Group Buying White Paper

Daily Deals White Paper:Understanding the industry dynamics of daily deals and implications formerchants and consumersHarvard Business SchoolEdelman Field Study Fall 2010Erik Eliason, Yohanes Frezgi, Fatima Khan

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLTable of Contents1.0 Executive Summary 1.1 Daily Deals Defined 1.2 Daily Deals vs. Flash Sales 1.3 Scope of Paper2.0 Industry Analysis 2.1 Overview of Industry Players 2.2 Porter’s Five Forces 2.3 Future Trends3.0 Merchant Analysis 3.1 Process for Merchants 3.2 Value Proposition for Merchants 3.3 Economics of a Deal 3.4 Effectiveness of Daily Deal Vouchers 3.5 Vendor Preference 3.6 Merchant Complaints4.0 Consumer Analysis 4.1 Consumer Demographics 4.2 Decision Making Heuristics Applied to Daily Deals 4.3 Consumer Purchasing Behavior 4.4 Receptiveness of Consumers5.0 Case Study: Weecation 5.1 Results 5.2 Merchants 5.3 Consumers 5.4 Website 2

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL1.0 Executive Summary1.1 Daily Deals DefinedThe daily deal craze is one of the most popular consumer-internet trends in 2010. It isessentially a sales tactic employed by websites in which they offer limited-time discounts oncoupons to local merchants. The coupon, also known as voucher, functions similar to a stored-value card because it has monetary value at a specific merchant, is generally anonymous, andmust be redeemed within a predetermined time-frame, for example, six months. Daily dealwebsites offer consumers deep discounts; a typical deal is $50 worth of food for $25, butconsumers only have 24 hours to purchase the voucher or they miss out.1.2 Daily Deals vs. Flash SalesTo establish the parameters of this white paper, it is important to define the differencesbetween daily deals and flash sales. Figure 1.0: Daily Deal vs. Flash Sales Factor Daily Deal Flash Sales Example Groupon, Living Social Gilt Groupe, HauteLook Openness Open to all Invite Only Geography Local National Type of Product Virtual voucher Physical product Hold Inventory No Yes Receive cash up front, Pay out cash for products, then Cash Flow then pay out over 90 earn back when the products days are sold ‘Instantly’ Consumable Yes No Scarcity Time-based Quantity-based Suppliers Small merchants Large brands Value Proposition to Get new customers Sell post-peak inventory Supplier Brands Relatively unknown Exclusive name brandsThrough this framework it is rather obvious that daily deal websites and flash sale websitesoperate very differently.1.3 Scope of PaperWhile flash sales do employ similar tactics for consumer promotion and offer merchants achannel to optimize inventory, the way in which this is executed is very different. The scope ofthis research paper is to analyze the dynamics of the daily deal as an industry and its impact onmerchants and consumers and does not analyze flash sales websites. 3

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL2.0 Industry AnalysisThe business model for daily deal sites operates primarily as an intermediary where the dealwebsite (merchant intermediary) works with local merchants (sellers) to negotiate a deal(product) that is sold to consumers (buyers). In this model typically there is no directinteraction with the buyers and sellers before the transaction. The one exception to this modelis Groupon Stores which operates as a multi-sided platform (MSP) in which buyers (consumers)can interact directly with sellers (local merchants) through the Groupon website. Each partyhas an affiliation with the MSP.2.1 Overview of Industry PlayersThe daily deals market is made up of over 500 players with over 200 in the United States.Figure 2.0: Daily Deal Company Analysis Number of >3,000i <600ii 60iii Employee Cities >300iv 124v 6viAverage Deal Price $41vii $35viii $136ix Funding 171Mx $232Mxi N/A # of subscribers 40Mxii 10Mxiii N/A% Daily Deal Web 79%xiv 8%xv N/ATraffic in the US6GrouponGroupon, which was originally started as The Point in 2007, is largely credited with establishingthe local daily deal space after observing users of The Point combine their efforts to buy goodsin bulk at large discounts. In 2008 the company pivoted and renamed itself Groupon(getyourgroupon.com), focusing exclusively on daily deals. Since then Groupon has become themarket leader in the daily deal space with deals in over 1,000 markets globally and estimatedrevenue over 5 times larger than the next biggest player, LivingSocial. To incentivize users tobuy deals Groupon uses a ‘tipping point’ that must be reached before anyone who haspurchased the deal is given a discount. If the quote is not reached everyone who agreed topurchase the deal is not charged and no one gets the discount. To help distribute their dealsGroupon relies on a strong emails base that consists in over 40 million emails worldwide whichaccount for 35% of their daily traffic. Users are also further incentivized to get others to buy 4

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLdeals through a referral program that rewards users for getting friends to sign up or purchase adeal that they have already bought.First Mover AdvantageSince Groupon was the first mover in the daily deal space they have enjoyed a significant firstmover advantage that combined with their operating execution has led to their current marketdominance. Their dominance can largely be seen through the significant difference in websitetraffic.TrafficIn a recent post by Hitwise, an online data and analytics service company; they reported thatGroupon commands 79% of group-based coupon traffic, while LivingSocial has just 8% as ofNovember 27, 2010.Figure 3.0: Market Share of Daily Deal Unique VisitsxviThe wide traffic margin that Groupon enjoys can mainly be attributed to their larger user base.While Livingsocial has accrued a base of over 10 million users in the United States since itslaunch in August 2009, Groupon has amassed nearly 40 million since November 2008. Many ofthese users signed up when Groupon first introduced the daily deal space with display adsmessages like “50% to 90% Off Your City’s Best Stuff”. 5

