Over the past week, two companies have abandoned the “daily deal” market, pricking holes in what many observers are calling an unsustainable bubble. Both Yelp and Facebook have decided to opt out of the market populated by companies like Groupon and LivingSocial. According to surveys, consumers feel overwhelmed by the glut of daily offers filling their inbox—discounts on everything from three-course dinners to auto detailing. Even the big dogs of the industry are losing steam: In July, Groupon and LivingSocial sustained traffic declines of almost 9 percent and almost 30 percent, respectively. Are daily deals doomed?
It might be too early to draw conclusions, but research by Rice University’s Utpal M. Dholakia does point to some fundamental problems with the daily deal business model. In a study published in June, Dholakia unveiled a survey of 324 businesses that conducted daily deal promotions over the last two years. Only 55 percent of the businesses reported making a profit, and less than half said they planned to conduct another such promotion (the others were either uncertain or opposed). These businesses have good reason to be concerned: People who use daily deal coupons aren’t very good customers. The study notes that only about 20 percent of customers ever return to the business for a full-price purchase, and only about one-third of customers spend beyond the value of a deal. This all adds up to a decidedly mixed picture for business—one which must have daily deal companies wishing for a better class of customer. After all, if nothing changes with the current crop of disloyal cheapskates (this writer included!), they could be headed for trouble.