Are daily deals really dying?

By Jose Mallabo on Monday, October 17, 2011

Tag Looking back at the near-record holiday shopping results from 2010, you could argue that this rise was driven by consumers feeling better about the economy. That’s probably true, but some of it was driven by the new innovations and technology that have made buying stuff easier.

Over the past 3-5 years, retailers have been doing better job of serving the consumer whether in store or online. Flash sales sites like Rue La La, Gilt Groupe and One Kings Lane were popular ways to buy premium brand goods at less-than-premium prices. Improvements in online stores, search engines, payments and data analytics have given marketers better mousetraps and tools to improve conversion. And, last year mobile became a significant player in holiday 2010.

What about the daily deals sites? Groupon filed a $750 million IPO and Wall Street analysts, media and industry pundits clamor over its unsustainable business model. Is it fair to say that consumers will tire of the deal? Each year I see people waiting in line in the cold to get the best deals when stores open on Black Friday. That kind of passion for the deal helped Groupon ring up revenue of $713 million in 2010 and the pace accelerated in early 2011 as the company posted $645 million in revenue for Q1 alone.

What gives? I sat down with Suchurita Mulpuru of Forrester Research recently to get her take. She’s been bearish on the deal model and recently published some research on the subject. In fact, Forrester predicted the model will die by 2016.

What are you seeing that tells you that the deal model will see its demise in the next few years? My colleague Shar Van Boskirk published an interactive marketing forecast where she suggested that consumers are getting too many daily deals. I don’t think the model will die—it’s actually a very useful lever to drive sales. But it’s not nearly as big of a market opportunity as it’s been posited to be and it’s a lever that is best used by a company for its own customers rather than going through a third-party.
What about outside of the U.S. where deal sites and email may be somewhat novel? Marketers in other regions are arguably not as likely to perpetually discount their products as American merchants are, so that actually makes procuring deals in those markets much harder. In fact, Groupon’s IPO filing showed that the majority of sales reps were abroad, because they can’t just be salespeople in a boiler room, rather they have to be “feet on the street” which is very labor intensive and expensive.
The VC community still sees opportunity in this space and is still funding sites like Coupons.com and One King’s Way – who’s right? One King’s Lane is a promising model because they are targeting a niche customer base and they generally don’t invest in inventory. So long as the aspirations of that site are to be a solid 8-figure business, they’re in good shape. It’s doubtful they have the market demand or access to enough solid inventory to be significantly larger than that, unless they pivot into a new and bigger business. Coupons.com is about giving manufacturers more means of digital distribution. I’m very bullish on Coupons.com—their app Grocery IQ is one of the more creative ones I’ve ever seen. Groupon is a very different business model and it would be a much bigger business model if there weren’t outsized expectations for the revenue it is supposed to generate.
Because most daily deal sites like Groupon and LivingSocial are one deal a day, do you see these sites making an impact on holiday shopping? Many of them are extending the timeline of their offers and the number of offers per day—that was inevitable because the limiting factor of this model is access to good, effective, useful merchandise day after day in market after market. It does capture discretionary income though and in the world of sites like Gilt, they are absolutely cannibalizing full price retailers—shoppers tell us so. Selling through an off-price business model is absolutely a slippery slope down.
What other things can retailers do to move product? Free shipping, which may sound counter to the point just made but it’s cheaper to give someone $8 for shipping than to give $50 off a $100 item, and it’s often just as effective. In fact, whereas most companies will email relentlessly and offer free shipping sparingly, Amazon is the opposite. They offer free shipping perpetually and email sparingly to drive incrementality.
The study reported that “not wanting email” is a motivation for unsubscribing – isn’t this all going to go to social anyway? Not for awhile. Email will be around so long as corporations communicate via email. It’s private, more flexible and “archiveable”. Some messages could be as easily communicated on a Facebook fan page or wall but will that replace email? Unlikely.
What can retailers take away from this when it comes to approaching email marketing? Keep perfecting it. Keep collecting names. Keep testing. And let’s not forget the power of direct mail. It’s expensive but it’s a great awareness driver.