada last year.
It's all about results
The first Sweetgrass Groupon was a half-price Mother's Day weekend special that offered a half-hour facial and a half-hour massage for $55. They sold 921, Joustra said.
Sweetgrass followed with a Super Bowl promotion that sold around 500. It was a major success, Joustra said.
As a result of its use of Groupon offers, Sweetgrass was able to optimize its scheduling to fill in what she calls donut days because there's a hole in usage in the middle of the afternoon. It also broke the public stigma of being considered a "fancy schmancy" spa, Joustra said, and broadened its demographic base by attracting younger, more social customers. It also made money.
The evidence of how well daily deals worked for Sweetgrass is more than anecdotal; Joustra has hard numbers to back up her claims.
"I'm a big nerd," she said. "I'm all about metrics. From May through August 23 last year, our gross sales from Groupon revisits were $33,000."
Overall, 43 percent of Groupon users have made repeat visits to Sweetgrass, she said. And 52 percent of them buy additional, non-discounted services while at the spa.
But there is a big learning curve involved in structuring a successful daily deal. You have to have a good handle on your offerings and how you're going to fulfill them, Joustra said.
"They coached me on how to prepare for it," she said. "In my opinion, they're the Cadillac of the geo-local community."
She also doesn't plan on going to the Groupon well too many times for fear of tarnishing the spa's image.
"I don’t want to be labeled as the discount place," Joustra said. "But if it got really quiet here, I wouldn't hesitate to use them."
Because daily deals are already steeply discounted and are further reduced by Groupon's cut, the profitability of daily deals can be problematic.
Profitability was not a major consideration for Maria Baugh, co-owner of Butter Lane Cupcakes, which opened in New York City's East Village in 2008. It was all about the marketing and the exposure.
"When we were launching we had zero marketing dollars," she told BusinessNewsDaily. "We could never afford to reach the number of people they reach just on our own."
Nonetheless, Baugh believes that Butter Lane's results can be recorded in black ink.
"I would say the deals are slightly profitable for us," she said. "We aren't too good about analyzing data regarding profit/loss for Groupons because we've already decided that any 'loss' will be considered a marketing expense. Of course we don't want to lose money and we try to craft deals that will be both popular and financially feasible for us."
A typical Butter Lane Groupon is for 50 percent off six or 12 cupcakes. An August 2009 deal of $8 for six cupcakes sold 1,769 and a similar one this past March sold 2,320. A November 2009 deal for a dozen cupcakes for $15 sold 900.
"The price point makes a difference," Baugh said.
Butter Lane also tried one deal with Living Social and uses Foursquare to bring in new people and promote loyalty, but Groupon is the primary go-to resource.
"I feel a lot of loyalty with them," she said. "We've had a really great experience with them. They were holding our hand, basically. Nothing happened that we didn't expect."
For HowAboutWe, an online dating service whose draw for members is that the service focuses at first more on the date itself than on their date's dossier, using Groupon has been both a profit center and a marketing vehicle.
"It's been a little bit of both," Erin Scottberg, HowAboutWe's media strategist, told BusinessNewsDaily.
Launched in New York City in 2009, the service has expanded to Washington, D.C., Boston, San Francisco, Los Angeles, Chicago and Philadelphia. To date, Scottberg said, it has played a role in setting up more than 200,000 dates. Its premise is that it enables members to online to go offline.
A typical HowAboutWe Groupon deal offers a three-month membership for $18, 67 percent off the normal price of $54. The service has also tested offering longer memberships, but finds that three months produces the best results.
"Three months seems more approachable," Scottberg said. "It's not a huge commitment."
HowAboutWe tried its first Groupon in January in Brooklyn. It netted 433 new members. Subsequent offers have brought in 142 new members in Boston, 257 in New York City, 155 in Washington and 175 in San Francisco.
"For us, because we're an online service, it's perfect," Scottberg said. "It has huge name recognition. Even for those who didn't take up the deal, it provided a point of exposure."
Are daily deals sustainable?
Are services like Groupon and others the real deal or just a flash in the pan?
Though recent media reports have questioned the long-term viability of daily deal sites, a new study from researchers at Rice and Cornell universities show that these deals are more popular than ever among consumers.
"The key finding is that there is no evidence of waning interest among consumers of daily deal promotions," said Rice's Utpal Dholakia, co-author of the new study. "In fact, the more deals purchased by an individual, the more enthusiastic they seem to be."
Reach BusinessNewsDaily senior writer Ned Smith at email@example.com. Follow him on Twitter @nedbsmith.