The former darling of the daily deals industry, Groupon, yesterday suffered a terrible day on the stock market, falling 6.5%. It is now worth just one-third of the $15 billion at which it was briefly valued on the day it went public. Does this mean the daily deals space is dead in the water? Are the performance marketing networks that glommed onto daily deals as a potential lifesaver just going to get pulled down as Groupon and LivingSocial sink? It’s still early days, but there are signs that things are going to get better. Groupon has seen a 35% growth in revenue in the last quarter and a new report says that daily deals are providing merchants with improved performance as they become more educated about what works.
There are still rumors of an impending Groupon bankruptcy, but none appear to have been substantiated and, given the attention that the Groupon IPO attracted, this seems to us like good evidence that the rumors are bunk. So, if they’re not going to go bust in the near future, what does the future hold? Utpal Dholakia, a professor of management at Rice University’s Jones Graduate School of Business has been focusing on the daily deals industry for a while. In June, in a report that used data from offers run by LivingSocial, Groupon, Travelzoo, OpenTable and BuyWithMe, he identified four “red flags” for the industry:
- A low percentages of deal users spend beyond the deal value (35.9 percent) and return for a full-price purchase (19.9 percent).
- Less than half of the businesses indicated enthusiasm about running another daily deal in the future.
- About 70 percent indicated openness to considering a different daily deal site.
- And only 35.9 percent of restaurants and bars and 41.5 percent of salons and spas said they would run another promotion in the future.
Since then however he has followed up by trying to work out if the business model is sustainable, and he reports good news:
- Almost 80 percent of daily deal patrons are new customers, even for businesses running their seventh (or more) daily deal. Businesses continue to see equally stable conversion rates for both repeat purchasing and spending beyond deal value.
- The most profitable daily deal sectors in order: Photographers; health and fitness services; tourism-related services; and doctors and dentists.
- The least profitable deals: Cleaning services; restaurants and bars; and retailers.
- The percentage of businesses making money remained fairly stable in Spring 2011 (55.5 percent) and October 2011 (54.9 percent), but jumped by 6 points in the May 2012 to 61.5 percent.
- Smaller businesses were able to retain customers better: Businesses with annual revenue below $500,000 enjoyed a 41 percent retention rate compared with larger businesses, which had a 15 percent retention rate.
On balance, it seems as though the daily deals business is going to be around for a long time, even if Groupon investors have been stung. Dholakia is doing good work and has a whole bunch of papers available here for download. Daily deals: not dead, just sleeping.