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLFigure 4.0: Sample Groupon AdvertisementxviiUntil mid-2009 Groupon’s ads were unique and user acquisition costs on websites likeFacebook were very low, but by late 2009 many new deal sites entered the market drivingcustomer acquisition costs up threefold. Livingsocial furthered suffered from a lack of PR, sinceGroupon who was first in the daily deal space and commanded much of the news attention,while Livingsocial was the 47 player to move in the space. For example, Google Trendsxviiishows Groupon has 20 times more search traffic than Livingsocial in 2010.Figure 4.0: Google Trends Analysis: Groupon vs. LivingsocialxixLivingsocialSimilar to Groupon, Livingsocial started with a different business model before moving into thedaily deal space in August 2009. Unlike Groupon, when Livingsocial made its pivot into the dealspace there were already 46 other players in the market. To differentiate themselves fromothers Livingsocial used data and a fan base from its original business of creating socialapplications on Facebook to drive traffic to its new deal site. They also advertised heavily asshown by the figure below in which they ranked 8th for Goggle Adwords spending during themonth of June 2010 with shelling out $2.29 millionxx. 6

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLFigure 5.0: Livingsocial marketing spend on Google Adwords in June 2010xxiHyper Expansion through InvestmentTo compete with Groupon, Livingsocial has raised over $232 million in funding, which is $61million more than Groupon, and includes a $175 million investment from Amazon. In a pressconference announcing Amazon’s investment CEO Tim O’Shaughnessy stated that they plan touse Amazon’s investment to triple employees to 1,800 and expand service to double themarkets they currently in.Brand ExtensionsIn an effort to target a specific demographic while maintaining their one deal per day motto,Livingsocial has launched branded extensions such as Livingsocial Escapes and LivingsocialFamily Edition. This is a direct contrast to Groupon strategy of simply adding additional deals totheir side bar while alerting the main deal based on the consumers’ buying habits.Gilt CityGilt City is one the first examples of a major non-deal site moving into the deal space. The ideabehind the concept was to extend the Gilt Grope service to their engaged user base. Theytested the market with a deal for a spa package in New York, it was a significant success and GiltCity was formed. In an interview with Andrew Koch HBS’10, Vice President of Gilt City, hementioned that the two key constraints that hinder many deal website from being a success arenot having a dedicated base of users and a lack of capital needed to promote and expand.Many feel that Gilt City is especially poised to do well because of the lack of completion in theluxury market. Gilt Groupe has an install base of over 2 million users and a relatively high pricepoint for an average deal. Koch also noted that they have higher full price return rates forconsumers who buy through Gilt City, signifying the higher desirability for merchants to have 7

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLtheir subscribers visit their businesses. Similar to Livingsocial, Gilt City does not have a tippingpoint for its deals.2.2 Porter’s Five Forces AnalysisTo understand the overall industry attractiveness of the daily deal space it is helpful to employthe Porter’s five forces model.Figure 6.0: Porter’s Five ForcesForce Strength DetailsThreat of New Entrants High  Over 200 daily deal clones in the US and over 1,000 in the China  Cost to create a daily deal site is as low as $89  (Con)High users acquisition rates  (Con)Poor quality with smaller deal sitesSupplier Power Medium  Lack of uniqueness for popular deal categories such as restaurant and spas  Large number of suppliers in metropolitan areas  High turnover in small business  Dependent on the reach of the daily deal site  Is not a necessity for a businessBuyer Power High  Low switching cost for consumers  Is not a necessity  low targeting for individual consumersThreat of Substitution Low  Daily deal make up a relatively small percentage of local advertising  Wait list for most popular deal sites turn SMB to other forms of advertising (Groupon receives 1,000 request everyday that they cannot process)Competitive Rivalry High  Low switching cost  Undifferentiated offerings  Multiple entrants in the same market  Price sensitive users 8

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL2.2.1 Threat of New EntrantsFigure 7.0 New EntrantsForce Strength Pros Cons  Low deal conversion rates require a large amount of daily traffic  Cost to create a daily deal site  Merchants do not want to work with can be as low as $89 and a deal site unless they already have requires very little set up time a larger users base  Daily deal business model isStrong  Hard to differentiate offerings from very attractive and provides other daily deal sites cash early in the business cycle  Scaling business requires large  Requires little specialty amounts of funding for sales people knowledge and user acquisitionKey TakeawayWhile the daily deal model has very low barriers to entry, as demonstrated from figure 8.0, thecost to scale the business are substantial. This is especially true given the large number ofplayers already in the market and high user acquisition cost. Livingsocial spent over $2.2 millionfor the month of June 2010 through Google Adwords and established players see marketingspend as a clear barrier to entry for non-venture backed companies.Figure 8.0: Growth of Daily Deal Services in the U.Sxxii. 9

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL2.2.2 Merchant PowerFigure 9.0: Merchant PowerForce Strength Pros Cons  Lack of uniqueness for popular deal categories such as restaurant and  Daily deal are seen as a spas supplemental advertising  Large number of suppliers in channel for merchants rather metropolitan areas than a necessity  Merchant are looking for new waysMedium  Deal sites are entirely to market to consumers dependent merchants  Low financial risk for merchants  Number of deals are outpacing the  Low switching cost for number of deal site merchantsKey TakeawayA merchant’s power is largely based on the size of the market they are in and the reach of thedaily deal sites. In locations with many merchant such as New York, Chicago, and Boston thewaitlist to get on popular deal sites can be six months to a year. In smaller markets merchantshave seen greater control and higher bargaining power on commissions to deal sites.Merchants also have a strong preference to do deals through sites with high amounts of traffic.In a paper on the effectiveness of Groupon many merchants had negative comments towardscompetitors stating, “Respondents largely indicated annoyance at the barrage of calls theyreceive from these competitors on a daily basis, and most reported a lack of success whenusing them to offer a promotion.” However, figure 8.0 demonstrates that deals are outpacingsites, which signals merchant’s strong demand for daily deal sites.2.2.3 Buyer PowerFigure 11.0: Buyer PowerForce Strength Pros Cons  Deal sites have begun to offer deal in specific unmeet verticals  Very similar product offering such as family, travel, and luxury  Deal are not very targeted to to build loyalty with consumers consumersStrong  Lack of competition in small  Low to no cost for switching deal markets sites 10

