Are Daily Deals Bad for Consumers?

Best-deals-simcardIn an article published in October by Thumbtack.com titled, “That daily deal you bought? Maybe not so great a deal after all”, Thumbtack compares the deal prices from local service providers with an average price quoted by service providers on their website. Thumbtack concludes that daily deals are overpriced and that in 5 out of 5 deals they looked at, the average rates of local service providers are lower than the discounted rates offered by daily deal websites.

There are several factors that Thumbtack’s article doesn’t address which are contributing to the discrepancy in the prices they used for their “study”.

1. How did Thumbtack calculate the industry average?

One of the major things to consider is how Thumbtack calculated the average price of a local service for the industry. Thumbtack obtained the averages they used in their article from the hourly rate of service providers that have listed on their website. Is this representative of the industry as a whole? When you consider the business model of Thumbtack and the types of service providers that typically post on Thumbtack, the answer is: No.

thumbtack-logo2. What type of service providers typically post on Thumbtack?

For those of you who are not familiar with Thumbtack.com, they allow individuals to post a local service that they require and allow service providers to bid on the contract. They also allow any service provider to list their service on Thumbtack for free. An environment where service providers bid on local service contracts creates a race to the bottom. There is significant pressure on service providers to submit a relatively low bid in an effort to “win” the contract. This squeezes the margins and favours local service providers with the lowest overhead. Consequently many service providers can’t compete with small, one or two-man service providers, or companies that use inexpensive (and potentially less skilled) labourers, so many service providers don’t list on websites like Thumbtack.

3. What is the real value of a deal

When comparing prices it is important to consider the value of a given service. As a service provider grows in scale, overhead increases and the price that they need to charge to stay profitable increases. Consumers choose to pay the higher prices to premium priced service providers because of the reputation and value of these service providers. Sure, a consumer could find someone who would offer to do the same service for less but the quality and consistency of the service is important and worth the additional expense for many consumers.

GRPN-LogoGroupon, LivingSocial and the other top daily deal websites are selective in the service providers that they partner with and feature on their website. They frequently turn down small and medium sized businesses that don’t meet their standards. If they offer a deal for a business or service provider that can’t meet the demand while providing a high quality service, daily deal subscribers will be turned off of their daily deal offerings. There is the occasional time where a service provider doesn’t set a reasonable cap on the number of deals sold (i.e. The Butchers  fiasco) but daily deal sites are enforcing stricter review processes to ensure that both their consumers and the businesses they partner with are happy with the results and interested in repeat business.

The service providers on Thumbtack and those that are featured on daily deal sites are often focusing on different target markets and so it is reasonable to expect a discrepancy in price. Thumbtack favours low-cost providers with low overhead and so it is reasonable to expect that the average quote for services on their website is below the industry average. Groupon and LivingSocial selectively choose reputable companies with a high capacity that can handle the demand of a daily deal offering. These service providers may have higher margins and may be priced at a premium, but the level of consistency, the quality of the job and the overall value of the service is higher than the average provider on Thumbtack.

Yelp logo. (PRNewsFoto)

Regardless of the source, it is important to educate yourself as a consumer prior to making any purchase. You should research any service provider before you buy. One great resource for this is Yelp.com (which recently filed an S-1 to IPO). Yelp is a large community of internet users who rate and review their experiences with local businesses. It has a large following in the US and it is growing in Canada. Yelp.com reviews exist for most, if not all of the service providers that are featured on Groupon, LivingSocial and the other top daily deal sites. If you use The Deal Pages website to browse daily deal offerings, you can see the Yelp ratings for each offer. Before you use the Yelp review to evaluate a business you should consider the number of ratings and the content of the reviews that have been provided.

Conclusion

Are the prices of the services offered on Groupon, LivingSocial and the other top daily deal websites higher than the industry average? Most likely. This is a result of Groupon and LivingSocial selectively partnering with high quality, services that may have higher margins. Are the reputations and value that service providers on Groupon and LivingSocial higher than the average provider on Thumbtack (which favours low-cost providers)? Definitely. Yelp.com and other review sites provide a great litmus test when evaluating a company you are unfamiliar with. This minimizes the risk of entering a contract with a low quality service provider. Many of the Thumbtack providers cannot be found on online consumer review websites and there is currently no consumer rating system on Thumbtack so the risk of a bad customer experience is relatively high.

