Who Wins and Loses with Daily Deals?

SMITH BRAIN TRUST – Are those daily promotions, like the ones from Groupon, a good deal or not? They can be, but it’s all a matter of perspective, says marketing professor Jie Zhang at the University of Maryland’s Robert H. Smith School of Business.

The daily deals were wildly popular when they debuted in the marketplace about a decade ago. From the start they were different from conventional price discounts and coupons. Businesses used them as an aggressive outreach vehicle, hoping to attract consumers by offering deep discounts at high costs to merchants.

But when the initial excitement about the deal services died down, their effectiveness as a sales promotional tool began to seem a bit dubious. Deal-making services saw a drop in participating merchants and revenue, and ultimately several collapsed.

Not Groupon. In fact, more recently some businesses have opted to use Groupon’s daily deal platform as a customer acquisition tool, looking to get consumers in the door and keep them coming back.

In recent research, Zhang and three co-authors conducted an empirical investigation on the effectiveness of this strategy and compared the values of customers acquired through a daily deal campaign to those acquired through other means, such as online search, referrals and drive-by.

Using detailed customer transaction data provided by a firm that ran daily deal promotions, the researchers also studied the effects of the strategy on a business’ existing customer base, as a way of gauging the overall effect of daily dealing.

They found that the daily deal promotion successfully drew new customers in and generated a healthy return of investment in terms of the incremental revenue streams. But the customers acquired via this tool tended to spend less money and had higher attrition rates than customers who came to the business via other means.

Customers acquired via a business’ online presence tend to have the highest customer lifetime value, followed by drive-by customers. Referrals come next.

Zhang says daily deal promotions should not be aimed at creating short-term profitability. She says that although a lot of deal-takers won’t become loyal, some will. If used judiciously, daily deal promotions can be a cost-efficient way to attract new customers, especially those who may not sign up to try out the business without a convincing incentive.

Nonetheless, businesses should prioritize resources to acquisition channels that attract customers of higher life-time values and use daily deals as a supplementary tool when there is capacity to serve the additional customers.

The researchers did not find negative impact of daily deal acquisition promotions on existing customers who were not eligible for the promotions. And that’s good, Zhang says.

“Existing customers are still among the most valuable customers, and businesses need to consciously foster their loyalty,” she says.

Read more: “Customer Acquisition via Daily Deal Promotions and a Comparison with Alternative Acquisition Methods,” by Maryland Smith’s Jie Zhang, Universidad Autónoma de Madrid’s Jaime Romero, Hong Kong University of Science and Technology’s Ralf van der Lans, and Maven Associates’ Mark Hess, is a working paper.

Jie Zhang is a professor of marketing and the Harvey Sanders Fellow of Retail Management at the Robert H. Smith School of Business at the University of Maryland.

Research interests: digital/Internet retailing, promotion strategies, retail management, and quantitative marketing models. She develops and applies advanced econometric and statistical models to study consumer purchase behaviors and retail strategies in the digital and multichannel retail environments. Her recent research projects focus on retail deal platforms, online shopping cart abandonment, app publishers’ monetization strategies, and innovative loyalty programs.

Selected accomplishments: Her research has twice been selected as a finalist for the Paul Green Award by the Journal of Marketing Research, has won the Procter & Gamble Marketing Innovation Research Award, the MSI-ACR “Shopper Marketing” Research Proposal Competition, and has been sponsored by the Marketing Science Institute. She has published in top marketing and management journals, and serves as an Associate Editor for the Journal of Marketing and the International Journal of Research in Marketing.

About this series: Maryland Smith celebrates Women Leading Research during Women’s History Month. The initiative is organized in partnership with ADVANCE, an initiative to transform the University of Maryland by investing in a culture of inclusive excellence. Other Women's History Month activities include the eighth annual Women Leading Women forum on March 5, 2019.

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