Group Buying White Paper

Daily Deals White Paper:
Understanding the industry dynamics of daily deals and implications for
merchants and consumers

Harvard Business School
Edelman Field Study Fall 2010
Erik Eliason, Yohanes Frezgi, Fatima Khan

DAILY DEAL WHITE PAPER HARVARD | BUSINESS | SCHOOL

Table of Contents

1.0 Executive Summary
1.1 Daily Deals Defined
1.2 Daily Deals vs. Flash Sales
1.3 Scope of Paper

2.0 Industry Analysis
2.1 Overview of Industry Players
2.2 Porter’s Five Forces
2.3 Future Trends

3.0 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 Complaints

4.0 Consumer Analysis
4.1 Consumer Demographics
4.2 Decision Making Heuristics Applied to Daily Deals
4.3 Consumer Purchasing Behavior
4.4 Receptiveness of Consumers

5.0 Case Study: Weecation
5.1 Results
5.2 Merchants
5.3 Consumers
5.4 Website

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1.0 Executive Summary

1.1 Daily Deals Defined
The daily deal craze is one of the most popular consumer-internet trends in 2010. It is
essentially a sales tactic employed by websites in which they offer limited-time discounts on
coupons 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, and
must be redeemed within a predetermined time-frame, for example, six months. Daily deal
websites offer consumers deep discounts; a typical deal is $50 worth of food for $25, but
consumers only have 24 hours to purchase the voucher or they miss out.

1.2 Daily Deals vs. Flash Sales
To establish the parameters of this white paper, it is important to define the differences
between 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 brands

Through this framework it is rather obvious that daily deal websites and flash sale websites
operate very differently.

1.3 Scope of Paper
While flash sales do employ similar tactics for consumer promotion and offer merchants a
channel to optimize inventory, the way in which this is executed is very different. The scope of
this research paper is to analyze the dynamics of the daily deal as an industry and its impact on
merchants and consumers and does not analyze flash sales websites.

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2.0 Industry Analysis

The business model for daily deal sites operates primarily as an intermediary where the deal
website (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 direct
interaction with the buyers and sellers before the transaction. The one exception to this model
is 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 party
has an affiliation with the MSP.

2.1 Overview of Industry Players
The 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 6vi

Average Deal Price $41vii $35viii $136ix

Funding 171Mx $232Mxi N/A

# of subscribers 40Mxii 10Mxiii N/A
% Daily Deal Web
79%xiv 8%xv N/A
Traffic in the US6

Groupon
Groupon, which was originally started as The Point in 2007, is largely credited with establishing
the local daily deal space after observing users of The Point combine their efforts to buy goods
in 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 the
market leader in the daily deal space with deals in over 1,000 markets globally and estimated
revenue over 5 times larger than the next biggest player, LivingSocial. To incentivize users to
buy deals Groupon uses a ‘tipping point’ that must be reached before anyone who has
purchased the deal is given a discount. If the quote is not reached everyone who agreed to
purchase the deal is not charged and no one gets the discount. To help distribute their deals
Groupon relies on a strong emails base that consists in over 40 million emails worldwide which
account for 35% of their daily traffic. Users are also further incentivized to get others to buy

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deals through a referral program that rewards users for getting friends to sign up or purchase a
deal that they have already bought.

First Mover Advantage
Since Groupon was the first mover in the daily deal space they have enjoyed a significant first
mover advantage that combined with their operating execution has led to their current market
dominance. Their dominance can largely be seen through the significant difference in website
traffic.

Traffic
In a recent post by Hitwise, an online data and analytics service company; they reported that
Groupon commands 79% of group-based coupon traffic, while LivingSocial has just 8% as of
November 27, 2010.

Figure 3.0: Market Share of Daily Deal Unique Visitsxvi

The 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 its
launch in August 2009, Groupon has amassed nearly 40 million since November 2008. Many of
these users signed up when Groupon first introduced the daily deal space with display ads
messages like “50% to 90% Off Your City’s Best Stuff”.

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Figure 4.0: Sample Groupon Advertisementxvii

Until mid-2009 Groupon’s ads were unique and user acquisition costs on websites like
Facebook were very low, but by late 2009 many new deal sites entered the market driving
customer acquisition costs up threefold. Livingsocial furthered suffered from a lack of PR, since
Groupon 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 Trendsxviii
shows Groupon has 20 times more search traffic than Livingsocial in 2010.

