By Utpal M. Dholakia
After enjoying rave reviews initially, opinions regarding the daily-deal industry have turned
Why do such negative outcomes occur?
There are at least two reasons. First, daily-deal operators stipulate that merchants offer deep discounts, 50% or more off regular prices. Coupled with the revenue shared with the operator, merchants are left with a quarter or less for every $1 worth of products or services sold to shoppers.This is often not enough to cover costs. Second, many merchants report that relatively few daily-deal users return to purchase at full price or become regular customers.
In other settings, businesses commonly offer deep discounts to new customers. They absorb the loss on the initial transaction with the understanding that future revenues from the customer will generate greater profits. But such a loss-leader model does not seem to be working in the daily-deal industry.
To find out why, with Professor Sherri Kimes of Cornell University, I recently conducted a survey of shoppers to understand their motivations for using daily deals. We obtained responses from a diverse sample of 973 American consumers, of which approximately two-thirds were daily-deal shoppers.
So which shopper motivations predicted daily-deal purchase? A regression analysis showed that the strongest psychological predictor was market mavenism --- the propensity to share information with others and exert influence on their purchases. Market mavens are individuals who actively gather information about many kinds of products, places to shop, and technologies. They use this knowledge to initiate discussions and provide information to others. Market mavens bought and used more daily deals in our study and reported checking their email for daily deals every day and integrating such deals into their regular shopping behavior.
Just as interesting, our findings showed that the shopper’s spending self-control --- the ability to monitor and regulate spending-related thoughts and decisions ---was a negative predictor of daily-deal purchase, indicating that the heavier daily-deal shoppers are those who are less careful with their finances.Value consciousness, which is an overarching concern with getting something at a low price, also did not predict number of daily-deal purchases.
The conventional wisdom in the industry is that deep discounts are essential to a daily-deal offer’s success. However, our analysis indicates that such a single-minded emphasis may be misplaced. When consumers are asked how sensitive they are to price or how much of a discount they require, they are notoriously strategic, always asking for deep discounts. Yet, in this behavior, as in other areas of life, there is a gap, often a substantial one, between what people say and what they actually do.
Our study’s findings indicate that shoppers buy daily deals for complex and multi-faceted reasons that have to do with more than just getting a deep discount. Many daily-deal shoppers will likely buy daily deals even if the offer is a little less sweet, and the terms of the deal a little more well-defined and constrained. And it is clear to them that daily deals can remain sustainable and local merchants survive only if there is a better balance between merchant welfare and consumer savings from such deals.
Perhaps now is the time for the daily-deal industry --- both operators and merchants --- to turn their attention away from offering deeper and deeper discounts and making blanket offers that bruise many merchants, to more creative and subtle ways of making offers with shallower discounts that appeal to consumers and merchants alike.