Final Note:

This is the second article from Thumbtack that I have reviewed. Both articles I have reviewed to date were direct attempts to undermine the daily deal industry which provides competition for Thumbtack.com. The “studies” that Thumbtack has used to back up its claims are based on small and biased samples and the conclusions and implications that they make must be taken with a grain of salt. I might come across as defensive in my writing but my intention is to provide a more objective overview of the issues as a daily deal industry follower. If you have any questions, comments or opinions, please leave them in the comment section below.

Do 8 out of 10 Deals from Groupon and Living Social have inflated values to deceive customers?!

GRPN-LogoBusiness Insider published an article called: “Busted: Groupon and Living Social Caught Inflating Regular Prices to Make Deals Look Better”. The article referenced a “case study” by Thumbtack.com called, “Are daily deal discounts inflated” which claimed that in “8 out of 10 deals we reviewed, the ‘regular’ prices quoted by Groupon and LivingSocial were higher than the prices quoted by the same merchants when we called them.” As an avid daily deal user this raised a lot of questions in my mind and so I decided to look into their study and conduct one of my own. After investigating Thumbtack’s sampling method and conducting my own survey of daily deal offerings, I concluded that the sampling by Thumbtack was heavily biased and although some prices are inflated, Groupon and LivingSocial are not deliberately inflating deal prices to “make them look better.”

Thumbtack’s Bad Science

Neither Business Insider nor Thumbtack discussed how the 10 vendors were selected for the study. Thumbtack’s “case study” looks professional and includes several graphs and a brief note on their methodology which doesn’t reference their sampling technique. It wasn’t until I read a reply to one of the comments on Thumbtack’s article (which was posted a week after the article was published) that I was able to determine that their sample was not random. In their reply to a comment about the validity of the article, Thumbtack stated “we looked only at deals in the local service industry – house cleaners, painters, photographers, etc.” This detail dramatically changes the context of the “study” as well as any major implications that can be drawn from it.

The fact that Thumbtack published the results after sampling only 10 vendors is one red flag that needs to be considered when assessing the validity of Thumbtack’s “study”. Although Business Insider noted this limitation, they did not mention the biased sampling technique and proliferated the misinformed conclusion Thumbtack was trying to make.

thumbtack-logoThumbtack.com is a competitor of Groupon, LivingSocial and the other daily deal sites that offer discounts on local services. Thumbtack allows internet users to list a local service they require, and allows service providers to bid on the contract. The offerings that deal sites provide, from local service providers, creates competition for Thumbtack. This sheds some light on the two articles Thumbtack has published attempting to undermine the daily deal industry (stay tuned for my review of the quality of Thumbtack’s other article on the daily deal industry).

Intentionally inflating prices to deceive customers is an unsustainable business practice for Groupon and LivingSocial. A daily deal site relies on establishing a base of repeat customers and these sites go to great lengths to establish a relationship of trust. This is especially true for today’s ecommerce websites where negative reviews and opinions are just a couple keystrokes away. Bad reviews can go viral if similar dissatisfaction is shared by members of an internet community.

Does Deal Value Inflation Occur?

I believe that Groupon and LivingSocial make every effort to accurately represent the value of a given deal, but there are two scenarios where the value published for a daily deal offering may be higher than a quote from the same vendor over the phone.

1. A former Groupon sales executive replied to Business Insider’s article and said that there is incentive for executives to inflate the value of a deal because they are under “pressure to meet their ever-increasing sales quotas.” Additionally, since these sales execs are compensated in part by commission, increasing the published value of a deal could lead to a higher number of sales in the short term (as long as this isn’t communicated to potential buyers who would be turned off by this deception). In an interview with Andrew Mason (Groupon’s CEO) he stated that each deal is reviewed by at least seven employees prior to being approved for Groupon’s website. All deal sites are highly motivated to review potential deals from their sales executives to ensure that the offering is accurate and suited to their users. Despite these efforts, it is conceivable that some price errors slip through the review process. However, given the review practices established by sites like Groupon and Living Social this isn’t likely to happen often.