Figure 4.0: Google Trends Analysis: Groupon vs. Livingsocialxix

Livingsocial
Similar to Groupon, Livingsocial started with a different business model before moving into the
daily deal space in August 2009. Unlike Groupon, when Livingsocial made its pivot into the deal
space there were already 46 other players in the market. To differentiate themselves from
others Livingsocial used data and a fan base from its original business of creating social
applications on Facebook to drive traffic to its new deal site. They also advertised heavily as
shown by the figure below in which they ranked 8th for Goggle Adwords spending during the
month of June 2010 with shelling out $2.29 millionxx.

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Figure 5.0: Livingsocial marketing spend on Google Adwords in June 2010xxi

Hyper Expansion through Investment
To compete with Groupon, Livingsocial has raised over $232 million in funding, which is $61
million more than Groupon, and includes a $175 million investment from Amazon. In a press
conference announcing Amazon’s investment CEO Tim O’Shaughnessy stated that they plan to
use Amazon’s investment to triple employees to 1,800 and expand service to double the
markets they currently in.

Brand Extensions
In 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 Livingsocial
Family Edition. This is a direct contrast to Groupon strategy of simply adding additional deals to
their side bar while alerting the main deal based on the consumers’ buying habits.

Gilt City
Gilt City is one the first examples of a major non-deal site moving into the deal space. The idea
behind the concept was to extend the Gilt Grope service to their engaged user base. They
tested the market with a deal for a spa package in New York, it was a significant success and Gilt
City was formed. In an interview with Andrew Koch HBS’10, Vice President of Gilt City, he
mentioned that the two key constraints that hinder many deal website from being a success are
not 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 the
luxury market. Gilt Groupe has an install base of over 2 million users and a relatively high price
point for an average deal. Koch also noted that they have higher full price return rates for
consumers who buy through Gilt City, signifying the higher desirability for merchants to have

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their subscribers visit their businesses. Similar to Livingsocial, Gilt City does not have a tipping
point for its deals.

2.2 Porter’s Five Forces Analysis
To understand the overall industry attractiveness of the daily deal space it is helpful to employ
the Porter’s five forces model.

Figure 6.0: Porter’s Five Forces
Force Strength Details

Threat 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 sites
Supplier 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 business
Buyer Power High  Low switching cost for consumers
 Is not a necessity
 low targeting for individual consumers
Threat 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

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2.2.1 Threat of New Entrants

Figure 7.0 New Entrants
Force 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 is
Strong
 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 acquisition

Key Takeaway
While the daily deal model has very low barriers to entry, as demonstrated from figure 8.0, the
cost to scale the business are substantial. This is especially true given the large number of
players already in the market and high user acquisition cost. Livingsocial spent over $2.2 million
for the month of June 2010 through Google Adwords and established players see marketing
spend as a clear barrier to entry for non-venture backed companies.

Figure 8.0: Growth of Daily Deal Services in the U.Sxxii.

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2.2.2 Merchant Power

Figure 9.0: Merchant Power
 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 ways
Medium  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
merchants

Key Takeaway
A merchant’s power is largely based on the size of the market they are in and the reach of the
daily deal sites. In locations with many merchant such as New York, Chicago, and Boston the
waitlist to get on popular deal sites can be six months to a year. In smaller markets merchants
have 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 towards
competitors stating, “Respondents largely indicated annoyance at the barrage of calls they
receive from these competitors on a daily basis, and most reported a lack of success when
using them to offer a promotion.” However, figure 8.0 demonstrates that deals are outpacing
sites, which signals merchant’s strong demand for daily deal sites.

2.2.3 Buyer Power

Figure 11.0: Buyer Power
 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 consumers
Strong
 Lack of competition in small  Low to no cost for switching deal
markets sites

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Key Takeaway
Consumers currently hold all the power over daily deal websites. The undifferentiated nature of
daily deals combined with noncompulsory consumers creates users who often sign up with
multiple deal sites or join aggregators to find the “best” deal in their desired location.

2.2.4 Threat of Substitutes

Figure 12.0: Threat of Substitutes
 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 to
Weak 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 sites

Key Takeaway
Daily deals have disrupted the local advertising space, which relied on print media, and face
little threat from the status quo. It’s actually print media who run the risk of being substituted
by 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 create
offerings that compete with daily deals in the near future.

Figure 13.0: Merchant spending after running a daily deal xxiii

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2.2.5 Competitive Rivalry

Figure 14.0: Competitive Rivalry
 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 or
Strong industry offering
 No switching cost
 Early cash flow for deal sites
 No customer loyalty

Key Takeaways
Fierce competition across nearly every aspect of the daily deal space has made it extremely
competitive. Smaller players have attempted to relieve their competitive pressures through
focusing exclusively on a specific subsector of consumers or type of deal. Bigger players, such as
Livingsocial and Groupon have focused on scaling their business to as many markets as possible
through company acquisition or organic expansion. However, competition is unlikely to
dissipate in the near future. Media companies who have already established a user base and
sales team have begun to enter the deal market and will likely further customize deals for their
user base.

