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Think Consumers Are Tired of Deals? Better Think Again

It Might Appear Groupon Fatigue Has Set in, but a Rice University Study Concludes the Opposite

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You've probably seen it, maybe even experienced it: two expired Groupons tacked to a wall for months. That $100 in unused yoga and dance lessons reduced to bad cubicle art inspires an outright offensive against daily deals and a rash of deleted, unopened emails from Groupon, LivingSocial, DealOn, Yipit and every city magazine launching its own version of the service.

Rice University professor of management Utpal Dhollakia
Rice University professor of management Utpal Dhollakia
While that 's a real scenario, it's also the outlier, a Rice University study finds. Even though Groupon has undoubtedly fallen from the graces of the press in recent months after drawing back its financial curtain for an initial public offering, the fact remains: U.S. consumers are still gaga for deals and Groupon is their favorite by far, with few reporting any shade of deals fatigue.

That disconnect explains why Utpal Dholakia, professor of management at Rice University and the lead researcher on the study, fell out of his chair when he saw the hard numbers. He, too, had heard about a woman who, with something like 17 unused deals, had given them up. As Groupon's brand began to tarnish, he set out to see if swaths of consumers, once enamored with the new-age digital coupons from Groupon and its legions of competitors -- numbering 600, according to deal-aggregator Yipit -- were indeed beginning to swear them off.

Not really, say the numbers.

"That's the virtue of quantitative analysis -- it cuts through the vocal few," Mr. Dholakia said.

The survey of nearly 1,000 U.S. online users finds that they're not yet tired of daily deals. Quite the opposite: Shoppers who tend to purchase the most daily deals continue to remain enthusiastic about them.

Only 13% of experienced and heavy daily-deal users agreed with the statement: "I buy daily deals less often than I used to," according to the study, published in conjunction with Cornell University. Only 8% agreed with the statement: "I have lost interest in daily deals over time."

BAI/Kelsey, a local media and ad research firm, revised its deals projections upward last week: U.S. consumer spending on deals, including daily deals, instant deals and flash sales, will grow to $4.2 billion in 2015 from $873 million in 2010. While the bump in its 2015 projection is only up slightly, the projection for 2011 revenue was revised to $2 billion, up 66% since the March estimate.

"In our forecast, we're seeing awareness of deals is still on the up," said Peter Krasilovsky, VP-program director, marketplaces. "A lot of people haven't signed up yet. The early adopters are already there and we're seeing a broadening of the overall user-base."

In the Rice study, 45% of those surveyed who had never purchased a daily deal before said they simply did not know they existed; 18% said deals weren't available in their area.

Things are "looking good" for Groupon specifically, to steal a phrase a recent leaked internal memo from CEO Andrew Mason. (This missive dragged the company into a patch of trouble for potentially violating Securities Exchange Commission-mandated radio silence.) "Groupon leads in every market that we know -- they continue to have highly curated deals with high [email] open rates," Mr. Krasilovsky said.

Groupon saw the lowest fatigue rate among nine total daily-deals sites, including Living Social, Gilt City and BuyWithMe, according to the Rice study. Only 1.5% of respondents admitted they use Groupon less than they used to.

Both Groupon and LivingSocial have, however, seen declines in traffic to their websites since June, according to ComScore data. But that 's not necessarily a death knell. For Groupon, the decline appears in step with past traffic patterns, where declines were followed by new highs, said ComScore analyst Andrew Lipsman. LivingSocial's decline could be a result of less advertising: ComScore shows July traffic declines coinciding with declines in paid search and display-ad impressions.

There is , of course, a hard ceiling to the entire deals category, regardless of provider.

"We don't see the incredibly sharp increases continuing," said BAI's Mr. Krasilovsky. "It's beginning to flatten out."

Some new entrants have recently cooled to the category; Facebook and Yelp have both put the brakes on their me-too deals products. Meanwhile, cable operators, myriad newspapers and magazines and other local media companies such as The New York Times, Google, McClatchy papers and Belo stations are supporting daily deals for their audiences off the back of their existing sales forces.

While consumers still have an appetite for daily deals, it remains to be seen if local businesses, which sometimes lose money on these promotions, will keep coming back -- or if Groupon as a business in itself is sustainable thanks to crippling customer-acquisition marketing costs (20% of revenue today, according to Mr. Mason's memo) and a high-overhead people-intensive operation.

Said BAI's Mr. Krasilovsky: "A merchant may think a deal will put them on the map, but other times they'll say: "Let's go with a banner campaign.'"

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