Are online daily deal promotions such as those offered by Groupon and LivingSocial, among many others, good for the businesses using them? Do they boost revenue or provide valuable exposure? A new study by a Rice University School of Management professor did an in depth analysis of the experience of Gourmet Prep Meals (GPM), a Houston-based startup, with running a Groupon promotion.
The results? Gourmet Prep Meals saw its revenue and profits increase modestly the first two and half months it was in business. When its Groupon promotion started, however, revenue more than doubled, although later analysis showed that profit per transaction dipped 60 percent from previous levels.
Study author, Rice Associate Professor of management, Utpal Dholakia, said, “Daily deal promotions can be effective marketing tools for retail startup businesses in local markets to achieve exposure and stimulate sales. But you can’t take a one-size-fits-all approach and assume a daily deal promotion will work for any business.”
Dholakia said, “Groupon users bring in less than half the revenues of GPM’s full-price-paying customers, and the company loses a small amount of money on its average Groupon transaction. But about 20 percent of those transactions yielded relatively high profits and helped keep GPM’s profit margin above zero throughout.”
The study says that the Groupon promotion increased the firm’s revenue over what it would have made doing “business as normal” by 140 percent, which it termed the “exposure value” of the deal.
An unexpected finding: The Groupon promo accelerated the purchase rate of full price customers. The purchase rate of full price-paying customers, some but not all of whom came to the company due to the promotion, was three times higher during the promotion, enough to push the profit per transaction into positive territory.
By the end of the study’s time period, about 4 percent of Groupon users returned to GPM for at least a second purchase and when they did, spent well over hte average level of other full price customers.
At the end of the Groupon promo, the company’s founders concluded that it has achieved most of the objectives they started with.
The study authors concluded that “These results all lead to the same conclusion: all in all, GPM enjoyed significant positiveexposure value from running the Groupon promotion and saw few, if any, downsides.”
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Tags: Gourmet Prep Meals, Groupon, LIvingSocial, online group buying, Rice University, study, Utpal Dholakia
Hmm, a 60% drop in profit per transaction? Only 4% of Grouponers returned for a full-price purchase? These are not downsides? Doing the same amount of work, or more work, for less profit does not see positive to me. I agree that Groupon and LivingSocial can bring exposure to a business, but at what cost to brand value?
I’d like to check back in with GPM in a year. I’d also like to know if GPM would be a frequent, repeat user of this tactic.
I’ve read this study and a lot of hypotheticals are employed and there is no long-term evidence of what the authors purport to prove. Marketing with these group buying sites is based on the thought that if you as the business owner just got more customers, you’d be able to wow them into becoming good customers.
Except if you were really wowing them to begin with, you probably wouldn’t need to attract more at such high costs. Much less use the profits from your good paying customers who support you 365 days a year to offer deeply discounted services. That’s why I wrote a 55-page ebook, Groupon:Why Deep Discounts are Bad for Business http://www.retaildoc.com/store/groupon-review-discount-business-model-livingsocial/
Please return to this operation in a year and ask them to open their books for the entire period.