The newest craze in pulling in new business, or trying to create a loyal customer is online discount voucher websites like Groupon, LivingSocial, OpenTable, Travelzoo and BuyWithMe. Starting in 2008, Groupon now claims to have more than 50 million subscribers in 400 markets. LivingSocial, with which it shares 90% of the US daily deal site traffic, according to comScore, has 40 million subscribers in 478 markets
How discount vouchers work is; Groupon posts a deal, one per city, every day and emails the details to its list of 500,000 users. The offers are targeted to certain cities; examples include tickets for $35 off Bespoke Cooking classes in Chicago, or $20 for an Esotouric bus tour of Los Angeles. Users sign up for the deal, but the discount works only when a certain number of people sign up. Businesses pay Groupon a percentage of each booking. If not enough people sign up for the Groupon to take effect, neither Groupon nor the business makes any money. So far, nearly all Groupon deals have succeeded, says Andrew Mason, Groupon’s founder and CEO. Businesses are eager to participate — there’s currently a 120-deal waiting list in Chicago, where Groupon launched late last year — because the deals bring a flood of new customers, at least some of whom will hopefully get hooked and become loyal clients.
But is it really that successful for everyone? Not according to some reports. Only 48% of small- and medium-sized businesses that have run a daily deal promotion say they would use the promotion vehicle again, according to a study by Rice University professor of management Utpal Dholakia. Of the 324 businesses surveyed, about 32% said they were uncertain if they’d run another daily deal promotion and 20% said they would not.
According to the study, 79% of consumers who redeemed a daily deal were new customers, but only 20% of the total deal users became repeat customers. Additionally, only 36% of deal users’ purchases exceeded the deals value. “The only assets all of these companies have are their email lists and their brand recognition and brand value,” he said, “which are not very sustainable in the face of competitors like Google, Facebook or Amazon, because they have exactly the same assets and more.”
In a study conducted by Harvard Business School professor Ben Edelman, Business Economics PhD candidate Scott Duke Kominers, and by Sonia Jaffe of the Harvard University Department of Economics, they concluded the following:
For consumers, online discount vouchers have obvious appeal: discounts as large as 90 percent. But for retailers offering the deals through the site, does the publicity compensate for the deep hit to profit margins? For retailers, discount vouchers provide price discrimination, letting merchants reach customers who know about the business, but wouldn’t ordinarily go there without a discount.
These vouchers also benefit merchants through advertising, simply by informing consumers of a merchant’s existence via e-mail.
For some merchants, the benefits of offering discount vouchers are sharply reduced if individual customers buy multiple vouchers.
As a marketing tool, discount vouchers are likely to be more effective for businesses that are relatively unknown and have low marginal costs.