2.3 Future Trends
Expansion
 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 day

Consolidation
 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

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 Livingsocial launched two niche sights for travel and family and plan to open a third for
college student in early in 2011

Competition 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.

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3.0 Merchant Analysis

Daily 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 average
mom and pop restaurant and new customers were not guaranteed.

3.1 Process for Merchants
Below is a diagram which describes the typical process for a merchant who works with a daily
deal 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

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Stage 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 occur

Stage 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 sale

3.2 Value Proposition for Merchants
The benefits of partnering with a daily deal website can be numerous for merchants if they are
prepared and have the capacity to handle a rapid influx of new customers. Below are the top
three 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.

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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 Deal
While the majority of retailers are willing to indulge in repeat deals with sites, and manage to
make a profit in the short and long term from the deals they offer, there are some deals that
can 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 reached

In addition, research conducted with Groupon merchants states that there is strong evidence
that profitability of a deal can be predicted by two key factorsxxv:
o Employee satisfaction with Groupon shoppers
o Effectiveness in reaching new customers

This shows that not only is it important for businesses to make incremental revenue, but
employees must be able to deal with the spike in sales and offer great customer service to the
bulge of new customers. Vendors who lose money on deals are those who offer excessively
deep discounts, share revenues with daily deal sites and are not able to generate incremental
value for their businesses or for their employees.

A study conducted among 150 small businesses showed how many businesses came out
profitable form the deal and why. The following graph taken from the study shows that the bulk
of promotions turned out to be unprofitable.

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Figure 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
future

3.4 Effectiveness of Daily Deal Vouchers
The findings from Figure 17.0 show that small businesses are finding increasing value in using
daily deal sites for promotionsxxvii. This may mean that businesses work with sites which can
provide them increasing margins. Depending on the size of the business and its popularity the
business 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%

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3.5 Vendor Preference: Analysis of Daily Deal Websites
Vendors from all categories are now entering the daily deal arena. There are various criteria on
which merchants choose which daily deal site to work with. All merchants want the site to be
credible, well known, with high consumer traffic and a good reputation. The decision to work
with a daily deal site may also depend upon the margins the merchant is allowed to keep. The
table below rates the top four daily deal websites from a merchant’s perspective. The
merchant 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 of
Content 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 21.5

Obviously the rating for the deal sites depends heavily on whom the merchant is and what
terms are negotiated. The table above is by no means a guide that should be used by all
merchants 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)

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 Service that the daily deal site provides the vendor in terms of forward planning

3.6 Merchant Complaints Against Daily Deal Websites
One of the most common complaints against Groupon is the expiration date which is imposed
on consumers. By law, a gift certificate should have an expiration period of up to 5 years. But
there are some instances where post contractual dates have been forced upon consumers in
which the coupon is valid only during a pre-specified time period. There currently is a class
action case against Groupon for enticing consumers to purchase discounted certificates and
having 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 investment
but have not been able to avail these discounts with the merchant due to capacity constraints
at the merchant level, or where the merchant reneges due to high volume and cost. One such
deal was the Peperrel Skydiving/ Tandem Jumping advertised outside of Boston. The deal
earned the diving merchant 600-900 consumers, where the usage wasn’t specified. Due to a
sudden rush in demand at one point in time the merchant has not been able to schedule sky
divers for many consumers due to capacity and the due date on the coupon has expired. Some
people complain about Groupon deliberately not having oversight at the merchant level which
makes the process less accountable, and sometimes more troublesome for the consumer.

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4.0 Consumer Analysis

4.1 Consumer Demographics
Groupon and Livingsocial are the leading daily deal websites in the United States with
approximately 19.25 million and 10 million email subscribers respectively. This nearly 30
million user base is the source of demographic data used in the following analysis. Our
research found that the average daily deal consumer is a 28 year-old female college graduate
with a household income of over $100K.

Figure 19.0: Daily Deal Consumer Demographics (according to deal websites)
Grouponxxix LivingSocialxxx Average
(weighted average)
AGE
18-34 68% 36% 57%
35-44 18% 28% 21%
45-54 11% 18% 14%
55+ 3% 18% 8%

EDUCATION
Some 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%

GENDER
Male 23% 40% 29%
Female 77% 60% 71%

4.2 Decision Making Heuristics Applied to Daily Deals
The design of daily deal sites leverage social psychology to influence decision making and
increase conversion. The designers understand what factors influence purchasing decisions and
how to best leverage social intelligence to position their offering. Social commerce utilizes
social intelligence, the ability to understand and manage people, to act wisely in human
relations, to create profitable opportunities for businesses. The six heuristics of decision
making, first defined by Robert B. Cialdini in his article, The Science of Persuasion in Scientific

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American in September 2001 provides a valuable framework on which psychological pressures
get people to say ‘yes’. In the daily deal space ‘yes’ equates to conversion.