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLKey TakeawayConsumers currently hold all the power over daily deal websites. The undifferentiated nature ofdaily deals combined with noncompulsory consumers creates users who often sign up withmultiple deal sites or join aggregators to find the “best” deal in their desired location.2.2.4 Threat of SubstitutesFigure 12.0: Threat of SubstitutesForce Strength Pros Cons  Substitutes for daily deals such as print newspaper, radio and  A new free offering from local magazines are being facebook called facebook deals disrupted and losing share to may pose a creditable threat toWeak daily deal sites deal sites in the near future  93% of merchants who have used  Long wait times for popular deal daily deal sites would do so again site may deter merchants from using deal sitesKey TakeawayDaily deals have disrupted the local advertising space, which relied on print media, and facelittle threat from the status quo. It’s actually print media who run the risk of being substitutedby daily deals as seen in a survey of merchants who used daily deals in Figure 13.0.Nevertheless, new entrants who have seen the demand for local advertising may createofferings that compete with daily deals in the near future.Figure 13.0: Merchant spending after running a daily deal xxiii 11

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL2.2.5 Competitive RivalryFigure 14.0: Competitive RivalryForce Strength Pros Cons  Over 200 deal site in the US alone and over 1,000 world wide  Low cost to leaving the  Little to no difference in quality orStrong industry offering  No switching cost  Early cash flow for deal sites  No customer loyaltyKey TakeawaysFierce competition across nearly every aspect of the daily deal space has made it extremelycompetitive. Smaller players have attempted to relieve their competitive pressures throughfocusing exclusively on a specific subsector of consumers or type of deal. Bigger players, such asLivingsocial and Groupon have focused on scaling their business to as many markets as possiblethrough company acquisition or organic expansion. However, competition is unlikely todissipate in the near future. Media companies who have already established a user base andsales team have begun to enter the deal market and will likely further customize deals for theiruser base.2.3 Future TrendsExpansion  Look to see further expansion in the daily deal space  Market leaders like Groupon are opening a new city nearly every dayxxiv  Livingsocial plans to double its markets in 2011  Groupon Stores, a self service deal platform, will allow merchants to create their own deals without going through the sale process that currently limits the number of deals done per dayConsolidation  In 2010 Groupon expanded from being only in the United States to moving into 35 countries mostly through acquisition of CityDeal in Europe, ClanDescuento in Chile, and 3 deal sites in Asia.  Google attempt to acquire Groupon and Amazon’s investment in Livingsocial will mean that other successful internet sites may follow suit by acquiring daily deal sites to stay competitive.Niche  New niche deal sites have already begun open up for niche markets like dining, luxury, health and beauty and family to decrease completion with major players 12

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL  Livingsocial launched two niche sights for travel and family and plan to open a third for college student in early in 2011Competition from non deal sites  With the success of nondeal sites like GiltCity other major internet destinations have already begun to move into the deal space like TravelZoo, OpenTable, and AOL. 13

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL3.0 Merchant AnalysisDaily deal websites have revolutionized how local merchants attract new customers.Traditional tools for attracting new customers included online advertising, paid search,newspaper ads and local publications. However, these paths were expensive for the averagemom and pop restaurant and new customers were not guaranteed.3.1 Process for MerchantsBelow is a diagram which describes the typical process for a merchant who works with a dailydeal website such as Groupon.Figure 15.0: Engagement Cycle for Merchants 1. Contact 2. Terms 3. Pre-Tip Merchants contact Deal terms are Deal is advertised daily deal site, or finalized between with a minimum vice versa the merchant and sales agreed to website make the deal ‘tip’ Stage One 8. Re-Engage 4. Deal Live Engagement Stage Three Stage Two Merchant re- Daily deal site engage with the daily deal site for Cycle for keeps a percentage of the revenue future offers Merchants 7. Redemption 6. Payment 5. Charged Customers redeem Three-tiered Consumers’ credit voucher at payment process to card is charged and merchant premises merchant revenue credited to Cross sell and over begins the daily deal site sell occurs 14

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLStage One: Contact, Terms, Pre-Tip  Merchants contact Groupon or are contacted by Groupon  Groupon works closely with Merchants to see if the deal can be fulfilled given the merchants operations, and finalize details  A deal between 45% to 90% off original sales price is advertised, and both parties agree on minimum customers required, to share the revenue generated 50-50 (split varies)Stage Two: Deal Live, Consumer Charged, Payment Commences  When a consumer purchases a deal, his debit or credit card is credited to Groupon which then pays the money to the merchants  The payment process is in three steps: Typically 33% immediately, 33% in 30 days and 33% in 60 days  If a minimum number of customers is reached the deal is activated, Groupon keeps 50% of the revenue generated. If the deal doesn’t reach the minimum number of customers no transactions occurStage Three: Redemption and Re-Engagement  Customers avail the discounts at respective merchant outlets, and merchants keep the copy of the coupons to tally against original sale3.2 Value Proposition for MerchantsThe benefits of partnering with a daily deal website can be numerous for merchants if they areprepared and have the capacity to handle a rapid influx of new customers. Below are the topthree value propositions for merchants: 1. Increase Traffic Daily deals are cost effective ways of attracting customers to a merchant’s outlet/service. Not only is the communication targeted, it also provides a call to action- with a discount that respondents are likely to visit, generate trial, and convert a percentage to repeat users. If a merchant’s business is high on fixed costs then the traffic from new customers is a plus. This is the most attractive value proposition to businesses that are new and trying to establish their brand name. 2. New Customers Deals are bought by existing users and new users and while selling to existing users generates additional revenue, it is the new customers that are more effective for businesses/merchants. New customers bring additional revenue in the short as well as long term. The merchant’s ability to reach out to new customers at a very low cost, and most importantly generate trial is a disruptive function that may one day take over traditional marketing and communications. The merchant doesn’t need high cost advertisements or promoters- but can now use the daily deal platform to offer products and services to millions. 15

