Inverted Deals versus Daily Deals

Updated September 28th 2013

Many business owners use daily deal sites to attract new customers, and some find that these promotions do not provide sufficient return on investment. Here are some research results indicating that inverted deals represent a solution to daily deal problems.

Daily deal sites such as Groupon and Living Social take a cut from the profits and offer menu items at a lower price. Owners have become increasingly doubtful that this is an effective tactic for reaching future regular customers. But what is certain is that it helps to promote the restaurant to a new audience so we fully acknowledge the magic of this promotional tool.

Inverted deals are similar to daily deal promotions, but the consumer does not need to purchase a coupon online. Under this system, consumers sign up and pay a small amount for a deal online and pay for the discounted item on location rather than in advance. Companies such as LevelUp or Mogl provide the platform for customers to find out about these deals as well as the means for businesses to track how well a promotion is working.

It does not seem like such a small adjustment could have such a great impact on profits, but this type of deal provides a solution to the two main problems associated with daily deals:

The first problem with daily deals is referred to as “price renormalization.” Price renormalization is the phenomenon in which consumers begin to perceive the value of a product based on its discounted price. By paying for a discounted product upfront, consumers are no longer willing to pay the regular full price for any given item. The reason that this is not a problem with inverted deals is that consumers are required to think of the item or service in terms of the full price before the discount is applied. This makes it more likely that they will come in to a business and pay full price in the future.

The second problem is known as “benchmarking.” When a customer buys a coupon that has a value of 10 dollars he or she is likely to try to keep purchases under that amount, which means businesses are losing upselling opportunities and therefore profits. With inverted deals, consumers make their purchasing decisions before the deal is applied and therefore do not have a fixed limit in mind.

It was with those solutions in mind that inverted deals were invented, and indeed they sound all very nice in theory but below are some general findings:

• On average, customers that use inverted deals return three times after trying the program.
• More than 50% return within the first 30 days.
• Consumers pay 20% more than the amount offered by the deal.

 

Promotion through daily deals has a great impact on bringing people to a venue for the first time and is recommended for anything extraordinary so that people have more fuel to virally promote the message further. The main issue that still remains is whether the same client will come back. Inverted deals could provide the right balance between value for the customer and value for the business owner in order to be a winning marketing tool.

Written by Daniel Grossmann