DailyDEAL2. Merchants are required to share the revenue that Groupon and Living Social collect from each deal sold. Often merchants receive only 50% of the revenue collected. This means that if the daily deal offering is 50% off the regular price, the merchant is collecting only 25% of the regular price. The 75% that the merchant forgoes is analogous to an advertising expense, except in this case, they can measure and set a limit on how many customers their advertisement campaign brings through the door. With the right implementation of a daily deal campaign, merchants can establish new lifetime customers who will continue to provide valuable word-of-mouth advertising. Merchants are motivated to set an inflated value and price for their daily deals to minimize the expense of running these campaigns. However, Groupon and Living Social verify the prices they are quoted by a merchant with the merchant’s website and retail stores while negotiating an offering. A problem arises when you consider independent service providers who don’t have a publicly available price list. These companies include independent house cleaners, painters, and photographers that don’t have a website or storefront with a set price list. Their prices are often flexible and may be influenced by the current demand for their services, the size of the job, the demographics of the potential customer and a variety of other variables. With flexible pricing, it is difficult for Groupon or LivingSocial to accurately verify the price of these services which can vary on a project-by-project basis. In these cases, the price that a service provider conveys to Groupon or LivingSocial may be higher than the price that the same service provider would quote to a potential customer over the phone on a given day.

Groupon and LivingSocial are making their best efforts to overcome these two factors. First, they are selective as to which businesses they partner with to provide daily deal offerings. They frequently turn down small and medium sized businesses based on the standards they employ. Groupon and LivingSocial are very transparent when it comes to the contact information of the service provider. They always provide the merchant’s phone number and website (if available) so potential customers can contact the merchant with any questions they might have. In addition, the former Groupon Sales Executive that Business Insider referenced indicated that Groupon and LivingSocial are developing databases with accurate merchant pricing to help them confirm the value of potential offerings.

My Deal Value Study

With the help of The Deal Pages’ database of previous deals from Groupon and LivingSocial, I was able to conduct a survey of my own to better determine the frequency of inflated deal prices. I randomly selected expired deals from Groupon and LivingSocial between July 1st, 2011 and October 1st, 2011 (a period within the range of dates from the “case study” by Thumbtack.com). I assigned each city The Deal Pages operates in a number between 1 and 298 and used the RANDBETWEEN excel function to create a random list of cities. I used another excel function to randomly choose a date within the stated range. If Groupon or LivingSocial had multiple offers in the random city on the random date, I used another excel function to randomly choose one of the offerings. If no offerings were available using these random variables, I went down to the next city in my random city list. Once I had a list of 30 randomly selected offerings (15 from Groupon and 15 from LivingSocial), I called the merchants to request a quote for the service they had offered in their daily deal offering (I made no mention of the daily deal unless I was asked if I had a coupon from Groupon or LivingSocial).

The Results

Of the 30 merchants I contacted only three of them quoted me a price over the phone that was less than the price that was listed in the daily deal offering. All three were from small businesses and two of the three were from merchants who mentioned that the price is dependent on a variety of factors. For example, a car wash that listed it’s offering at a value of $100 quoted me $80 over the phone after I informed them that the car I wanted washed was a Lincoln LS. It is possible that had I told them that the wash was for a more premium model of car and/or a larger vehicle, the price quoted would have been closer to the $100 value that was listed. Another merchant that gave me a quote lower than the value in their offering was a hair salon that informed me that their rates vary by stylist. Consequently, the rate I was quoted was from a specific stylist and it is likely that other stylists in the salon charge a price that is in line with the price quoted on their deal offering. See Table A for the deal values and quotes I received for my study. If you are interested in the full data set or have any questions about my sampling technique, leave a comment below or contact me at dave@thedealpages.com.

As with any study, there are some limitations and questions that remained unanswered. I would have liked to use a larger sample and I may conduct another study with a larger sample to get a more statistically reliable answer to the question of how frequently deal values are inflated.

