With an innovative cooking method, market-specific menu options, and franchisee interest across the globe, better-burger chain Smashburger would seem to have it all. The five-year-old company has already grown to about 155 U.S. stores and more than $130 million in annual sales, with a few hundred more units and Middle East expansion already in the works.

But Smashburger is still trying to place one very important piece to the puzzle: how to attract new customers to the brand. And like many quick serves and other retailers, the company is turning to a daily-deal site to accomplish it.

“As a relatively new brand in most of our markets, we really do think about the Groupon spend as a media spend,” says Jeremy Morgan, senior vice president of marketing and consumer insights for Smashburger.

“For my budget I’ve got to allocate the same way I would a newspaper ad, or the same way I would a radio buy. As a cost, for us, Groupon is very effective at bringing people in and, as a new brand, we’re looking to activate a lot of new customers.”

Three years ago, Groupon may have sounded like a funny word to come from a major executive at a fast-rising fast casual. Today, however, the name of the leading daily-deal site has become synonymous with the deals industry, a collection of hundreds of websites that are trying to persuade consumers to visit businesses by dangling almost-too-good-to-be-true coupons in front of them.

The infant industry is catching on quickly, so quickly that some have suggested the bubble could soon pop, especially considering the number of new services cramming into the space. To date, there are hundreds of versions across the country, with crazy names like Yipit, Woot!, and TravelZoo to help buyers distinguish them. But for now, at least, consumers can’t seem to get enough.

According to a 2011 study by customer experience researcher ForeSee, about 65 percent of online shoppers subscribe to at least one daily-deal e-mail; 46 percent of them subscribe to more than one. Meanwhile, almost two-thirds of deal subscribers had purchased a deal in the past 90 days, and 89 percent of them had redeemed it.

Another study, from Utpal Dholakia, professor of management at Rice University, found that about two-thirds of people who purchased deals for restaurants had bought three or more deals in the past year.

Although coupons and discounts have always wooed cash-conscious shoppers, the daily-deal industry is turning the notion of saving on its head. By offering deeply discounted—often 50 percent or more off the regular price—services and products to shoppers via daily e-mails, deal sites have encouraged consumers to spread their patronage around to the businesses with the best offers.

The industry has also changed the way operators approach the issue of attracting customers. Its model, in which customers purchase a deal upfront and it’s only redeemable if a certain number of people buy it, all but guarantees an audience.

“It’s a totally new way of marketing that’s never been an option to [retailers] before,” says Julie Mossler, director of communications for Groupon. “If you compare it to radio advertising or newspaper, before you would put money down for an ad and there was no guarantee that anyone would ever come to your door. With Groupon, you know these people are coming in because they already purchased it upfront.”

Groupon, of course, is not the only major player in this space, but was one of the earliest products to market and is easily the most popular service to date. According to the ForeSee study, 51 percent of online shoppers subscribe to Groupon, a full 27 percentage points higher than second-place service LivingSocial.

Chicago-based Groupon launched in late 2008, born out of a start-up called The Point that sought to bring groups of people together to tackle various social issues. When the founders discovered that users were more interested in gathering in large numbers to get discounts on retail items, they realized there was market demand for a service that offered group-based coupons. So they refocused the company as Groupon to fit the niche.

The company has since enjoyed a meteoric rise in popularity that culminated in filing an IPO and going public in November. The company, which has made a billionaire of 30-year-old CEO Andrew Mason, grew to every major market in the U.S. and many abroad, and has swelled to more than 10,000 employees. Despite the fact that the marketplace is crawling with imitators, the vast majority of the competitor start-ups are minuscule compared to Groupon.

Smashburger’s Morgan says the decision to choose Groupon over a smaller start-up or localized service was based on exposure potential. Smashburger’s $6-for-$12 deal was for all corporate stores across the country (it was also optional for franchisees and eventually ran in roughly two-thirds of the chain’s stores).

“Because of the awareness and trial portion of what this is, it’s a little bit like being in a local paper versus a national paper,” Morgan says. “LivingSocial and Groupon are really the elephants in the room, and if you’re going to do one of those deals, you might as well get the reach that comes from the size of their companies.”

Indeed, LivingSocial has also grown into a venerable contender in the daily-deal industry. The service, which was founded as an app developer but became a daily-deal site in 2009, offers essentially the same model as Groupon, but provides full payment to merchants faster than its rival (15 days after the deal ends versus Groupon’s 60 days). It also offers more of a localized twist than the deals leader, says one company representative.

“Unlike anybody else in the industry, we’ve got a boots-on-the-ground strategy, which means we have actual LivingSocial employees in every single market,” says Maire Griffin, director of communications for LivingSocial.

“We believe you should shake the hand of the person you’re doing business with if you want. Especially if you’re working with a mom and pop, it’s really reassuring to sit down face to face with someone. But also from a consumer perspective, we’re able to actually check out that restaurant, salon, [or] spa, to make sure it’s something we want to feature.”


