The recession has caused consumers at all income levels, including the affluent, to rethink their spending habits. This is driving the rapidly evolving deal-of-the-day business, resulting in an environment where consumers appear to be addicted to deals and discounts. According to BIA/Kelsey, a media-consulting firm, as of June 2011, there were more than 480 companies in the U.S. deal-of-the-day marketplace. The firm estimates that U.S. consumers spent $873 million on deals in 2010 and forecasts deal-of-the-day sales of $3.9 billion by 2015 – a 35% compound annual growth rate. Peter Krasilovsky, vp, says, “The combination of fun offers and convenience makes deal-a-day a very attractive vehicle to drive sales.” He adds that, while consumer fatigue may occur, he anticipates the expansion (e.g., Google Offers), plus, the creation and specialization of deals involving social experiences (e.g., LivingSocial Adventures, TravelZoo Local Deals, Facebook Deals) will combat that effect.

Who are these deal-hungry consumers? Currently the majority (60%+) are college-educated women, and average household incomes are upward of $50,000. A 2010 survey of restaurants by market-research firm, Restaurant Marketing Group, reported that nearly 48% of customers are looking for a deal. Even the affluent are interested. The annual Survey of Affluence and Wealth in America, co-produced by The Harrison Group and American Express Publishing in 2010, reported that interest in coupons and published discounts is up 22% for those with $100,000+ in annual disposable income.

“The fact that 85% of consumers plan to continue to purchase online restaurant deals and 79% look forward to receiving them are strong indications of the impact of the online daily deal business and of its potential within the restaurant space.” – Bob Goldin, vp, Technomic

The current deal marketplace: Broadly speaking, today’s deal market is made up of national and local companies (Groupon, BuyWithMe, Citydeals) focused exclusively on providing huge discounts (50%+), and those offering experiences that feature discounts (LivingSocial, TravelZoo, Facebook). Some offer deals on a wide range of products and services, while others specialize in a product or service sector, such as travel, restaurants (OpenTable Spotlight), some at no cost to restaurants (Blackboard Eats). Redemption cycles can last weeks, and the great majority of deals are distributed via email.

To deal or not to deal: The subject of deals is very controversial – there’s an active debate about whether restaurants ultimately gain or lose. A recent Technomic survey of 5,000 consumers reported that 48% of buyers of restaurant deals from online sites used a daily deal at a restaurant they had not visited before; 67% later returned to the same restaurant without a daily deal. However, many restaurateurs complain that the financial structure of daily deals results in big losses and that deal customers are problematic – they don’t make incremental purchases, don’t tip on the full amount of the bill, and don’t become repeat customers, instead moving on to the next deal. “I think deals requiring huge discounts are incredibly dangerous for restaurants – they’re all about trial and first timers. What happened to providing a better experience for a loyal customer?” asks Bob Phibbs, author of Groupon, Why Deep Discounts are Bad for Business. “These deals are heavily tilted towards the customer; the restaurant can’t help but lose money, and ends up cannibalizing itself.” Fred LeFranc, founding partner, ResultsThruStrategy, adds, “It’s simple math – if food and labor costs run 55-65%, as soon as you offer a 50% discount you’re already losing 5-15% and you haven’t even considered other fixed expenses.” Fred believes many restaurateurs who do deals don’t think about how they can convert the deal customer into a regular. “If you’re going to offer deals, do it strategically and get your staff on board – let them know why you’re doing it and focus on converting the deal customer into a repeat guest; at the very least capture their emails,” he advises.

What’s next: The good news is that there’s a new phase of deals on the horizon that may be better suited to businesses with very small margins such as restaurants. The next step is to go mobile, taking advantage of the GPS features on smartphones, to offer instant deals in close proximity to consumers. Peter says this phase of deals will be about instilling loyalty – something that, although promised, is often missing from huge discounts appealing predominantly to deal hunters. Those companies offering mobile deals, he explains, will be moving towards creating a longer-term relationship with merchants to help them manage mobile to stimulate repeat visits. The mobile deal structure will allow merchants to turn deals on and off as they choose and will be ideal for items that are available for a specific time (e.g., restaurant seats), have limited inventory (such as special menus), and/or are available for a limited time (like happy hours). “These mobile deals are really pure e-commerce, they don’t involve social media – getting a group together to activate the deal,” explains Peter. Some mobile deals will follow the commission-based model, while others will offer businesses the option to set up a monthly account. Groupon and LivingSocial are already in the mobile game with GrouponNow and LivingSocial Instant Deals. Also, American Express is partnering with Foursquare to offer deals to Cardmembers when they check in on their cellphone at certain shops and restaurants. A test in March found that, on average, participating Cardmembers spent 20% more than those American Express Cardmembers who did not have access to the special deals.