Figure 20.0 Six Purchasing Decision Techniques

4.2.1 Popularity
Popularity is an incredibly powerful tactic to influence user behavior. The popularity principle
employs the views of the crowd to convert users to follow a certain behavior. Whereas
traditional ecommerce websites do not display purchase data or popularity data on a product
page, daily deal websites are transparent with this information and leverage it to increase
conversion. Daily deal websites include a discussion feature for each deal which allows users to
comment 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 to
share how many Facebook fans or twitter followers they have.

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4.2.2 Authority
People naturally seek experts to assist in decision making. Experts are helpful screening
mechanisms which decreases the amount of work a user needs to do and therefore shorten the
time required to make a decision. News reports, startups, politicians, and even tweets
acknowledge and solicit subject matter experts to validate a point of view. Daily deal websites
employ the authority principle by including reviews from nationwide media outlets such as the
New 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 that
feature local, community ‘experts’. Daily deal websites create authority themselves through
their branding and claiming they are experts with deals, local businesses, and ‘things to do’ in a
city.

4.2.3 Reciprocity
The reciprocity principle is employed by daily deal through various methods such as exclusive
access and the deal itself. Reciprocity represents an action taken by a person or company with
the 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 feeling
amongst customers drives them to spend more than the value of the voucher when they
redeem it.

4.2.4 Scarcity
Daily 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, they
become more attractive. In practice, scarcity can be constructed to make commodities seem
exclusive. In relation to the popularity principle, the scarcity principle is not so much about
what the consumer stands to gain from the purchase, rather what they stand to lose from not
purchasing. Daily deal websites employ the scarcity principle using specific tactics such as time
sensitive deals, limited quantity deals, and invitation only deals.

4.2.5 Affinity
The affinity principle describes the behavior that users follow users, brands, and objects that
they like. Affinity represents a belief that consumers like people, brands, and products that are
both similar and familiar to them. Daily deal websites employ the affinity principle by
increasing their likeability and common interest amongst their customers in the cities they
operate. One method to do this is to compose custom merchant content which feature local
references and regional idioms. Additionally, daily deal websites like Groupon feature
merchants 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 they
have a relationship with.

4.2.6 Consistency
Once people take a position, they prefer to stick with it. The deal content published references
terms and practices that relate specifically to the merchant, deal, and the user. More
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importantly, content about the merchant and deal describe activities the user wants to be
known for and what the user would like to become. For example, many of the spa deals or
workout 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.

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Figure 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
view

4.3 Consumer Purchasing Behavior
-what consumers want to buy

24


4.3 Consumer Purchase Behavior
When considering which deals are most popular to consumers there are a variety of factors to
consider. Variables such as the voucher price, location of merchant, time of season, uniqueness
of offering, and capacity of the merchant all contribute to the ‘success’ of a deal. To assess the
most popular deals, we analyzed the data both in terms of mean gross revenue per daily deal
category and the quantity sold.

4.3.1 Mean Revenue Per Category
Analyzing the most popular deals based on mean revenue per deal. In this case, the most
popular 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

0

4.3.2 Mean Quantity Per Categoryxxxi
The following data cover 120 Groupon deal offers from April 28, 2010 through July 3, 2010 in
which 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 were
segmented 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


 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 $9,075,460 625

Takeaways:
 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 days

4.4 Receptiveness of Consumers
According to Valpak 66% of Americans say they're currently searching more for coupons and
discounts than in the pastxxxii. Consumers in the US have been considerably more frugal since
the 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 outlined
below.

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


5.0 Case Study: Weecation

To test our theories and apply key learnings from this research paper we decided to launch a
niche daily deal site in the local travel industry. We chose this industry because of the average
price point for vouchers, the inherently social nature of travel, and personal interests in
discovering interesting places outside of our hometown. We launched the site in Boston in
October 2010 with our first deal featuring a getaway to New Hampshire. Our deals did not
include transportation (eg train, plane, or car) but were focused on the actual vacation
packages such as lodging, entertainment, and dining.