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL 3. Low Risk Daily deals have a low cost compared to other advertising and sales mediums and therefore have lower risk profile. If a customer doesn’t buy the deal there is no harm to the dealer, as there is no upfront investment in the deal form the merchant’s end.3.3 Economics of a DealWhile the majority of retailers are willing to indulge in repeat deals with sites, and manage tomake a profit in the short and long term from the deals they offer, there are some deals thatcan be unprofitable for the merchant.Some of the drivers that may impact profitability are: o Number of deals sold o Amount of discount on the deals relative to actual price o Amount of commission given to a deal site o Duration of the promotion o Number of people who paid more than just the value of the deal, i.e. immediate incremental sales o Deal design; does the deal encourage repeat purchase based on rewards or staggered discounts o Number of new customers reachedIn addition, research conducted with Groupon merchants states that there is strong evidencethat profitability of a deal can be predicted by two key factorsxxv: o Employee satisfaction with Groupon shoppers o Effectiveness in reaching new customersThis shows that not only is it important for businesses to make incremental revenue, butemployees must be able to deal with the spike in sales and offer great customer service to thebulge of new customers. Vendors who lose money on deals are those who offer excessivelydeep discounts, share revenues with daily deal sites and are not able to generate incrementalvalue for their businesses or for their employees.A study conducted among 150 small businesses showed how many businesses came outprofitable form the deal and why. The following graph taken from the study shows that the bulkof promotions turned out to be unprofitable. 16

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLFigure 16.0: Profitability of a daily deal offer xxvi 90% 82% 80% 66% 70% 60% 50% 50% 40% 32% 31% Profitable 30% 25% UnProfitable 20% 13% 8% 10% 0% % of Study % Buying more % repurchasing % Running Sample than groupon a second time another value groupon in the future3.4 Effectiveness of Daily Deal VouchersThe findings from Figure 17.0 show that small businesses are finding increasing value in usingdaily deal sites for promotionsxxvii. This may mean that businesses work with sites which canprovide them increasing margins. Depending on the size of the business and its popularity thebusiness will be able to negotiate margins.Figure 17.0: [Merchants] Would you use a daily deal site for another promotion? xxviii Would you use a daily deal site for another promotion? No 7% Yes 93% 17

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL3.5 Vendor Preference: Analysis of Daily Deal WebsitesVendors from all categories are now entering the daily deal arena. There are various criteria onwhich merchants choose which daily deal site to work with. All merchants want the site to becredible, well known, with high consumer traffic and a good reputation. The decision to workwith a daily deal site may also depend upon the margins the merchant is allowed to keep. Thetable below rates the top four daily deal websites from a merchant’s perspective. Themerchant assumed is a middle-tier restaurant in the suburbs of a larger metropolitan area.Figure 18.0: Daily Deal Website Analysis Subscriber size 5 1 0.5 0.5 Commission charged 1 2 2 3 Discount Requested 1 1 4 2 Average Price 3 3 1 3 Rigidity ofContent Calendar 1 3 2 3 User Demographics 4 4 5 3 Payment Terms 3 3 3 3 Cannibalization Rate 2 2 2 2 Retention Rate 2 2 4 2 Total Score 22 21 23.5 21.5Obviously the rating for the deal sites depends heavily on whom the merchant is and whatterms are negotiated. The table above is by no means a guide that should be used by allmerchants in their analysis, simply a framework in which they should compare the deal sites.Important Factors to Remember:  No. of cities the daily deal site operates in (for a national chain/ brand)  Referral Incentive for users ($10 if you pass along to a friend, or group buying)  Reward Points (use this deal and get reward points with the merchant for a later purchase)  Mobile Apps platform (Accessibility through smart phones/androids) 18

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL  Service that the daily deal site provides the vendor in terms of forward planning3.6 Merchant Complaints Against Daily Deal WebsitesOne of the most common complaints against Groupon is the expiration date which is imposedon consumers. By law, a gift certificate should have an expiration period of up to 5 years. Butthere are some instances where post contractual dates have been forced upon consumers inwhich the coupon is valid only during a pre-specified time period. There currently is a classaction case against Groupon for enticing consumers to purchase discounted certificates andhaving them utilize these within a certain time period that is not in alignment with the law.In addition, there are some Groupon deals where consumers have made the initial investmentbut have not been able to avail these discounts with the merchant due to capacity constraintsat the merchant level, or where the merchant reneges due to high volume and cost. One suchdeal was the Peperrel Skydiving/ Tandem Jumping advertised outside of Boston. The dealearned the diving merchant 600-900 consumers, where the usage wasn’t specified. Due to asudden rush in demand at one point in time the merchant has not been able to schedule skydivers for many consumers due to capacity and the due date on the coupon has expired. Somepeople complain about Groupon deliberately not having oversight at the merchant level whichmakes the process less accountable, and sometimes more troublesome for the consumer. 19