As I mentioned, a week after Thumbtack published its article, it replied to a comment stating that they only sampled deals from local service providers. According to Thumbtack, these offerings make up 11% of all the offers from Groupon and LivingSocial. Did Thumbtack.com randomly sample all of the offerings from local service providers or did they selectively choose ten merchants? Is the phenomenon of deal price inflation an increasing or decreasing trend? Even if the rate of inflated deal prices was close to 10% when Thumbtack.com did its survey, I suspect that the rate will decline as Groupon and LivingSocial build their merchant/price databases and impose better deal review controls.

Conclusion

In conclusion, Thumbtack’s article was deceptive and the numbers it presented were based on biased sampling that was not specified in its “case study”. Price inflation does occur among a relatively small percentage of daily deal offerings but it is most likely due to the flexible pricing of small business owners and not due to deception by Groupon or LivingSocial. Daily deal companies are highly incentivized to accurately represent their offerings to encourage repeat buying behavior and they are imposing methods to reduce the frequency of inflated deal prices.

The Future of The Daily Deal Market

DailyDEALThere’s been a lot of buzz around the recent turnover and consolidation of several daily deal websites. Some sources have predicted a collapse of the industry while others remain optimistic about it’s future growth. The rapid growth of the number of competitors into the market is not sustainable but there still seems to be lots of room for growth in the industry (see Don Young Jr’s Daily Deal Media Article: Daily Deals Market not even Close to Breaking Point). Despite this, some sources estimate that roughly 20% of these sites have either thrown in the towel or been acquired by another company within the last year.

The huge success of Groupon in North America created a too-good-to-be-true gold rush of entrepreneurs and publishers into the emerging industry. Relatively few were prepared to compete with the large budgets that Groupon and LivingSocial could afford to pay for customer acquisition. Groupon and LivingSocial were quick to implement aggressive growth strategies that built a lot of initial hype that convinced the early adopters to try out the concept of Daily Deals. There have been several other successful companies to follow but the best recipe for success is to be innovative and attentive to the needs of customers. Building brand loyalty is key to retaining customers and there have been a wide variety of strategies and attempts by the big players to do so.

At the end of the day, an individual shouldn’t care whether a 50% discount at their favorite restaurant is being offered from Groupon, LivingSocial, or another reputable deal site. The relatively low switching cost (an email address and your credit card information) makes it easy for users to try another daily deal provider. Users who sign up to numerous deal sites are soon to find their inboxes flooded by numerous offers every day. When this happens, the need to unsubscribe or migrate to a new email address emerges. By using The Deal Pages, you can find all of the offers from the top daily deal sites without having to go through numerous emails to ensure you don’t miss the occasional deal that you might want. These factors hurt the business model of daily deal sites since it increases the attrition rate of their users which lowers the average user’s lifetime value and lowers the price daily deal sites can afford to pay for a new users.

One thing is for sure, the Daily Deal Market is changing. By many standards it is still in its infancy and given recent advances in technology and consumer trends, it is likely to continue well into the future. Boyan Josic, CEO and Founder of Daily Deal Media recently wrote an article about his view on The Future of The Daily Deal Market in which he shares his ideas as well as the ideas of Dean DeBiase, Chairman and CEO of Entertainment.com. Josic and DeBaise’s message was simply “despite what pundits have been saying, the Golden Age of the daily deal is not over, in fact, it has not even begun.”

One trend I expect we’ll see continue into the future is the shift towards deals that can be redeemed instantly. Currently, the majority of offers from daily deal sites require that you wait one day or more before you can redeem your voucher. This reduces the effectiveness of the “flash sale” model that helps drive the consumption of daily deals. Recently, Groupon, LivingSocial, WagJag and several other providers have begun experimenting with deals that can be redeemed immediately after they are purchased. For the most part, these “instant deals” are typically in the 15% – 30% discount range, which is less than their standard offerings of 50% – 90% off. These deals are often promoted through restaurants or service providers who are looking to increase their sales during slow business hours. I expect that as the market matures, we’ll see a growing trend in significantly discounted “instant deals.” This is especially true with the maturation of the secondary market. Stay tuned to The Deal Pages for some exciting new features related to these growing trends in the Daily Deal industry.

