Study offers grim news on deal sites like Groupon

June 16, 2011: 4:50 PM ET
A Groupon customer holds up her receipt to a Portland Winterhawks game. The Winterhawks won.

A happy Groupon customer; but will she return? (Photo: Flickr)

People may love online deals. But a Rice University study finds that bargain-hunters rarely turn into regulars.

FORTUNE -- The growing backlash against daily-deals services got some fresh support this week from an academic study finding that fewer than half of the companies that use such services once are unlikely to do so a second time.

The study, by Utpal Dholakia, professor of management at Rice University, also found that nearly 80% of coupon users are first-timers, and only 20% of them become repeat customers of businesses offering deals through services like Groupon, LivingSocial and OpenTable (OPEN). Other companies like Google (GOOG) are actively eyeing the space.

The whole idea behind these services is that they act as loss leaders, getting customers through the door to take advantage of a bargain. Theoretically, many customers will either spend beyond the deal offer or return for more business. But Dholakia found that just 36% of customers buy goods or services beyond what was offered in the deal. Worse, less than 20% return to the business for full-price purchases.

The findings generally align with the data Groupon released earlier this month when it filed to go public. As competitors pile into the market – some of them huge, like Facebook and Amazon (AMZN) – the business will only get tougher, especially if perception grows among small companies that daily deals don't generate much new business.

"Over the next few years," Dholakia wrote, "it is likely that daily deal sites will have to settle for lower shares of revenues from businesses compared to their current levels, and it will be harder and more expensive for them to find viable candidates to fill their pipelines of daily deals."

Dholakia surveyed 324 businesses that offered deals from August 2009 to March 2011 from five coupon services: — Groupon, LivingSocial, OpenTable, BuyWithMe and TravelZoo.

Find the full report here: How Businesses Fare With Daily Deals by Utpal M. Dholakia

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