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL4.0 Consumer Analysis4.1 Consumer DemographicsGroupon and Livingsocial are the leading daily deal websites in the United States withapproximately 19.25 million and 10 million email subscribers respectively. This nearly 30million user base is the source of demographic data used in the following analysis. Ourresearch found that the average daily deal consumer is a 28 year-old female college graduatewith a household income of over $100K.Figure 19.0: Daily Deal Consumer Demographics (according to deal websites) Grouponxxix LivingSocialxxx Average (weighted average)AGE18-34 68% 36% 57%35-44 18% 28% 21%45-54 11% 18% 14%55+ 3% 18% 8%EDUCATIONSome College 12% 9% 8%College Grad 50% 35% 48%Grad School 30% 15% 25%associate degree 5% 0% 3%vocational school 2% 0% 1%No college 1% 41% 15%INCOME$29K 7% 6% 7%$30K-$39K 12% 10% 11%$40K-$49K 12% 10% 11%$50K-$69K 21% 14% 18%$70K-$99K 19% 29% 22%$100K+ 29% 32% 30%GENDERMale 23% 40% 29%Female 77% 60% 71%4.2 Decision Making Heuristics Applied to Daily DealsThe design of daily deal sites leverage social psychology to influence decision making andincrease conversion. The designers understand what factors influence purchasing decisions andhow to best leverage social intelligence to position their offering. Social commerce utilizessocial intelligence, the ability to understand and manage people, to act wisely in humanrelations, to create profitable opportunities for businesses. The six heuristics of decisionmaking, first defined by Robert B. Cialdini in his article, The Science of Persuasion in Scientific 20

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLAmerican in September 2001 provides a valuable framework on which psychological pressuresget people to say ‘yes’. In the daily deal space ‘yes’ equates to conversion.Figure 20.0 Six Purchasing Decision Techniques4.2.1 PopularityPopularity is an incredibly powerful tactic to influence user behavior. The popularity principleemploys the views of the crowd to convert users to follow a certain behavior. Whereastraditional ecommerce websites do not display purchase data or popularity data on a productpage, daily deal websites are transparent with this information and leverage it to increaseconversion. Daily deal websites include a discussion feature for each deal which allows users tocomment on the deal and merchant. Overwhelming, the reviews from consumers are positive.Another method daily deal sites employ to communicate the popularity of a merchant is toshare how many Facebook fans or twitter followers they have. 21

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL4.2.2 AuthorityPeople naturally seek experts to assist in decision making. Experts are helpful screeningmechanisms which decreases the amount of work a user needs to do and therefore shorten thetime required to make a decision. News reports, startups, politicians, and even tweetsacknowledge and solicit subject matter experts to validate a point of view. Daily deal websitesemploy the authority principle by including reviews from nationwide media outlets such as theNew York Times and metropolitan-specific media such as the Boston Globe. More specifically,daily deal websites will display user reviews from websites such as Yelp and OpenTable thatfeature local, community ‘experts’. Daily deal websites create authority themselves throughtheir branding and claiming they are experts with deals, local businesses, and ‘things to do’ in acity.4.2.3 ReciprocityThe reciprocity principle is employed by daily deal through various methods such as exclusiveaccess and the deal itself. Reciprocity represents an action taken by a person or company withthe belief that the other party will repay the initial action. Customers realize that the merchant,through the Groupon voucher, have already ‘given’ a gift in the form of a discount. This feelingamongst customers drives them to spend more than the value of the voucher when theyredeem it.4.2.4 ScarcityDaily deal sites employ the scarcity principle to influence and encourage specific user behavior.Evidence has proven that as objects and opportunities become less available to people, theybecome more attractive. In practice, scarcity can be constructed to make commodities seemexclusive. In relation to the popularity principle, the scarcity principle is not so much aboutwhat the consumer stands to gain from the purchase, rather what they stand to lose from notpurchasing. Daily deal websites employ the scarcity principle using specific tactics such as timesensitive deals, limited quantity deals, and invitation only deals.4.2.5 AffinityThe affinity principle describes the behavior that users follow users, brands, and objects thatthey like. Affinity represents a belief that consumers like people, brands, and products that areboth similar and familiar to them. Daily deal websites employ the affinity principle byincreasing their likeability and common interest amongst their customers in the cities theyoperate. One method to do this is to compose custom merchant content which feature localreferences and regional idioms. Additionally, daily deal websites like Groupon featuremerchants which have multiple locations which both increase the convenience of the deal(shorter distance to commute to redeem the deal) but also increase the familiarity of the deal.Consumers are predisposed to make a purchase because of their affinity towards brands theyhave a relationship with.4.2.6 ConsistencyOnce people take a position, they prefer to stick with it. The deal content published referencesterms and practices that relate specifically to the merchant, deal, and the user. More 22

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLimportantly, content about the merchant and deal describe activities the user wants to beknown for and what the user would like to become. For example, many of the spa deals orworkout deals target people who see themselves as fashionable and lead a healthy lifestyle.Customers prefer a path that is consistent with their behaviors and past actions. 23

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLFigure 21.0: Applying the Decision Making Heuristics to a Groupon Deal Webpage Reciprocity  Saves customers $ upfront Popularity  Displays number of deals purchased Popularity Scarcity  Limited time frame  Limited number of vouchers per user Authority  Reference Boston Globe and local restaurant review source  Include reviews from CitySearch and Yelp which feature power users Affinity  Multiple locations increase familiarity  Use of local idioms Consistency  Deal content is consistent with the user’s point of view4.3 Consumer Purchasing Behavior-what consumers want to buy 24

