by Benjamin G. Edelman, Sonia Jaffe, and Scott Duke Kominers
[Reprinted for our readers, from HBR Blogs with author's permission.]
Hundreds of websites like Groupon, LivingSocial, Eversave, and BuyWithMe sell discount vouchers for services ranging from restaurant meals and museum visits to spa treatments and skydiving. Best known is Chicago-based Groupon: although only two years old, Groupon touts a ten-digit valuation and purportedly rejected a $6 billion acquisition offer from Google.
To consumers, discount vouchers promise substantial savings — often 50% or more. To merchants, discount vouchers offer possible opportunities for price discrimination, exposure to new customers, online marketing, and “buzz.”
Perhaps the biggest unknown going into a new Daily Deal campaign is the rate at which you will succeed in converting the coupon visitor into a returning customer. Some evidence suggests this can be the single biggest problem in the viability of Daily Deals. The fact is, at one level, the goal of the Daily Deal provider is somewhat competitive to your goals. Akin to a Tour Bus, the Deal provider aims to channel their consumers from deal to deal as frequently as possible. Conversion rates are critical to the value you derive from any Loss Leader promotion!
The Deal Purchaser List
Most Daily Deal providers do not share the contact information of the consumers who have purchased the voucher. While the name of the consumer may be shared for coupon redemption management, the business will not normally get contact information. Essentially you are “renting their list” as part of the service, and it’s your job to convert their consumers into return visits.
There are important other factors that should weigh into your overall equation, beyond just the direct effect of the deal on your traffic and near-term margin:
1. A Daily Deal can allow you to reduce other marketing/ad spending.
To the extent you actually lower your normal advertising spending (because the DD campaign brought you as many leads as you wanted), this cost saving is a legitimate offset to your Deal Math. The caution often made, however, is that while this makes sense on paper, it is not always easy to “turn off” media spend temporarily, and there can be risk to brand development when media spending is curtailed.