Recent study indicates deals are sustainable advertising model for merchants
We talk a lot about the success and promise of deals and believe that local media in particular is perfectly positioned to see continued growth with deals and promotions. Some have cast doubt on the industry based on the activities of Groupon and the like. But, a recent study conducted by Rice University’s Utpal Dholakia took a look at the deals industry and uncovered a number positive trends.
Dholakia surveyed 641 owner/operators of small and medium-sized businesses throughout the US over three periods (April-May 2011, October 2011 and May 2012), so the bulk of his findings come from the perspective of the merchant. And for many merchants, deals are proving to be not only a great way to make a splash in the market but also as an ongoing medium for advertising and promotions. According to Dholakia, “daily deals appear to be sustainable marketing programs for about a third of the small- and medium-sized businesses that try them.” Why is that? Some of it is based on what industry they’re in, as we can see from the chart below.
How long the merchant had been in business and business size aren’t datapoints that we see often, but he found that both factors can have a significant impact. Businesses under six years old are 39% more likely to become repeat deal advertisers, while businesses over 6 years are only 23% likely to repeat.
On business size, Dholakia states:
“The smallest businesses (those earning less than $100,000 annually, 60.1% profitable) and the largest ones (those earning more than $5 million, 76.7 % profitable) do relatively better whereas those in the middle that earn between $500,000 and $5 million in revenues each year do relatively poorly.”
Other findings from the study showed that specific types of business are more likely than others to repeat deals. “Restaurants and retailers indicated higher dropout rates, and salons and spas indicated lower dropout rates,” according to Dholakia. This isn’t a huge surprise given the margins that come along with spas and salons. The same could be said for other service deals like mobile detailing and laser hair removal. We recently did an in-depth analysis of the restaurant, retail, travel and beauty deal categories and subcategories to uncover which of them performed best. (We’ll be evaluating recreation, service and event categories over the next week).
Additional key takeaways from the study:
- 33.9% of deal consumers spent beyond the deal value.
- 20.1% of deals purchased went unredeemed when promotional period ended.
- The deal sites’ share of revenue increased from 42.5% last October to 45% this May indicating stable or increasing pricing power.
- 79.6% of customers were new to the business. This was a consistent number throughout the three sample periods.
In a related article, Street Fight Magazine interviewed Dholakia about the study. Two things stood out from that interview that should be a rallying cry for local media: merchants need ongoing marketing and advertising help and the audience is a key driver for merchants in their decision making process for running a deal. Local media distinguishes itself in the deals space by having an affluent, mature and loyal audience and leveraging its ability to offer merchants a plethora of marketing tools beyond deals. These are the buttons to push when talking with a potential advertiser. An attractive promotional package and desirable audience helps a local media company get in the door with a new deals advertiser. From there, a successful campaign ingratiates the advertiser with your company and you start a long-term relationship by offering them ongoing marketing tools to help their business grow!