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL4.3 Consumer Purchase BehaviorWhen considering which deals are most popular to consumers there are a variety of factors toconsider. Variables such as the voucher price, location of merchant, time of season, uniquenessof offering, and capacity of the merchant all contribute to the ‘success’ of a deal. To assess themost popular deals, we analyzed the data both in terms of mean gross revenue per daily dealcategory and the quantity sold.4.3.1 Mean Revenue Per CategoryAnalyzing the most popular deals based on mean revenue per deal. In this case, the mostpopular deals are City Tours as detailed below.Figure 22.0: Mean Revenue Per Daily Deal xxvii Mean Revenue Per Daily Deal 70,000 60,000 50,000 40,000 30,000 20,000 10,000 04.3.2 Mean Quantity Per CategoryxxxiThe following data cover 120 Groupon deal offers from April 28, 2010 through July 3, 2010 inwhich 362,384 vouchers were purchased in the following six cities: New York, Los Angeles,Chicago, Houston, San Francisco, and Boston. To analyze the data set, the deal offers weresegmented into six categories:  Education- kid’s activities, science fairs, wine class, cooking class, etc.  Spa- hair removal, massage, dental services, facial, etc.  Travel- city cruises, city tours, sailing, etc.  Restaurant- vegetarian, ethnic, cupcakes, etc.  Leisure- bowling, movies, theatre, mini-golf, sky diving, car wash, etc. 25

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL  Fitness- workout classes, gym memberships, yoga, boot camp, etc. Figure 23.0: Data of Daily Deals from Groupon.com Categories Total Average Vouchers Avg. Revenue Purchases/Day Offers Duration Sold Price (adjusted for duration) Education 14 3.71 41273 $36.36 $910,834 794 Spa 20 3.60 35947 $71.15 $2,185,621 499 Travel 13 5.08 51351 $33.46 $1,230,595 778 Restaurant 37 5.30 124820 $15.57 $1,610,992 637 Leisure 27 4.93 89024 $30.37 $2,346,713 669 Fitness 9 6.11 20419 $38.78 $790,705 371 Total/Avg. 120 4.79 362,384 $37.61 $9,075,460 625Takeaways:  The most purchases per day were in the education and travel categories  The most featured deals on Groupon such as restaurants and leisure had the fewest purchases per day  The most expensive vouchers were in the Spa category at an average price of $71.15 were live for the shortest amount of time, 3.60 days4.4 Receptiveness of ConsumersAccording to Valpak 66% of Americans say theyre currently searching more for coupons anddiscounts than in the pastxxxii. Consumers in the US have been considerably more frugal sincethe recession and will continue to search for discounts on staple and non-essentially purchases.For restaurant specific offers, email is the preferred method of communication as outlinedbelow.Figure 24.0: Online Offers Likely to Prompt an Order from a Restaurant (% of US Consumersxxxiii) 18-24 25-34 35-44 45-54 55+ An Email 53% 63% 51% 49% 32% A Pop up ad on the internet 37% 39% 26% 22% 12% A social network message 34% 40% 28% 20% 9% or update A text message 37% 41% 22% 20% 11% 26

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL5.0 Case Study: WeecationTo test our theories and apply key learnings from this research paper we decided to launch aniche daily deal site in the local travel industry. We chose this industry because of the averageprice point for vouchers, the inherently social nature of travel, and personal interests indiscovering interesting places outside of our hometown. We launched the site in Boston inOctober 2010 with our first deal featuring a getaway to New Hampshire. Our deals did notinclude transportation (eg train, plane, or car) but were focused on the actual vacationpackages such as lodging, entertainment, and dining.5.1 ResultsIn total, Weecation sold 14 deals during a 7 day period. Total revenue generated for themerchant was $2,250. Figure 25.0: Weecation Results Vouchers Sold 14 Weekend ($149) 12 Weekday ($119) 2 Total Sales $ 2,026 Susidy per Voucher 16 Total Subsidies 224 Total Revenue for Merchant $ 2,2505.2 MerchantsOur first and most important objective was to acquire merchants. To do this, we employedvarious methods such as:  Cold Call- we searched for names and phone numbers of local hotel owners and  Cold Email- we emailed hotel owners, HBS alumni, and local chambers of commerce  SEO- built business.weecation.com as the source of information for merchants interested in the service (see appendix for screenshots).5.3 ConsumersThe top goal for consumers was the number of users on our email list. To acquire users weemployed various tactics such as:  Facebook Advertising- we advertised the Weecation fanpage on Facebook to people living in the New England area.  Employee newsletters-worked with employee newsletters from universities in Boston such as Harvard and Boston University  On campus fliers (see appendix for image)-posted fliers around campus 27

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL  Student Organizations- emailed relevant student organizations such as the Partner’s ClubCost per Acquisition on FacebookAside from campus promotion the most significant advertising we pursued was Facebookadvertising. We built four different fan pages targeted users primarily in the seven NewEngland states. To acquire fans we advertised on Facebook’s self-service platform. After a fewrounds of optimizing our ads and decreasing our bid, we were able to acquire fans ratherinexpensively. In addition to increasing our fan base, we also leveraged Facebook to acquireemails. On our fanpages, the landing tab a user would land on when they clicked the Facebookad would be our Welcome Tab which featured an embedded Google doc form and asked fortheir email address. From this one data point, it’s interesting to note that every $1.00 spent onFacebook advertising generated almost 7 fans, 0.5 emails, and $1.80 in revenue. Figure 25.0: Fanpage Fanpage Results Fanpages Fans Spent Cost Per Emails CPA Total Voucher FB Ads Fan Acquired Revenue Return Weecation 42 0.16 27 1.56 Boston 260 - Weecation 171 0.13 79 1,349 2.16 447 Cape Cod 33 0.38 14 86 2.36 - Lake Geneva 3 0.20 - n/a 15 - Travel Deals Total 248.6 $0.15 120 $1.80 1,710 2.05 $4475.4 Weecation WebsiteAnatomy of the Deal Page- (see appendix for screenshots)  User reviews- harvested user reviews from websites such as Trip Advisor  Payment Integration- employed Paypal standard due to its ease of use and ubiquity  Photos- both deals included over ten photos because we knew that the number one factor influencing a purchase decision for travel is pictures  Compelling Offer- to communicate the value of the deal the page displayed value, price, and the amount saved  Snapshot- we included a brief synopsis of the deal in under 100 words  Highlights- 3-4 bullet points of features included in the package  Deals sold/remaining- displayed the number of deals sold and remaining to instill scarcity 28

