How Daily Deals Are Losing Their Allure — For Businesses and Consumers Alike

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Two big names are dropping out or seriously scaling back their interests in the daily deal marketplace, an oversaturated field with hundreds of competitors that’s still mostly dominated by dominated by Groupon and LivingSocial. Facebook, which launched its flash deals offering called Facebook Deals last spring, is already pulling the plug on the operation, while local business review site Yelp is significantly reducing efforts to build its daily deal arm, Yelp Deals, which was introduced last summer.

For two years now, new daily deal businesses have been opening almost, well, daily. The daily deal aggregator Yipit now sifts through 30,000 deals a month from some 650+ daily deal sites.

Despite the growth, the daily deal business isn’t quite as lucrative and game-changing as proponents have made it out to be. One sign: Daily deal giant Groupon lost $103 million in the last three months.

Two more signs from the past few days: First, Facebook announced the killing off of Facebook Deals (which was once heralded as a likely Groupon killer), and then, Yelp cut the sales staff for Yelp Deals in half.

Bloomberg reports that in July, for the first time in a long time, the number of daily deal sites closed (38) surpassed the number of new daily deal sites opened (36). Beyond the fact that there are simply too many daily deal businesses in the marketplace, it appears as if, two years after Groupon fully burst onto the scene, daily deals are less exciting for businesses and consumers alike.

Last week, the Wall Street Journal published a story about how businesses could make the most of Groupon. If utilizing daily deals for marketing was a total win-win for small businesses, such as story wouldn’t have to be written. But it’s been estimated that only 56% of businesses actually make money with daily deal promotions. The rest either break even or lose money. As the deck to the WSJ story noted: “The coupon service can be a real loser—but it doesn’t have to be.”

The strategies suggested to businesses for increasing the chances of making money (or not losing as much) on daily deals include:

*Pushing Groupon or other daily deal services to accept a smaller cut of voucher sales.

*Coaxing new customers redeeming daily deal vouchers to sign up for loyalty programs and discounts sent via text message or email—to spur on repeat business.

*Shortening the redemption period, so that the business can plan carefully for the rush of new customers.

*Tweaking daily deal offers to get more money out of new customers, and overall larger profit margins on the deals.

All of these strategies could help a daily deal promotion work for a small business. But in one way or another, these strategies also make the daily deal concept less of a deal for consumers and/or daily deal sites themselves.

By shortening the daily deal voucher redemption period, for instance, the consumer gets less value out of the deal—especially if he or she fails to redeem in time. Somewhere between 10% and 30% of daily deal vouchers are never redeemed, and the odds that a voucher would go unredeemed goes up as the redemption window gets smaller and smaller. (Generally speaking, if a daily deal isn’t redeemed by the set expiration date, it doesn’t automatically become worthless. A $30 restaurant voucher purchased for $15 would be worth $15 once the redemption period is over.)

(MORE: How Coupons Became Cool)

By now, consumers may also be suffering from daily deal overkill—so accustomed to their in-boxes flooded with “BUY NOW!” offers that they no longer seem exciting, or even like much of a bargain. As one consumer psychology expert recently told MainStreet:

“There is definitely a risk of oversaturation with these daily deal programs,” said Kit Yarrow, a professor of psychology and marketing at Golden Gate University who specializes in consumer psychology research. “Consumers can develop an increasing tolerance to that sense of the thrill of a bargain, and eventually it just stops being thrilling.”

The first time you got $10 knocked off the bill at some random restaurant was utterly amazing. (Why that is the case is a question worth pondering in itself.) But by now? It’s not quite as much fun, especially not if at some point you wound up at a restaurant because of a daily deal—and afterward you swore you’d never go there and pay full price.

Nowadays, most deals just aren’t that big of a deal.

(MORE: 12 Things You Should Stop Buying Now)

Another interesting problem with the daily deal concept is that consumers have a tendency to value items more when they pay more for them. Conversely, when they pay less, they view the purchase as less valuable. A Christian Science Monitor post explained it this way:

For buyers, it’s like the infamous “low fat” cookies craze – each one is less satisfying than its full-fat counterpart, so you wind up eating three times as many. For sellers, you have a clientele that doesn’t care about the quality of your goods – they’re totally focused on the price, and they’re less satisfied no matter what you offer them.

This is why many consumers suffer from what’s become known as “Groupon remorse” or daily deal regret, in which they’ve purchased deals they didn’t really want, probably won’t ever use, and yet somehow still couldn’t pass up.

What’s more, in the same way that eating tons of low-fat food is not good for nutrition or weight loss, “saving” money by buying tons of daily deals doesn’t save money at all. In surveys, consumers say that old-school coupons are better for saving compared to daily deals. And given that the vast majority of daily deals are wants, not needs, it’s a no-brainer to skip buying daily deals when money is tight.

(MORE: Daily Deal Backlash)

The problem from the business side is that by using daily deals, you may be attracting streams of customers that value your product less because it’s been discounted via a daily deal promotion.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

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