Daily Deals (or ‘Deal of the Day’) Websites

What are daily deals sites?

Daily deal or deal-of-the-day websites provide their subscribers with time-limited offers (usually, but not always the availability of an offer is twenty-four hours) on particular goods and services covering a range of markets such as restaurant meals, hotel stays, spa treatments and outdoor activities.

Offers are usually targeted to a subscriber’s geographical location although the business offering the discount may be regional or national. The discounts on offer to daily deal site subscribers typically range between 50% and 90% off the recommended retail price of the particular product or service, with an overall average offer discount of 53%.^[1]

The history of daily deal sites

The origins of the concept of the time-limited or daily deal can be traced back to American local radio at the beginning of the last decade. Local businesses would donate vouchers for time-limited deals to radio stations in exchange for on-air promotion. The radio station would then sell these vouchers to listeners, effectively raising advertising revenue from them.

In this business model, the radio station acquired new advertising business, local businesses obtained additional exposure and the listeners secured significant discounts on local goods and services.

Ironically, as radio advertising revenues have declined as a result of competition from other media, and particularly the internet, radio stations are once again promoting time-limited or daily deals in order to obtain revenue.

The rise of social networking sites on the internet beginning in 2003/4^[2] with services such as LinkedIn and MySpace represented offered new and greater opportunities for the daily-deal model of business promotion since it provided vast ready-made consumer networks comprising groups of friends, relatives and employees.

Online retailer Woot! founded in 2004^[3], is often cited as the first daily deals site, although Woot! Differs from what we now understand as a daily deals site since it only offers a single deal each day which, once sold out, is not replaced until the following day.

Although smaller and localised daily deal sites began to proliferate during 2005/6 the first daily deals site to make any significant large-scale impact was Chicago-based Groupon which was founded in November 2008^[4], initially as a side project from group-campaigning website The Point. Capitalising upon The Point’s collective purchasing power, Groupon selected one local product or service from a range of markets to offer each day at a significant discount to its customers. A combination of shrewd product selection, compelling discounts and commitment to customer service resulted in Groupon’s unprecedented rise in popularity: in June 2009 Groupon had 152,203^[5] subscribers. By March 2011 Groupon had 83.1 million subscribers.

Keen to share in Groupon’s prosperity, other daily deals sites were quick to appear; Living Social, originally a developer of social-networking applications for Facebook, launched its own successful daily deals operation in August 2009^[6] to become Groupon’s main competitor, whilst countless smaller sites have appeared since.

Whilst the initial surge of daily deals sites may have abated, growth remains steady with large investors such as British Petroleum and telecoms company AT&T currently investigating the daily deals business model.

How daily deal sites work

In simple terms, daily deal sites work by utilising the power of collective purchasing among social groups. By offering a product or service at a discounted price via a daily deal site, a business is effectively guaranteeing that a minimum number of potential new customers will take advantage of their offer in the hope that a significant proportion of that number will return to the business with a view to making future, non-discounted purchases.

Customers subscribe, via their chosen daily deals site or sites to an email which notifies them of each forthcoming daily deal. They may then purchase a deal for themselves and/or inform friends and relatives who may also be interested.

How daily deal sites make money

Daily deals sites offer local and national businesses risk-free exposure to an almost unlimited field of prospective sales leads. Naturally, an advantageous marketing model such as this does not come without a price and daily deals sites work on a commission basis in agreement with the businesses for which they are promoting deals.

As a guideline, a business might be expected to pay anything up to 50% of the value of each discount voucher plus VAT in commission^[7] and sends the remainder on to the business, usually within a month of the deal in question ending.

The benefits of daily deal sites for customers

The most obvious benefit of daily deals sites for consumers is that they can obtain products and services they want at a fraction of the normal purchase price. The diversity of available daily deals sites now online means that, as long as they don’t mind a deluge of daily email, customers have a wide choice of offers and discounts from which to choose.

Thanks to the inherent social networking aspects of daily deals websites, customers can also benefit from the recommendations and referrals of their peers to discounts and offers which they might not otherwise find out about.