LivingSocial and Groupon have gone toe-to-toe fighting for more merchant and subscriber customers, both promising the best sales-team help and both rolling out a range of products.

LivingSocial has its Gourmet, Room Service, and Adventures deals, and is testing Instant Deals, which consumers can buy and use on the spot (helpful in an increasingly mobile world). Groupon, meanwhile, has its Getaways travel deals; Deal Types, which lets users filter deals by areas of interest; and a new instant-deal service called Groupon Now!

But as the two companies have gone up against each other, they’ve also had to keep an eye on more established tech companies joining the fray. Amazon, for instance, launched its Amazon Local service, which debuted last year and is already in dozens of markets. And though it quickly bowed out of the market after a mere four months, Facebook tested its own Deals service in 2011 as well.

Perhaps the biggest competitor to LivingSocial and Groupon, however, is from Internet juggernaut Google, which reportedly tried to buy Groupon for $6 billion in 2010.

The tech giant launched its Offers product last June and already charts as the No. 3 deals service, according to ForeSee, with 14 percent of online shoppers subscribing to it despite only being in about 25 markets.

Eric Rosenblum, director of product management for Google Offers, says Google’s suite of services for restaurant operators make Offers a natural extension for the company. Google already offers restaurants tools such as AdWords, Places, and Maps to help maximize their business potential.

“A lot of businesses would prefer to deal with one or two vendors and not 100 vendors,” Rosenblum says. “If it’s possible for them to run ad campaigns where they can display ads so there’s brand building … [and] they can do search campaigns, where they can also do an Offer to come in and try a new sandwich, this is great for them.”

Rosenblum says another strength of Google is its massive amount of data and analytics that can help operators track the success of the daily deals. “The daily deal world doesn’t give a good way yet of tracking if people come back,” he says. “This is an area Google is putting a lot of work into: how to reward people for coming back and how to track that repeat visit.”

This has been one of the loudest arguments of daily-deal detractors. Many say return on investment is difficult to measure, and that there’s no way of knowing whether or not the deal that brought the customer into the store will keep them coming back for more.

On top of this, Groupon’s stock, at press, was trading much lower than its initial offering. And the highly publicized horror stories of operators losing heaps of money with daily deals hasn’t helped squelch the argument that the industry bubble is getting ready to pop.

Dholakia has conducted multiple surveys on the daily-deal industry. In 2010, his “How Effective are Groupon Promotions for Businesses?” study found that 66 percent of businesses that ran a Groupon said it was profitable, and 32 percent said it was not profitable. Dholakia’s study found that many operators “were jumping on this daily-deal bandwagon without thinking about what they were doing.”

And in his 2011 study “Restaurant Daily Deals: Customers’ Responses to Social Couponing,” which he coauthored with Cornell professor Sheryl Kimes, Dholakia found that restaurants using a deal might be cannibalizing their own business. Some 44 percent of deal users at restaurants were already frequent visitors of the restaurants they bought deals from, while 34 percent were infrequent visitors and only 22 percent were new visitors.

“What I found in my most recent study is that more merchants are becoming smarter about doing these daily deals,” Dholakia says. “So what you essentially have is you have merchants who got burned and dropped out and didn’t do any more daily deals, and then others who were kind of moderately successful the first time around are doing smarter daily deals.”

Smarter deals, Mossler says, require careful work with a deal-site sales member to craft an offering that doesn’t just give a product away, but rather builds incremental sales.

“My advice would be to know your business inside and out before you decide on … the structure of your feature,” Mossler says. “But once it actually runs, take the time to look at the numbers and figure out, are your customers female? Are they older? Are they male? What are they buying when they come in?”

Google’s Rosenblum says the future of the daily-deal industry lies in taking this type of information and using it to design the deal itself.

“I get a lot of deals that are of no interest to me—they fill my inbox, they fill my mobile alerts,” he says. “I would prefer to be better targeted. I think this is an area that Google thrives in. We like the challenge of figuring out what people want and getting them the right deal.”

Mossler says targeting is already playing a role at Groupon through its new Deal Types feature that filters deals, and that it will continue to play a big role. On the merchant side, Griffin says LivingSocial’s Instant Deals offering gives businesses more control over which dayparts the deal can apply to.

It’s clear the daily-deal industry is evolving, but it’s not clear just what will become of the hundreds of providers jostling for market share. Dholakia says that while he used to believe the daily-deals industry was a bubble on the short path to popping, he no longer believes that to be the case. He cites his research showing how many people have bought multiple deals, and suggests heavy users are also the most enthusiastic.

“The industry as a whole is sustainable,” he says. “What is not sustainable is the sheer number and volume of daily deals that we are seeing. I think as the industry matures, it’s going to become a stable element of local marketing spending, but it’s going to be much smaller than many people expect.”

Growth, Marketing & Promotions, Ordering, Story