If you have any thoughts about The Daily Deal market and the future of the industry, don’t hesitate to share them with us in the comments section below.

8 Things You Should Never Pay Full Price For

With the rapid growth of the daily deal industry, there has been a growing number of active deals in a given location on a given day. In large cities such as New York, Chicago and Toronto there are anywhere between 50 – 250 active daily deals on a given day. This means that there are numerous opportunities to purchase great deals of 50 – 90% off from retailers and service providers. It is no surprise that some category of offers come up more often than others. This is partly because some businesses have larger margins and/or low variable costs and can more easily afford to offer daily deals. As a result, these category of services often appear on The Deal Pages and if you’re not particular about who you are buying the service from, you can regularly find high quality businesses that are offering savings of 50 – 90% off the eight items in the list below. (Note: if you are concerned about the quality of the retailer or service provider, be sure to view the business’ Yelp rating to see the feedback that paying customers have provided based on their experiences)

tanning1. Tanning – On a given day you can regularly find at least tanning deal on The Deal Pages in any major city. This is especially true during the fall and winter months when the “tanning season” is the slowest. Tanning studios have the relatively high fixed cost of purchasing the tanning beds but the variable cost to run the tanning bed is relatively small. Consequently you can often find deals that offer 80 – 90% off tanning packages that range from one week to one year of unlimited tanning.

2. Massage – New and established massage parlors are often looking to build their client books and offering a discounted massage is a good way to build loyal customers. If you aren’t a regular massage seeker and don’t have a favorite masseuse, you can browse numerous offerings on The Deal Pages and explore the wide variety of disciplines that make up massage. There’s everything from traditional Thai massages to Swedish massages and often these are in the 60 – 80% discount range.

3. Waxing – Now as a male, I admit that I don’t have much experience in this department (with the exception of one armpit which was waxed as part of a charity fundraiser); however I consistently see deals for 50 – 80% off waxing services. I can imagine that waxing is the kind of experience that you might want to share only with someone you know and trust, but if you don’t mind trying somewhere and someone new, then you should browse The Deal Pages and find an offer that appeals to you. You can always check out the Yelp reviews to see what customers have shared about their experiences with a specific service provider.

facial-sw4. Facials – Spas regularly offer 60 – 80% discounts off a variety of services including facials, manicures, pedicures and a variety of other services. If you want to go out and get the full spa experience for a fraction of the price, browse the daily offerings and you’ll likely find an offer that looks good from a reputable spa.

5. Laser-Hair Removal – I’ve heard stories from friends about the ridiculously high price tag that is associated with laser hair removal. The main expense for one of these clinics is the laser and the variable cost of the technician and the operating costs are relatively low. Consequently, these places have huge margins and can offer significant discounts off their services. I’ve seen laser hair removal packages being offered up to 97% off their retail price. More commonly you see these offers in the 80 – 90% discount range. Save a boatload of cash when you’re determined to get laser-hair removal by taking advantage of a daily deal.

6. Teeth Whitening – You can often find in-home or in-clinic teeth-whitening packages in the 60 – 80% discount range. If you’re planning on getting your teeth whitened keep an eye out for these offers and you’re sure to find a great deal.

free-yoga7. Yoga – If you’re a hard-core yoga student then I can understand the value in paying full price to attend classes from your favorite instructor. If you’re new to the activity, then I’d strongly recommend that you try one of the numerous daily deal offerings that are listed on The Deal Pages on a regular basis. Not all yoga studios or yoga instructors are the same, so you should try a couple different instructors from the different yoga styles (Bikram, Moksha, Ashtanga, Vinyasa, etc.) before you make a decision on which combination you like best.

8. Paintball – Depending on where you live and the weather conditions, you may not be able to regularly find a paintball deal. However, these deals frequently come up during the summer months and if you live close to indoor facilities you’ll often find daily deals from these companies trying to increase their client base. These deals typically range in the 60 – 80% discount range.