Merchants Say Fine-Tuned Daily Deals Are Starting to Pay Off

It may have taken some fine tuning over the past four years, but merchants say that daily deals have started to perform better in recent months, according to a new survey.

The survey, which tracked 641 small-and medium-sized businesses during three time periods over the past year, found that the industry is performing better based on at least a couple of key metrics. In particular, it noted two areas of improvement: consumers are more willing to spend beyond the deal’s value and the amount spent by repeat customers on their next visit has increased.

The report was conducted by Utpal Dholakia, a professor of management at Rice University’s Jones Graduate School of Business.

Most notably, his findings are in contrast with a study he conducted in June, which revealed a number of red flags, including a relatively low numbers of buyers who were spending beyond the deal value.

But in the report published last week, it was his goal to find out whether the industry’s performance was deteriorating as questions arose on the long-term viability of the business model. Dholakia explained the survey’s results in a video, saying: “We were concerned because of negative publicity that many of these daily deals sites have received that performance might be deteriorating.”

Indeed, over the past couple of years, there have been a number of recurring issues brought up in the media, ranging from deal fatigue (the phenomenon in which consumers become less enthusiastic about purchasing offers) to stories about merchants becoming overrun with deal-seekers to the point of exhaustion. Additionally, Groupon’s public offering was fraught with a number of problems, and the company continues to trade at more than half off. Today, its stock fell 5.5 percent, or 48 cents, to trade at $8.31 a share.

Despite all that, the professor added this surprisingly positive message: “On most measures, performance has remained the same or has improved.”

Both Groupon and LivingSocial have spent the past year or so fine-tuning the experience and working more closely with merchants to ensure that each deal is a success. Looks like the extra effort is starting to pay off.

Here’s some of the findings from the report, along with Dholakia’s video:

• 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.
• Daily deal site loyalty levels are low for businesses running multiple daily deals. For a business’ second deal, 54 percent used the same daily deal site they used the first time. By the time they have run seven or more deals, only 8.6 percent of businesses have used the same site for all their daily deals, whereas 27.5 percent have used four or more daily deal sites.