Deals: Groupon effect on Small- and Medium-sized Businesses

Deals: Groupon effect on Small- and Medium-sized Businesses
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A new study from Rice University details the effects of Groupon in the small and medium sized business segment with interesting results. The study is based on data from 641 small- and medium-sized businesses obtained at three time periods: April-May 2011, October 2011, and May 2012. Last year, a study from the same Professor showed contrasted results:

The 2011 research paper detailed a study which ran through five major sites in 23 US markets. In a survey-based study of 324 businesses that conducted a daily deal promotion between August 2009 and March 2011, 55.5% of businesses reported making money, 26.6% lost money and 17.9% broke even on their promotions. Although 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. 48.1% of businesses indicated they would run another daily deal promotion, 19.8% said they would not, and 32.1% said they were uncertain.”

It’s precisely the rate of customers return / retention that was an issue; Groupon deals perceived as a one shot, occasional bargain that didn’t necessarily mean that the wave of initial customers would return, and if they did, they would accept prices higher than the ones used during the deal.

The new study shows nevertheless a number of positive signs for the daily deal industry.

“Overall, the results find little or no evidence of deterioration in the performance of daily deal promotions over the past year or as the business operator runs multiple daily deals,” says Utpal Dholakia, professor of management at Rice University’s Jones Graduate School of Business. “Rather, there is improvement on some metrics.”

Key findings from the new paper include:

  • The likelihood of enjoying profitable promotions is associated positively with the business’s experience; while less than half of the businesses running their first daily deal report profitable promotions, three-quarters of those running seven or more deals report profits from these promotions. The percentage of businesses making money jumped by about 6 percentage points in the May 2012 sample—from 55.5 percent (spring 2011) to 61.5 percent.
  • Daily deals are just as likely to be successful for both businesses that don’t do any marketing and those that spend heavily on marketing.
  • Almost 80 percent of daily deal patrons are new customers, even for businesses running their seventh (or higher) daily deal, and businesses continue to see equally stable conversion rates for both repeat purchasing and spending beyond deal value.
  • Daily deals appear to be sustainable programs for approximately 30 percent of businesses. Newer and relatively smaller businesses have even higher sustainability rates of close to 40 percent.
  • Photographers (with a 75 percent rate of profitable daily deals), health and fitness services (69.3 percent), tourism-related services (68 percent), and doctors and dentists (66.7 percent) have significantly higher rates of daily deal success, while cleaning services (27.3 percent), restaurants and bars (44.2 percent), and retailers (50 percent) fare relatively poorly.
  • Daily deals appear to be more sustainable for newer and smaller businesses. Businesses founded within the past six years had a 39 percent retention rate after seven deals compared with a 23 percent retention rate for older, well-established businesses. Smaller businesses with annual revenue below $500,000 enjoyed a 41 percent retention rate compared with larger businesses, which had a 15 percent retention rate.

“These findings indicate that daily deal promotions appear to be sustainable marketing programs for about one-third of the businesses that try them,” Dholakia says.

“The challenge for the daily deal sites in the coming months will be to find these businesses and earn a greater share of their business.”

In summary, Groupon provides a good kick off effect from small and medium businesses, providing visibility and reach to new customers.

Source: Rice University via Futurity
Photo Credits: maybank + groupon partnership By diloz / FlickR