Do Groupon type of offers create long lasting customer relations? Are Daily Deals profitable for businesses? An overview. #Digital #Marketing #DailyDeals #Coupons

** This is the extended version of “To Groupon or not to Groupon” Published in Linkedin.

TO GROUPON OR NOT TO GROUPON

To groupon or not to groupon

The literature on retail discount and couponing use is vast and covers broad and specific topics. The internet facilitates the implementation of a myriad of business models that allow customers to acquire products at deeply discounted prices. The research on those business models is as extensive as their diversity is, and it is investigated from many different angles in consumer research. Some examples of those include consumer behavior on redemption of online coupons [1-3], the role of reputation on online auctions [4-6], the role of emotions and risk-taking in blind bidding and reverse auctions [7, 8], how reviews influence purchasing behaviour in big online discount stores [9], and how group buying mechanisms increase price fairness perception and increase purchase intention [10] to name a few.

One type of group buying is of particular interest as it offers well-known brands at a deep fixed discounted price. This kind of group buying platforms includes companies like Groupon, Living Social, and others.

DelVecchio, Krishnan [11] show how future price expectations decrease with the depth of a promotion. Furthermore, they illustrate how framing those promotions in terms of cents-off or percentage-off can mitigate the effects of deep discounts. The challenge with Groupon type of discounts is that the framework proposed by DelVecchio, Krishnan [11] falls short in the sense that both, the cents-off and percentage-off are explicitly stated in the offer (see below).

“…the way you set prices doesn’t just influence demand. It also guides the way buyers use your product or services – and that can have a lasting impact on customer relationships.” Gourville and Soman [16]

While Davis, Inman [12] found no evidence of a deep discount adverse effects on brand evaluation, other authors pinpointed their plausible negative effects such as delaying purchases until the next promotion becomes available [13]. Consistently with Raghubir [14] findings that the higher the discount, the lower the price expectation, another downside in this type of offers is the increase of price and promotion sensitivity [15].

The long-term effectivity of deep discounts with clear “percent-off” and “cent-off” present within Groupon type of offers is questionable. Pricing and promotions are critical to building a profitable business. In Gourville and Soman [16] words “the way you set prices doesn’t just influence demand. It also guides the way buyers use your product or services – and that can have a lasting impact on customer relationships.” A simple question remains to be asked: do Groupon type of offers create long lasting customer relations??

THE GROUPON PROMISE

According to Groupon [17] web page, the company objective is to provide “new ways to exceed the expectations of all our customers—both consumers looking for great experiences at a great value and merchants seeking solutions to attract more customers and run their businesses better”. In other words, consistently with Armstrong, Adam [18] definition of marketing, it is an exchange of value between customers and businesses i.e. a win-win situation.

The business model of Groupon is simple. Businesses offer deals to Groupon subscribers at a deep discount (usually over 50%), the proceedings of the sale are typically distributed between the merchant and Groupon 50/50. Merchants are also charged for credit card transaction fees. That means merchants receive less than 25% of the original product/service value. For example, in Figure 1, the customer receives a $111 discount, Groupon will keep close to $30, and the merchant will receive less than $30 for a meal priced at $170. In other words, the merchant invested $140 to get a gross income of $30. To be on the winning side of the “win-win situation”, the merchants expect to expose their businesses to new patrons, having returning customers, or upselling additional products during the clients’ visit. In other words, “voucher discounts are likely to be profitable if they predominantly attract new customers who regularly return, paying full price on future visits.” [19]

restaurant daily deal exampleHowever, offering deep discounts comes with side effects. Mela, Gupta [15] affirmed that in the long-run discounts exacerbate consumers’ price sensitivity. Additionally, consumers learn to wait for the next promotion [20] defeating the main purpose of merchants in creating returning businesses. Moreover, in a meta-analysis of 51 academic papers DelVecchio, Henard [21] found that “large promotions (>20% of the product’s value) were found to have a detrimental effect on brand preference.”
Given that Groupon and similar companies came to the market after 2007, the research on the long-term impact of this type of promotion is limited. Most of the extant literature focuses on two main topics.