5.1 Results
In total, Weecation sold 14 deals during a 7 day period. Total revenue generated for the
merchant 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 $ 2,250

5.2 Merchants
Our first and most important objective was to acquire merchants. To do this, we employed
various 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 Consumers
The top goal for consumers was the number of users on our email list. To acquire users we
employed 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


 Student Organizations- emailed relevant student organizations such as the Partner’s
Club

Cost per Acquisition on Facebook
Aside from campus promotion the most significant advertising we pursued was Facebook
advertising. We built four different fan pages targeted users primarily in the seven New
England states. To acquire fans we advertised on Facebook’s self-service platform. After a few
rounds of optimizing our ads and decreasing our bid, we were able to acquire fans rather
inexpensively. In addition to increasing our fan base, we also leveraged Facebook to acquire
emails. On our fanpages, the landing tab a user would land on when they clicked the Facebook
ad would be our Welcome Tab which featured an embedded Google doc form and asked for
their email address. From this one data point, it’s interesting to note that every $1.00 spent on
Facebook 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 $447

5.4 Weecation Website
Anatomy 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


 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


Appendix for Weecation Case Study
Consumer Demographics of Fanpages

On Campus Flier

Email Capture on top of every page on website

30


Weecation Homepage Screenshot

31


Deal Page

32


Merchant’s Website- business.weecation.com

33


SAMPLE MERCHANT AGREEMENT

This 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”).

RECITALS

WHEREAS, Weecation has developed and operates online properties for the promotion and sale of
vacation packages;

WHEREAS, Merchant owns and operates a resort [XXX]; and

WHEREAS, Merchant wishes to offer Weecation the right to promote and sell vacation packages to its
resort in the form of Vouchers (defined below) and shall pay Weecation XX commission for each voucher
sold.

NOW THEREFORE, in consideration of the foregoing, the mutual agreements set forth herein and for
other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged,
Weecation and Merchant hereby agree as follows.

1. Responsibilities

A. 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 at
Merchant’s resort as set forth in the table below.

Venue
Address
Valid nights
Price
Lodging
Goods/Services
Included
Valid
redemption
time period
Blackout dates

34


B. Weecation shall use commercially reasonable efforts to market and sell the Vouchers offered by
Merchant 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 the
voucher 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 the
details of the Voucher sold. All other information about the purchaser obtained from the sale
transaction shall belong exclusively to Weecation, which Weecation may disclose to Merchant at its sole
discretion 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 shall
continue 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 merchant
arising out of this Agreement unless caused directly by the gross negligence of Weecation in fulfilling its
obligations under the agreement. Weecation shall not in any circumstances be liable for indirect or
consequential 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 the
terms 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 other
party, which consent shall not be unreasonably withheld or delayed. The rights and obligations of this
Agreement 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 or
waiver, express or implied, by Weecation of any right or any breach by Merchant will constitute a waiver
of any other right or breach by Merchant.

35


7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of
the State of Delaware..

8. Severability. In the event any provision of this Agreement is deemed to be unenforceable, such
determination shall not affect the validity or enforceability of the remaining provisions of the
Agreement. To the extent that any provision of this Agreement is unenforceable because it is
determined to be overbroad with respect to scope, duration or geographic area, that provision shall not
be 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 and
understanding concerning the subject matter addressed herein between the parties, and supersedes
and 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 or
warranties relating to the subject matter of this agreement that are not set forth in this agreement.

36


Endnotes

i
Amir Efrati and Geoffrey A. Fowler, “Google Plots Move From Search to Sales,” The Wall
Street Journal, December 1, 2010,
http://online.wsj.com/article/SB10001424052748704679204575647033055940528.html,
accessed on December 2010.
ii
Joseph Galante, “LivingSocial Counts on Amazon.com's 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 December
2010.
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.com's 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 December
2010.
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 2010
xi
Crunchbase, “Groupon”, Groupon wiki page on Crunchbase,
http://www.crunchbase.com/company/groupon, accessed on November 2010
xii
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


xiii
Mike Isaac, “LivingSocial Receives $175 Million Investment From Amazon”, Forbes, December
2,2010, 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% For
LivingSocial,” 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 Advertising
Dollars,” September 6,2010, post on blog “search engine land” Search Engine Optimization
Blog, 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 Advertising
Dollars,” September 6,2010, post on blog “search engine land” Search Engine Optimization
Blog, 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” PowerPoint
Presentation 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


xxvi
Utpal M. Dholakia, “HOW EFFECTIVE ARE GROUPON PROMOTIONS FOR BUSINESSES?”, Rice
University, September 28,2010, http://www.ruf.rice.edu/~dholakia/Groupon%20
Effectiveness%20Study,%20Sep%2028%202010.pdf, accessed on November 2010.
xxviii
Jim Moran, “Local Social Commerce: The Explosion of Group Buying” PowerPoint
Presentation 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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