From the standpoint of the retail vendor, these sites are thought to help grow or sustain their business by building brand loyalty as well as quickly selling surplus inventory. Wholesale merchandise sellers often use these deals to deplete inventory. But when retailers use this method is it effective? Indeed, there is the benefit of allowing the vendor to off-load inventory.  Furthermore, the business model can be perfect for companies looking to launch a new business or product, as this is a direct marketing resource where proven consumers will be able to see the deal offers.  

The theory of developing brand loyalty and building more long-term consumers, however, is more in question.  Actually, use of these sites may lead to long-term brand damage, because once a deal has been offered, it is more difficult for consumers to want to pay full price ever again.  For example, the Museum of Sex in New York City has a normal admission price of $18, but offered $5.00 admission tickets on the Living Social website. After the promotion had ended, it became clear that any customers were no longer interested in paying the full price of $18 to get into this popular attraction.  

Even if the deal is no longer available, consumers are seen to just wait until the next deal is available again before making their purchase. Sometimes waiting so long, in fact, that they never go unless there is a discount deal. The Museum of Sex is no stranger to the daily deal model, with a litany of offers with many deal sites, ensuring no-one will ever pay retail again. The question remains, if no-one ever pays retail, then is the true price of their product only $5, but everybody is sold on the idea that is in fact much higher and it will always be discounted? Museum of Sex has made it clear that their goal this year is to drive over 150,000 people through their doors, at any cost. They are well on their way to achieving that goal through their relentless discounting through the daily sites, without any apparent damage to the brand. Its unclear if a brand can jump from being the daily-deal-darling to an established brand, as very few businesses have jumped the gap. From empirical evidence, it appears that going daily-deal, means that you might not be able to go back.

The daily deal sites also have the drawback of being quite expensive.  First, the vendors are asked to lower their prices substantially, with the daily deals site pushing for deeply discounted prices, as it is thought only “deep” discounts make customers interested in daily deals.  On top of this, the middleman site takes a large cut of their profits, and these commissions can be as much as 50%.  These commissions are negotiated individually with businesses.  Sometimes this can work as a loss-leader strategy, whereby customers are wooed with a low price, so low that the company may even incur a loss, in order to gain long-term customer loyalty; however, this can just as often backfire.  

There can be long-term brand damage, and the companies can fail to convert a discount buyer to become a full price buyer after the offer is over.  In fact, the reverse conversion can exist, where full price buyers are converted to discount buyers, thereby cannibalizing full price sales for discounted sales.  

Most customers would be more likely to move on to the next discounted offer instead of staying with the first brand they have sampled.  Some brands, such as Broadway shows, are a “one time only experience.”  Therefore, this strategy is particularly flawed in such cases, as there is no opportunity to convert them to full price buyers. Most people will only be going to the show once, as the Broadway League indicated in their 2013 annual report on the industry where they indicated that on average 97.2% of the audience of a particular show is seeing it for the first time.

Summation Points – Retail Vendor Perspective

Benefits:

• Sell large amounts of inventory
• Perfect for launching a new company or product
• Supposed to develop brand loyalty and get new customers

Drawbacks:

• It’s expensive – Groupon can charge up to 70% of the sale, but can vary by industry depending on the profit margins
• Long term brand damage
• Failure to convert discount buyer to full price buyer after offer is over
• Reverse conversion exists – converting a full price buyer into a discount buyer, thereby cannibalizing full price sales for discounted sales
• Most customers move on to the next offer instead of staying with the original brand
• Some brands, products or services are “one time only experience”, EG Broadway Shows, there is no opportunity to convert them into full-price buyer as people will only be going to the show once.