Whether they participate directly or indirectly, mobile service providers will, at some point, involved in some revenue-related way with local advertising, promotion, commerce and payment operations. If not, then mobile service providers really will find themselves relegated, in one more role, to that of simple “access” provider.
Of course, not everyone thinks social shopping (deal of the day) offers make as much sense for local retailers as they do for the firms aggregating the offers and presenting them to consumers. See Read this. for example. In that case, the whole social shopping business as now constituted might be considered a fad.
Others think social shopping could be a big deal because it represents a new and affordable way to invest in local advertising, offering a new set of “revenue compared to investment” metrics. And, so far, the data is inconclusive or mixed.
Yipit, a deal aggregator, says its data suggests many criticisms of the business are incorrect. “Based on our Yipit data product, 44 percent of daily deals run in May were run by businesses who had already run a daily deal,” says Vinicius Vacanti, Yipit CEO.
“If they really had a bad experience, why would so many merchants be doing it again?” he asks. “Also, if local merchants didn’t like daily deals, how was Groupon able to increase the number of merchants they work with in a mature market like Boston by 60 percent in just the last three months? See this.
A major concern for daily deal space is whether deal promotions are profitable for individual merchants. The argument is that if the average discount is 50 percent and the daily deal service takes 30 percent to 50 percent in commissions, how can a merchant possibly earn a profit? Those are good questions.
And, in fact, a study conducted by researchers at Rice University found that Groupon promotions were profitable for 66 percent of the businesses surveyed for the study, but they were unprofitable for 32 percent. More than 40 percent of the respondents indicated they would not run such a promotion again. See this.. This contrasts with a survey Yipit conducted, where 94 percent of merchants who ran a daily deal would like to do so again.
Utpal Dholakia, author of the Rice Univeristy study and associate professor of marketing at the Jones School, conducted surveys with 150 businesses spanning 19 U.S. cities and 13 product categories that ran and completed Groupon promotions between June 2009 and August 2010. See this..
The Dholakia study provides some evidence that issues other than the actual amount of the discounts, or the repeat behavior of consumers using the coupons, are the key variables. The percentage of discount offered and the number of Groupons sold did not predict the deal’s profitability, for example. That should come as a surprise to most observers. You would think the size of the discount was the most-important issue.
Nor did the percentage of Groupon users who purchased beyond the Groupon’s value, or purchased again at full price, seem to be the crucial issues, the study concluded. In fact, “satisfied employees” is the most important factor for the Groupon promotion to work successfully for a business, Dholakia maintains. If employees remain satisfied through the promotion, the likelihood of its profitability is significantly higher. You might wonder why that is the case.
Shopper behavior, in fact, is quite important, since many of the deals seem to be offered by retailers whose employee compensation can be meaningfully affected by tips.
“Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal,” Dholakia said. “So employees need to be prepared for this type of customer and the sheer volume of customers that might come through.”
Other findings were that Groupon promotions offer the most benefit for businesses in which the promotion does not cannibalize sales to existing customers. That you would have guessed would be true.
Among the service businesses using the offers (restaurants, educational services, tourism and salon and spa), restaurants fared the worst and salons and spas were the most successful. Businesses with unprofitable promotions reported low rates of spending by Groupon users beyond the Groupon’s face value and low rates of return to the business again at full price.
“I think these findings show that social promotion companies need to better balance consumer appeal with positive outcomes for the small businesses offering them,” Dholakia said. “Right now, these deals are tilted too far in consumers’ favor.”
Dholakia outlined some strategies for success. Use promotions for building relationships (or at least repeat visits) instead of creating one-time transactions, he suggested. “Instead of offering $60 worth of food for $30, parcel it out to offer $20 worth of food for $10 over the customer’s next three visits.”
Don’t offer discounts on a total bill; rather, offer a specified discount for various products or services. Use offers to sell unpopular items or stimulate consumption of services that do not presently have much demand.
Opinions aside, the Rice University study does suggest both sides of the social shopping debate are correct, up to a point. The offers can be detrimental to local merchants, but also can generate positive revenue as well. So far, the Rice study suggests, 66 percent of merchants have gained while 33 percent have lost. Over time, as merchants and networks get further down the experience curve, the percentage of positive campaigns should grow.