At a more practical level, the geographical nature of daily deals means that customers gain the opportunity to visit businesses such as spas, hotels, restaurants and sports facilities in their own area which they may not have known about previously.

The benefits of daily deal sites for businesses

Daily deals sites represent an online marketing strategy unparalleled in its ability to target specific sales demographics and could be the ideal solution for any business seeking new customers or wishing to increase its existing customer base. As an example of the popularity of daily deals sites, figures for April 2011 indicated that the UK’s largest daily deals promoter, Groupon, attracted 2.39 million unique users every month ^[8].

Each of the most popular daily deals sites exploits the concept of social networking, both off- and online, to some degree. Incentives, such as obtaining the product or service being offered at no cost, are often used in order to encourage customers to recommend a particular deal to their friends, colleagues and relatives. The availability of a particular discounted deal is restricted until a target number of customers has been reached, which provides a further incentive for customers interested in the deal to spread the word within their social circle.

Besides generating significant additional interest in the businesses offering deals via daily deal sites, the quality of the resulting sales leads is higher than that associated with traditional marketing method since customers have greater faith in businesses that are recommended to them by their close friends or family.

Criticism of daily deal sites

• Businesses should be aware that the use of daily deal sites is a marketing strategy and not a short-term profit-making opportunity. As with any marketing strategy, research and judgement is required prior to entering any agreement: no matter how compelling your offer may seem there is no guarantee that 100% of your offer vouchers will be redeemed. Furthermore, some daily deals sites work on the basis that an offer will not become available until a particular customer threshold has been realised – there is always the possibility that this may not happen. Therefore the return in footfall in your business may be considerably less than your outlay on a daily deal.
• Conversely, businesses should ensure in advance that they have the resources available to be able to cope with additional demands for products and services that have been generated as a result of exposure through daily deals sites; the goal of daily deals sites is to extol the virtues of your business such that customers are willing to return without the additional incentive of a daily deal. Any failure to satisfy or impress those customers at the first opportunity following a daily deal promotion could severely damage a business’s long-term prospects given the social-networking aspect of the daily deals business model.
• Since daily deals sites generally target consumers within a particular geographic area, businesses need to ensure that their own particular market is not already being oversold via daily deals in its current location.
• Since the emergence of daily deals sites around 2008 numbers have been growing steadily and market analysts are beginning to warn of the signs of market saturation. Nevertheless this has not deterred investigation and investment in this internet business model from organisations traditionally associated with offline businesses (such as BP)^[9].
• There is an opinion that daily deals websites can only truly prosper during an economic recession and that once financial recovery is underway the discounts and financial incentives offered by businesses through daily deals sites will become unnecessary and obsolete. This argument does not consider the innate desire of the buying public to seek out bargains irrespective of prevailing financial conditions, nor does it allow for the modification of the daily deal marketing model in accordance with changing socioeconomic circumstances.

Resources and Useful Links

A brief historic overview and financial trend analysis of daily deal sites:
http://www.dealicio.com/content/brief-history-transactional-advertising-total-us-market-value-half-and-deal-day-offers-2000-

Who’s Who in the Social Buying Space: http://www.guardian.co.uk/technology/pda/2010/dec/02/amazon-livingsocial-groupon?INTCMP=SRCH

Daily deal sites Q & A:
http://tomuse.com/groupons-group-buying-guide-faq-how-to-daily-deal-tips/

BusinessWeek’s analysis of the Pros and Cons of daily deals sites:
http://www.businessweek.com/debateroom/archives/2011/07/daily_deal_sites_mean_everyone_wins.html

References

1. Internet Retailer website : data retrieved 12/09/11
2. University of California-Berkeley website : data retrieved 12/09/11
3. Information Week: data retrieved 12/09/11
4. Groupon.Com About Us : data retrieved 12/09/11
5. Wall Street Daily website: data retrieved 12/09/11
6. LivingSocial.Com Press Room : data retrieved 12/09/11
7. The Globe and Mail (Canada) : data retrieved 12/09/11
8. MarketingWeek.co.uk (1): data retrieved 12/09/11
9. MarketingWeek.co.uk (2): data retrieved 12/09/11