Why the Daily Deal Appears To Be Dying

SMITH BRAIN TRUST – Groupon was once the fastest-growing company in the history of the web. Its stock reached a $28 initial public offering high mark in 2011, but now trades at about $4 per share. And despite diversifying its business, introducing discounted stuff to buy via Groupon Goods, the company has seen its revenue steadily decline. It was down last quarter by about 4 percent from the year-ago period at $673.6 million, a level that fell well short of the $725 million analysts had expected. Meanwhile, similar coupon services in the U.S. and elsewhere, including Korean counterpart Coupang, have pulled the plug on daily deals.

As observers ponder such developments as signaling a dying industry, marketing professor Lingling Zhang at the University of Maryland's Robert H. Smith School of Business offers some insights. She says two factors have significantly hindered Groupon in terms of working with small retailers to give big discounts.

"First, not surprisingly, consumers in the daily deal market tend to the price sensitive. A slight reduction in discount depth could lead to a big drop in sales. Because of that, deal platforms do not have much power over the deal buyers," says Zhang, who recently studied the bargaining power between the daily deal platform and merchant counterparts. The work, coauthored with Doug J. Chung of Harvard Business School, is summarized here as part of the Smith School's recent Women Leading Research series.

The second factor, Zhang says, stems from Groupon and its smaller peers competing head-to-head in many markets by operating in similar deal categories, such as restaurants, automobile services, and beauty and personal care. "On the surface, one would expect Groupon to have an easier time recruiting merchants thanks to its larger customer base. However, it is not the case," she says. "Merchants in this market often have a sales cap on the deals. And, too many deal sales may crowd their business and hurt the service quality, to say the minimum."

Many merchants, she adds, can reach their sales goal either through Groupon or a smaller platform. "Sophisticated merchants can then take advantage of this platform competition and bargain for a more beneficial cut with the smaller platform."