Newly launched businesses looking to catch the public’s eye may find success with daily deal promotions like Groupon, according to a new study.
In the first-of-its-kind analysis of Groupon's impact, a new Rice University study found that the daily deal promotions in local markets can help small businesses achieve exposure and stimulate sales. The study examined Houston-based startup Gourmet Prep Meals and the effect a Groupon promotion had on business: Gourmet Prep Meals earned revenues almost 140 percent higher than it would have earned had it not run the promotion. In addition, the increased exposure led existing customers who normally pay full price to more than triple their rates of purchase.
“There was an explosion of awareness,” Utpal Dholakia, associate professor of management at Rice's Jones Graduate School of Business and lead author of the study, told BusinessNewsDaily. “That translated into increased sales.”
The data show that during the first two-and-a-half months that Gourmet Prep Meals was in business, its revenues and profits increased at a modest rate. As soon as the Groupon redemptions started, however, its revenues more than doubled.
While it might be enticing for all businesses to try that marketing approach, Dholakia cautioned that it isn’t always necessarily the right tactic.
“These are not broad-based programs that are going to help everyone,” Dholakia said.
It worked for Gourmet Prep Meals, Dholakia said, because the company was a startup and relatively unknown to its target customer base, with owners who used the promotion as a market-research opportunity and focused on providing a high-quality product and service.
The study, “A Startup's Experience With Running a Groupon Promotion,” is also the first to show the redemption pattern of Groupons over the course of a participating business’ promotional period.
In the case of Gourmet Prep Meal, the first spike came at the beginning of the promotion, when there were redemptions about three and a half times higher than during the middle weeks. The second spike came at the end of the promotion, when redemptions were almost five times higher than the average.
The new study also offers a glimpse at whether daily deal promotions create repeat customers. Approximately 4 percent of Gourmet Prep Meal’s Groupon users returned for at least a second purchase, and when they did, they spent more than what its regular customers spent on average.
Based on the study, Dholakia believes daily deal promotions for new businesses work because they offer a cheap way to create name recognition.
“This promotion is a great way to get that (brand awareness) going quickly,” Dholakia said. “That is a big deal for a company just starting out.”
The study was a follow-up to research Dholakia conducted last year that found Groupon promotions were profitable for 66 percent of businesses that participated.