By Hallie Busta
Chicago startup Bare Deal entered the crowded social buying space in November by doing something Groupon doesn’t: Providing its deals without requiring consumers to pay upfront.
Instead, the company offers discounts free of charge to consumers in the form of a scratch card sent through the mail that’s designed to build loyalty, said co-founder Justin Shapiro.
“What we wanted was for consumers to pay at the place of business,” rather than on Bare Deal’s website, he said. That way, consumers won’t lose money if they don’t use the discount.
By implementing a point system in the future for repeat use, Bare Deal might offer an advantage to businesses who often reap only short-term gains when they offer deals, experts said. His concept addresses the challenge many daily deal sites face in proving the long-term benefits of social buying sites to participating businesses.
Groupon-style daily deals don’t necessarily lead to repeat customers for the client businesses, said Opal Dholakia, associate professor of marketing at Rice University’s Jones Graduate School of Business in Houston. “A significant number of customers are just buying because of the price, because they are getting a deal,” he said. “Using these coupons doesn’t necessarily guarantee loyalty or long-term relational behavior.”
In a 2010 study, Dholakia found that while two-thirds of companies reported a profitable Groupon experience, four in 10 said they would not run another deal on the site largely because the promotions didn’t generate loyal customers.
Because customers who use daily deal websites are looking for a bargain, business owners should not expect them to purchase more than the coupon’s value or make a return visit, the study said. Groupon did not return phone calls requesting comment.
But Dholakia said daily deal sites could generate long-term customers by changing the structure of the deals to encourage repeat purchasing. For example, he wrote, “Instead of offering $60 worth of food for $30, a sushi restaurant could offer $20 worth of food for $10 on each of the consumer’s next three visits.”
Bare Deal has devised another approach to customer loyalty. It plans to implement a point system in the next three to six months, where customers would acquire points as they use the scratch cards, Shapiro said. Acquiring points would provide consumers with access to more deals. Customers would lose points if they fail to redeem a card by its expiration date, which would limit their access to new deals.
Shapiro said the loyalty model is designed to give customers an incentive to redeem the cards, increasing the likelihood that offering the deals will actually drive business for the companies.
The site has issued more than 15 deals so far with discounts ranging from 40 percent to 100 percent of the product’s or service’s price, Shapiro said. Bare Deal designs and distributes the scratch cards, allowing participating businesses to track the number of deals selected and redeemed. Bare Deal also tracks consumer responses and gives businesses a report after the deals expire, which is typically in three to six months, Shapiro said.
Can small businesses afford to offer deals?
Bare Deal’s first offer was for $10 worth of food at one of Imran Kasbati’s two I Dream of Falafel locations in the Loop, Kasbati said.
So far, partnering with Bare Deal has increased traffic to the store that normally sees a decrease during the winter months, Kasbati said. Nearly 75 percent of customers have redeemed their deals according to the tracking system he and other Bare Deal clients use, he said.
Bare Deal’s discounts range from 40 percent to 100 percent of the product’s or service’s price, with the average discount hovering around 50 percent, Shapiro said.
While a 50 percent discount might be typical for a daily deal site, Dholakia said, that might be too high for small businesses to benefit. “It’s attractive to the customer, but it’s harmful to the business owner to offer that high a discount,” he said.
Winners and losers
Restaurants and other businesses with high fixed costs and low margins stand to lose more with social buying deals, Dholakia said. Besides receiving less profit on items they sell at a discount, they also pay the host site a fee per offer or a percentage of sales generated, further reducing their margin. What’s more, an influx in traffic stemming from a deal risks overwhelming some businesses, reducing the quality of the service they provide, he said.
Shapiro said he works with Bare Deal clients to issue appropriate discounts so that the offer doesn’t bring in more customers than a business can handle. But because the user base is still small, generating too much traffic hasn’t been an issue. “We’re not yet at that point where we’re offering so many cards that it would inundate our clients,” he said.
He hopes that the scratch card model will set Bare Deal apart as the company begins expanding to 12 additional cities, including Atlanta, Dallas, Los Angeles, New York, Seattle and Washington, D.C., over the next six to 12 months, he said.
What’s the future of social buying?
The social buying landscape will likely change by 2012, Dholakia said. While more established sites like Groupon and LivingSocial are expected to survive industry consolidation, some smaller websites will likely fade away.
Overall, the industry will see “much less enthusiasm and much less hype than we do now,” Dholakia said.