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Are daily deals good for merchants?

Sunil Gupta, Timothy Keiningham, Ray Weaver, Luke Williams, Havard Business School, in Havard Business School, 10/2012

In the relatively short time since Groupon was founded, the response to "daily deals"—services that promote businesses by marketing deeply discounted, pre-paid vouchers to an online subscriber base—has by all accounts been spectacular. In the process, a global multi-billion dollar industry has emerged, attracting hundreds of competitors, tens of thousands of merchants, and many millions of consumers. Despite this success, a vocal contrarian view of the daily deals model has emerged. Its chief criticism is probably skepticism about the value of daily deals to the merchants whose goods and services are promoted. In this article, we evaluate the profitability of daily deals for merchants more thoroughly and in more detail than previous attempts. For this purpose we developed a model of merchant profits that includes not only the effects of voucher purchase and redemption, but also cannibalization and the long-run profit from newly acquired customers.