The first deals with customer motivation and attitudes. In this area, authors like Erdomus and Çiçek [22] found that while novelty and discovery of new products and services were somehow important, discount rates were the key drive for consumers to engage in group buying. They concluded that group buying may be suitable for companies offering products that consumers hesitate to purchase in the absence of a discount. Other authors focused on the effect of daily deals on the business reputation and found a correlation between daily deals offers and lower Yelp reviews [23-26].

The second stream of research focuses on the profitability and immediate feedback from merchants. The question of profitability and if “to Groupon or Not to Groupon” is addressed in different studies [19, 27]. Dholakia [28] believes that the win-win relationship mentioned above is shifted towards the customer side i.e. the customer receives considerable value, but the business gets little in return. His paper shows that 1/3 of the businesses interviewed said the deal was not profitable, and overall only 8% of the merchants were willing to offer a daily deal again.
Drawing a parallelism with the couponing research, we can observe that the extant literature on daily deals started by studying the consumer side of the equation, then the profitability, but little has been investigated on the long-term effects of daily deals.

DO DAILY DEALS DELIVER ON THE PROMISE OF CREATING RETURNING CUSTOMERS?

Deep discount deals provide exposure and attract new customers [29].There is a discovery factor on daily deals, i.e. customers looking to try new products and services, but at the same time, those potential clients focus on the discount side showing little interest in coming back to the same business without a discount being offered.[30]. This is consistent with Dholakia [31] findings. In a survey of 324 businesses that offered this deals he observed that while “close to 80% of deal users were new customers, significantly fewer users spent beyond the deal’s value or returned to purchase at full price.” Therefore, it is possible to assert that in the majority of the cases, daily deals do not create a long-term relationship with customers. Most of the clients that buy a daily deal will not return to the same business for a full price or would not have purchased the same product at the full price from the beginning.

CONCLUSIONS

Group buying in general and popular applications like Groupon, in particular, became an immediate online sensation after their launch to become multi-billion dollars operations. The general impression is that customers will not return or repurchase the same product. There is a significant caveat regarding this assumption: a merchant operating a restaurant may have expectations for returning customers, but another type of products i.e. a concert or a class may not expect recurring purchases. To be more precise regarding “returning customers”, future research should focus and narrow the investigation in a single type of product.

Group buying in general and popular applications like Groupon, in particular, became an immediate online sensation after their launch to become multi-billion dollars operations. The general impression is that customers will not return or repurchase the same product. There is a significant caveat regarding this assumption: a merchant operating a restaurant may have expectations for returning customers, but another type of products i.e. a concert or a class may not expect recurring purchases. To be more precise regarding “returning customers”, future research should focus and narrow the investigation in a single type of product.

The above is also true when considering the question of the profitability or the existence of a win-win situation. The case of a restaurant was presented here. That type of business has a different cost structure than an attraction place or a concert, where available space or seats are perishables that change nothing in the basic price structure of the business.

When looking at the long-term relationship between a business and its customers, a more detailed study is also required to understand if customers will wait until the next daily deal and how the daily deals cannibalize the full price customers pool and how daily deals users will directly impact your business reputation.

MANAGERIAL IMPLICATIONS

Daily deals are a multi-billion industry and managers need to remember that the multi-billions are paid from their pockets. The use of daily deals should be considered an additional promotion channel and needs to be evaluated in the context of all business promotional efforts. While companies can see the immediate revenue stream, other long-term factors should be considered. Managers should weigh, among those factors, the profitability of the deal, the impact in the business reputation, the price perception sensitivization, the cannibalization of full price paying customers, and others, against maximizing short-term revenues or capitalizing on extensive exposure to a new pool of clients.

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