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL  Social integration- integrated the Facebook like button, like box, and share on Facebook and Twitter to promote the offer  Map- included a map and address of the location so consumers could quickly understand the travel time required (under 2 hours) 29

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLAppendix for Weecation Case StudyConsumer Demographics of FanpagesOn Campus FlierEmail Capture on top of every page on website 30

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLWeecation Homepage Screenshot 31

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLDeal Page 32

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLMerchant’s Website- business.weecation.com 33

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL SAMPLE MERCHANT AGREEMENTThis Merchant Agreement (the “Agreement”) is made and entered into as of XXX, (the “Effective Date”)by and between XXX, with offices at XXX (hereinafter “Merchant”), and Weecation, Inc. (hereinafter“Weecation”) (collectively the “Parties”).RECITALSWHEREAS, Weecation has developed and operates online properties for the promotion and sale ofvacation packages;WHEREAS, Merchant owns and operates a resort [XXX]; andWHEREAS, Merchant wishes to offer Weecation the right to promote and sell vacation packages to itsresort in the form of Vouchers (defined below) and shall pay Weecation XX commission for each vouchersold.NOW THEREFORE, in consideration of the foregoing, the mutual agreements set forth herein and forother good and valuable consideration the receipt and sufficiency of which are hereby acknowledged,Weecation and Merchant hereby agree as follows.1. ResponsibilitiesA. Merchant shall offer Weecation the right to market and sell up to XXX (XX) Vouchers. “Voucher”mean proof of purchase that entitles its purchaser to lodging, meals and other goods and services atMerchant’s resort as set forth in the table below.VenueAddressValid nightsPriceLodgingGoods/ServicesIncludedValidredemptiontime periodBlackout dates 34

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLB. Weecation shall use commercially reasonable efforts to market and sell the Vouchers offered byMerchant under the terms of this Agreement during the “Sale Period,” which shall be from XXX to XXX.C. Merchant shall honor the terms of the Voucher until its expiration date.D. For each Voucher sold, Weecation shall pay Merchant an amount equal to the sale price of thevoucher as detailed in the table in Subsection A. Payment shall be made in the following manner: Seventy percent (70%) of the revenue from sale of Voucher shall be paid within the earlier of ten (10) business days of sale of Voucher or the expiration of Sale Period. Fifteen percent (15%) of the revenue from sale of Voucher shall be paid within the earlier of ten (10) days after the third (3rd) month of the sale or the expiration of Sale Period. All amount outstanding from the revenue from sale of Voucher shall be paid within ten (10) days of the expiration of the Sale Period.E. For each sale completed, Weecation shall provide Merchant with name of the purchaser and thedetails of the Voucher sold. All other information about the purchaser obtained from the saletransaction shall belong exclusively to Weecation, which Weecation may disclose to Merchant at its solediscretion and only to the extent required to effectuate the terms of the Voucher sold.2. Term and Termination. This Agreement shall be effective upon signing by both Parties and shallcontinue until the earlier of XXX or termination by mutual agreement of both Parties.3. Limitation of Liability. Weecation shall not be liable for costs and damages incurred by merchantarising out of this Agreement unless caused directly by the gross negligence of Weecation in fulfilling itsobligations under the agreement. Weecation shall not in any circumstances be liable for indirect orconsequential damages and costs incurred by Merchant for any reason whatsoever.4. Intellectual Property. Weecation owns all copyrights, trademarks, intellectual property rights, know-how and any other rights connected to the online services used to promote and sell Vouchers.Merchant does not acquire any rights or licenses whatsoever to Weecation’s technology under theterms of this Agreement.5. Assignment. Weecation may assign this agreement in whole or in part to its successors or assigns.Neither party may assign this Agreement to a third party without the prior written consent of the otherparty, which consent shall not be unreasonably withheld or delayed. The rights and obligations of thisAgreement shall bind and benefit any successors or assigns of the parties.6. Modification, Amendment, or Waiver. No provision of this Agreement may be modified, amended,or waived except by an instrument in writing signed by the parties to this agreement. No delay orwaiver, express or implied, by Weecation of any right or any breach by Merchant will constitute a waiverof any other right or breach by Merchant. 35

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws ofthe State of Delaware..8. Severability. In the event any provision of this Agreement is deemed to be unenforceable, suchdetermination shall not affect the validity or enforceability of the remaining provisions of theAgreement. To the extent that any provision of this Agreement is unenforceable because it isdetermined to be overbroad with respect to scope, duration or geographic area, that provision shall notbe void but rather shall be limited to the extent required by applicable law and enforced as so limited.9. Entire Agreement. This agreement constitutes and contains the entire agreement andunderstanding concerning the subject matter addressed herein between the parties, and supersedesand replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral,concerning this subject matter, and the a parties have made no agreements, representations orwarranties relating to the subject matter of this agreement that are not set forth in this agreement. 36

