Only 20% of Daily Deals Users Come Back for Full Purchases

For the second time in eight months, Rice University has bad news for the likes of Groupon and LivingSocial. Among its findings: Only 19.9 percent of deal users are returning for full-price purchases at restaurants, bars, salons, and other retailers.

Utpal Dholakia, associate professor of management at Rice’s Jones Graduate School of Business, said small businesses are exhibiting low levels of loyalty to Groupon, LivingSocial, and other deals sites.

“The major take-away from the study is that not enough businesses are coming back to daily deals to make the industry sustainable in the long run,” he said in a prepared release. “And our results from three studies and close to 500 businesses surveyed show that the deals are nowhere close to the rates of financial success for participating businesses that some companies claim to be having.”

Other findings from the Houston-based school’s research:

• 35.9 percent of deals users spend more than the voucher value when visiting a merchant.
• 21.7 percent of them never redeem the vouchers they’ve paid for.
• 55.5 percent of businesses reported making money on their promotions, 26.6 percent lost money, and 17.9 percent broke even.
• 48.1 percent of businesses planned to run another daily deal promotion, 19.8 percent indicated they would not, and 32.1 percent didn’t know for sure.

But there was a statistic that surely echoes the sales calls being made by Groupon and LivingSocial’s local teams: 80 percent of deal users were new customers. Even if less than one-fifth came back, one could argue they gave the advertising establishment a shot at their continued patronage.

Additionally, two San Francisco-based businesses told The Wall Street Journal that daily deals were growing their enterprises. However, both were tourism/events-based ventures with fixed product costs, entailing more easily predictable profit/loss margins for their promotions when compared to the food inventory concerns of bistros and bars.

Indeed, daily deals appear to work better for some verticals than others. And Rice’s study on hundreds of businesses says so.

Among industries, 70 percent of marketers in special events, health, and services made money on their promotion. Conversely, 43.6 percent of the restaurants surveyed financially profited from the promotion, and only 35.9 percent of them intend to run another daily deal.

Meanwhile, Dholakia of Rice offered more cautionary commentary on the so-called social commerce landscape. “Our findings…uncovered a number of red flags regarding the industry as a whole,” he said.

Dholakia authored a study last fall that found Groupon to be unprofitable for one-third of 150 businesses that ran a deals promotions between June 2009 and August 2010.