The Art of the "Daily Deal"
By Kim Hennig
Senior Vice President of Marketing at Taco Bueno Restaurants
I was never a dedicated coupon clipper, at least not when coupons came in the daily newspaper or an overstuffed envelope in my mailbox. As my favorite retailers became web-savvy, they started sending me coupons by e-mail, posting specials on their websites, and tempting me with offers on their Facebook pages. The object for the retailer was to drive top-line sales by reducing price (and margins) slightly in order to generate a sufficient transaction increase. It's a notion that today seems almost quaint. Welcome to the age of the "daily deal."
Daily deals companies have been proliferating at a dizzying rate. Groupon, the 2,000-pound gorilla of the market, is the fastest-growing company in history, according to Mashable. And if a daily deal isn't enough, there's Groupon Now, a smartphone app that will allow users to click "I'm hungry" or "I'm bored" buttons to open up a list of time-specific daily deals, based on his or her location. LivingSocial is testing a similar concept, Instant Deals. AT&T is testing ShopAlert, a mobile service that notifies consumers of nearby deals from HP, Kmart, JetBlue, and others. Facebook is entering the space, joining the roughly 500 group buying sites that Wharton marketing professor David Reibstein says have emerged worldwide. And scaring the entire industry, Google Offers is in test.
Exciting? Yes. Sustainable? No.
It's destined to become a downhill spiral for three key reasons: trade down tendencies, one-and-out customers, and a diminishing supply of offers.
I subscribe to six different sites (which is kid stuff to consumers who actively play), so as I manage the barrage of offers, I skim for deals on stuff I was going to buy anyway. If I subscribed to one daily deal service, I might be tempted to visit a retailer I hadn't tried before, buy a new product, or try a new service. I might become a new customer. Instead, I trade down.
Wharton's Reibstein calls the second issue the one-and-out customer. He says, "Unfortunately, the people Groupon is attracting are those who are referred to as deal-prone customers. These customers tend not to be the most loyal of customers. And because you attracted them with a low price, you are more likely to lose them because somebody else offers a lower price. There is the challenge of whether they are really building future business, because what they really are getting is a fickle customer. Merchants are going to discover that the Groupon customer is not where to build future business."
Reibstein points out the third cloud on the daily deals horizon. "As the economy picks up, and there is less excess inventory, the availability of supply will go down. The willingness of the merchant to offer deep discounts will go down. The business proposition to the customer will be less attractive if [the item or service being offered] doesn't have the same deep discount."
So how long will it last? According to a report from CNN Money, "Traffic to flash sales and daily deal sites has been dropping over the past few months, according to online traffic monitor comScore. Gilt is down 22 percent since the start of 2011, and Groupon has fallen off 13 percent during the same time period."
For the consumer, it's been a great ride. For new businesses aiming to generate trial among a large pool of consumers, it's been an effective—but expensive—tactic. But for the established retailer who feels the pressure to play in the daily deals arena, as one retailer put it, "You're damned if you do and damned if you don't."