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLEndnotesi Amir Efrati and Geoffrey A. Fowler, “Google Plots Move From Search to Sales,” The WallStreet Journal, December 1, 2010,http://online.wsj.com/article/SB10001424052748704679204575647033055940528.html,accessed on December 2010.ii Joseph Galante, “LivingSocial Counts on Amazon.coms Help in Groupon Gunfight”,Bloomberg, December 7,2010, http://www.bloomberg.com/news/2010-12-07/livingsocial-counts-on-amazon-com-s-help-in-groupon-gunfight-ceo-says.html, accessed on December2010.iii Andrew Koch, interview by Yohanes Frezgi, Boston, MA December 1,2010.iv Stacy Cowley, “Groupon walks away from Google takeover talks – report,” CNNMoney,December 4,2010, http://money.cnn.com/2010/12/03/technology/groupon_google/index.htm,accesed on December 2010.v Joseph Galante, “LivingSocial Counts on Amazon.coms Help in Groupon Gunfight”,Bloomberg, December 7,2010, http://www.bloomberg.com/news/2010-12-07/livingsocial-counts-on-amazon-com-s-help-in-groupon-gunfight-ceo-says.html, accessed on December2010.vi Andrew Koch, interview by Yohanes Frezgi, Boston, MA December 1,2010.vii Steven Carpenter, “A TC Teardown: What Makes Groupon Tick”, May 2,2010, post on blog“TechCrunch,” Technology Startup Blog, http://techcrunch.com/2010/05/02/teardown-groupon/, accessed November 2010.viii Ibid., p.1.ix Source: Data from www.GiltCity.com deal pages, and average price of highlight deal.x Crunchbase, “Livingsocial”, Livingsocial wiki page on Crunchbase,http://www.crunchbase.com/company/livingsocial, accessed on November 2010xi Crunchbase, “Groupon”, Groupon wiki page on Crunchbase,http://www.crunchbase.com/company/groupon, accessed on November 2010xii Andrew Mason, interview by Charlie Rose, The Charlie Rose Show,http://www.hulu.com/watch/199904/charlie-rose-andrew-mason-ceo-groupon-stacy-schiff-john-wood#s-p1-so-i0, December 09,2010 37

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLxiii Mike Isaac, “LivingSocial Receives $175 Million Investment From Amazon”, Forbes, December2,2010, http://blogs.forbes.com/mikeisaac/2010/12/02/livingsocial-receives-175-million-investment-from-amazon/xiv Erick Schonfeld, “Hitwise: Groupon Is Getting 79% Of U.S. Group-Buying Visits Vs. 8% ForLivingSocial,” December 2,2010, post on blog “TechCrunch,” Technology Startup Blog,http://techcrunch.com/2010/12/02/hitwise-groupon-livingsocial/.xv lbid., p.1.xvi Source: Bill Tancer, “Livingsocial and the Adoptive Curve”, December 2,2010, post on blog“Hitwise,” Online Competitive Intelligence, http://weblogs.hitwise.com/bill-tancer/2010/12/living_social_and_the_adoption.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+hitwise+(Hitwise+Intelligence).xvii Silver Smith, “How has Groupon Grown so Fast?” May 21st, 2010, on Nodal Bits Blog,http://www.nodalbits.com/bits/how-has-groupon-grown-so-fast/ accessed on November 2010.xviii Goggle Trends, http://www.google.com/trends?q=Livingn,Groupon+&ctab=0&geo=all&date=2010&sort=1, accessed on December 2010.xix Goggle Trends, http://www.google.com/trends?q=Livingn,Groupon+&ctab=0&geo=all&date=2010&sort=1, accessed on December 2010.xx Barry Schwartz, “Google’s Top AdWords Advertisers: Leaked Document Reveals AdvertisingDollars,” September 6,2010, post on blog “search engine land” Search Engine OptimizationBlog, http://searchengineland.com/googles-top-adwords-advertisers-leaked-document-reveals-advertising-dollars-49918, accessed on November 2010.xxi Barry Schwartz, “Google’s Top AdWords Advertisers: Leaked Document Reveals AdvertisingDollars,” September 6,2010, post on blog “search engine land” Search Engine OptimizationBlog, http://searchengineland.com/googles-top-adwords-advertisers-leaked-document-reveals-advertising-dollars-49918, accessed on November 2010.xxii Jim Moran, “Local Social Commerce: The Explosion of Group Buying” PowerPointPresentation on slideshare, August 19,2010, http://www.slideshare.net/yipit/yipit-webinar-81910-5014486.xxiii Ibid., p.10.xxiv Andrew Mason, interview by Charlie Rose, The Charlie Rose Show,http://www.hulu.com/watch/199904/charlie-rose-andrew-mason-ceo-groupon-stacy-schiff-john-wood#s-p1-so-i0, accessed on December 09, 2010. 38

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOLxxvi Utpal M. Dholakia, “HOW EFFECTIVE ARE GROUPON PROMOTIONS FOR BUSINESSES?”, RiceUniversity, September 28,2010, http://www.ruf.rice.edu/~dholakia/Groupon%20Effectiveness%20Study,%20Sep%2028%202010.pdf, accessed on November 2010.xxviii Jim Moran, “Local Social Commerce: The Explosion of Group Buying” PowerPointPresentation on slideshare, August 19,2010, http://www.slideshare.net/yipit/yipit-webinar-81910-5014486, accessed on November 2010.xxix Groupon, “Have you meet our subscribers yet?,” Groupon website,http://www.grouponworks.com/why-groupon/demographics, accessed on November 2010.xxx Livingsocial, “Feature Your Business-Demographics,” Livingsocial Company website,http://livingsocial.com/getfeatured, accessed November 2010.xxxi Erik Eliason, based on data from every Groupon deal from April 28 to July 3,2010.xxxii Krista Garcia, “Restaurant Industry Emulates Groupon and Gilt’s Recipe for Group-Buying”,August 18,2010, post on blog “The eMarketer Blog,” E-Commerce Blog,http://www.emarketer.com/blog/index.php/restaurant-industry-emulates-groupon-gilts-recipe-groupbuying/, accessed on November 2010.xxxiii Ibid. 39

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