Not enough businesses are coming back to daily deals to make the industry sustainable in the long run, says Utpal Dholakia in his third and most exhaustive study on the daily deal industry. That can’t be good news for Chicago-based Groupon, which raised a billion in venture backing and has filed for an initial public offering of stock, or DC-based LivingSocial, which has raised hundreds of millions in VC investments.

Dholakia, associate professor of management at Rice University examined performance of daily deals run through five major sites in 23 U.S. markets, including a survey-based study of 324 businesses that conducted a daily deal promotion between August 2009 and March 2011.

“The major take-away from the study is that not enough businesses are coming back to daily deals to make the industry sustainable in the long run,” Dholakia says. “And our results from three studies and close to 500 businesses surveyed show that the deals are nowhere close to the rates of financial success for participating businesses that some companies claim to be having.”

Some key findings of the study include:

• 21.7 percent of deal buyers never redeem the vouchers they’ve already paid for.
• 55.5 percent of businesses reported making money, 26.6 percent lost money and 17.9 percent broke even on their promotions.
• Although close to 80 percent of deal users were new customers, significantly fewer users spent beyond the deal’s value or returned to purchase at full price.
• 48.1 percent of businesses indicated they would run another daily deal promotion, 19.8 percent said they would not and 32.1 percent said they were uncertain.

Study uncovers industry red flags

“Our findings also uncovered a number of red flags regarding the industry as a whole,” Dholakia says. “The relatively low percentages of deal users spending beyond the deal value (35.9 percent) and returning for a full-price purchase (19.9 percent) are symptomatic of a structural weakness in the daily deal business model.”

The study also points out that 72.8 percent of businesses indicated openness to considering a different daily deal site, and only 35.9 percent of restaurants/bars and 41.5 percent of salons and spas that had run a daily deal said they would run another such promotion in the future.

On average, close to 80 percent of deal users were new customers of a business and spent $64.30. To increase the likelihood of a profitable promotion, businesses should consider offering a daily deal of relatively high face value ($50 or more) with a shallow discount (at most 25 percent off face value), a short redemption period (three months or less), and a limit on the number of deal vouchers that consumers can buy.

Among industries, health, services and special events are the most successful at using daily deals: more than 70 percent of them made money on the promotion.

Less than half of restaurants earned a profit from daily deals promos

However, two of the largest industries—restaurants/bars and salons/spas—don’t perform as well. Only 43.6 percent of the restaurants surveyed earned a profit from the daily deal promotion, and just 35.9 percent of them intend to run another daily deal in the future. 53.7 percent of salons and spas made money on the promotion, but only 41.5 percent of them intend to run another daily deal in the future.

“Since restaurants, bars, salons and spas represent the bread-and-butter for many daily deal sites, these findings raise questions regarding the continued availability of a sufficient pool of viable revenue-generating merchants from these two industries for daily deal sites,” Dholakia says.

Daily deal spending has adversely affected all traditional marketing programs, Dholakia says.

Spending on Yellow Pages advertising was down 27.5 percent compared with 2009, print advertising was down 21.6 percent and self-managed direct mail was down 17.6 percent.

Local radio and TV advertising also dropped substantially, whereas spending on email promotions and online search programs was up substantially (7.8 percent in each case) over the past year.

“The businesses that we see spending their marketing dollars on daily deal sites have dramatically cut their advertising budgets,” Dholakia says. “This is a problem for businesses, because they’re not building their brand when they offer discounted prices for their products and services. Only about 20 percent of customers using daily deals return to businesses to buy at full price; customers acquired through other programs typically have much higher rates of full-price repurchases.”

There is still an upside for consumers and some business types to do daily deals, but Dholakia advises caution.

“For consumers, I’d say to be cautious about buying a daily deal. If you’re going to purchase a voucher, make sure you use it before it expires,” he says.

“Right now the getting is still good for the consumer, but that isn’t going to last much longer as these steep discounts won’t and can’t last very much longer.”

We wonder if this study will impact Groupon’s upcoming IPO or impede LivingSocial’s progress. In addition to those 800-pound gorillas of the daily deals space, there are hundreds of smaller firms doing similar things with various twists and in local markets. Is the whole daily deals phenomena just a passing fad? What do you think? Let us know in the comments.