Daily Deals: Not Dead Yet
The daily deal business has managed to generate bold proclamations, soaring valuations, maddening scrutiny, and--most recently--positively dire predictions. Not bad for an industry that's only about five years old.
Groupon, hardly the first site to offer daily deals but by far the most successful (at least revenue-wise), went public in November 2011 with a nearly $13 billion valuation. Its success spawned hundreds of similar daily deal start-ups and imitators, each more niche than the last. By May 2011, Yipit, itself a New York-based daily deals start-up that collects data on the industry, was tracking more than 500 of these companies, most of which were less than three years old.
For a while, analysts and bloggers were bullish that daily deals could re-invent e-commerce. But almost as quickly as they pronounced the industry's promise, many declared its death. The doom-and-gloomers didn't need to look far to find signs of a daily deal apocalypse, either. In January, Daily Deal Media, an industry research firm, found that nearly 800 daily deal sites closed down in the last six months of 2011 (though many had been acquired).
And more recently, the Wall Street Journal alerted the public to what it considered an alarming development: Groupon investors were dumping their shares because, as the newspaper put it, the daily deal company and other "young Internet firms" hadn't "lived up to hopes." The WSJ noted that at least four investors, including Marc Andreessen, had sold their stakes in the company--a sign that early backers must believe the company is fading.
But is the daily deal industry really in such bad shape?
Despite signs suggesting the contrary, a look at the numbers reveals the industry is still going strong.
Consider a July 2012 research report of the daily deal industry published by Rice University. The under-publicized paper analyzed the performance of deals run by 650 small- and medium-sized businesses between May 2011 and May 2012.
"Taken together," the authors conclude, "our results find little or no evidence of deterioration in the performance of daily deal promotions over the past year (April-May 2011 to May 2012) for small- and medium-sized businesses or with experience as the business operator runs multiple daily deals. Rather, there is improvement in some metrics."
In fact, the report found that the success rate of daily deals "increases with prior level of experience." In other words, businesses are getting smarter about deals. The study also found that though less than half of businesses found success in their first daily deal offer, more than three-quarters of businesses reported profitable promotions by the time they had run seven or more deals.
In other words, there's a learning curve among business owners using daily deals, and the types of businesses offering deals.
An Industry Matures
Though the daily deal industry is still in its relative infancy, it's growing up. Businesses are learning which promotions work--and which don't--and adapting their strategies to reflect these trends. While some types of retailers have shifted away from daily deal promotions, others--many of them in unlikely categories, like medical or dental services--have stepped in to fill the void of retailers that have left. And this new volume has buoyed the ecosystem.
James Moran, CEO and co-founder of Yipit, says that his company's data reflects a similar trend. "There are certainly businesses that have run a deal that wasn't ideal for either the business or the consumer," he says. "But as the industry matures and gets smarter, the right businesses are running deals again. There's been a shift to new categories like medical, home, and travel."
Moran says that the early days of daily deals focused heavily on beauty and restaurants offerings, so those verticals quickly saturated. Now, he says, the scope and categories of deals have shifted to newer offerings. Moran and his team assembled data for the purposes of this article, which reflect that change. While "Restaurants" declined from 16% to 11% from the end of last year to 2012, the "Home & Auto" category jumped from 9% to 13% in the same time period.
Data from Rice identified a similar trend: About two-thirds of both tourism-related services and doctors and dentists have significantly higher success rates on average than, say, cleaning services or restaurants and bars.
"There is little or no evidence to indicate that daily deals are working less effectively for businesses than they did last year," the study concludes.
Another way to assess the current state of the industry is to look to the email marketing companies that send the deal emails to consumers. Last month, email marketing service MailChimp analyzed its own email data to verify the claims that the daily deal industry was dying. To get a long-term view, the company pulled data from January of 2010 to November of 2011 to analyze the market. The resulting research debunked a popular daily deal myth: that customers are unsubscribing en masse.
"Everyone says daily deals are struggling, so we expected to see hideous list stats here," the authors note. "Instead, the lists are clean, and subscribers are sticking with them. The attrition rate is surprisingly low."
They concluded: "We've definitely come across some daily deals with bad stats. They had poor list-collection practices, questionable content, and they're gone now. But we don't see evidence of a crumbling industry."
What's the Matter With Groupon?
So, the question remains: Why did at least four of Groupon's investors decide to cash out?
The obvious explanation is that private investors are experts in making market decisions about private companies, but once investors experience a liquidity event, like going public, they have an obligation to their limited partners to generate a cash return, even if that return is not necessarily five or 10 times the original investment.
Dan Primack, writing for Fortune.com, sums up this important point clearly. He says, "I'm not exactly sure why Andreessen Horowitz selling the shares is a negative, given that it booked a $14 million profit off of its $40 million investment. Not a venture home-run, but not terrible for an 18-20 month hold. And I'm pretty sure that generating positive returns is a venture capitalist's primary job responsibility (not tech cheer-leading, although it's an easily forgiven error)."
In short, put away the death knells--for now.
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