How beneficial are promotional coupons or "daily deals" for the hotel industry? The Cornell Center was in charge of studying this phenomenon to give an answer
by Glenn Withiam*
Social coupons, also known as "daily deal", have caught the attention of a large number of hotel operators and their potential customers in North America, particularly; but also in many other countries around the world.
If you are not familiar with the types of businesses like Groupon, LivingSocial, OpenTable Sporlight and Restaurant.com, let me briefly describe the way they operate and then we will discuss some of the issues that that type of business faces with these websites.
Given the rapid growth and deployment for such sites, researchers at the Cornell Center for Hotel Research have been analyzing customer attitudes toward these sites and business strategies for working with the sites to win potential new customers.
Groupon is the largest company in this type of day trading or social coupon business. In short, this is the way they operate. A company agrees to offer a product or service at a price well below its usual price, which is usually at 50% off. Groupon then publishes this business on its website in the form of a coupon or sends an email describing the offer to consumers who have subscribed to receive such offers. The key to the Groupon model is that the business does not become effective until a certain number of consumers have agreed to purchase the coupon for this offer. Once the significant number of buyers has been reached, the offer becomes effective and the business must be fulfilled.
Popular media coverage of "daily deal" sites has had negative stories about businesses that ended up losing money on promotions when they cannibalized existing demand or were besieged by one-time customers who turned to this type of business just for the discount and were no longer permanent customers. This certainly happens a few times, but, as I explain here, businesses that create well-structured offerings can win new customers and improve revenue.
First, let's take a look at the customers themselves. In a study of 931 restaurant customers conducted by Professor Sheryl Kimes (of Cornell) and her colleague Utpal Dholakia (of Rice University), it was found that a relatively small percentage of customers who used a "daily deal" fit the negative description of customers with little affinity for the type of business. By contrast, Kimes and Dholakia found that the benefits of supplying such offers appear to outweigh the disadvantages. In their study, a significant percentage of restaurant customers said they would likely return to the restaurant that offered the most recent "daily deal" they had purchased (and would be willing to pay regular prices).
When comparing those consumers who use the "daily deal" sites with those who do not, Kimes and Dholakia found only a few differences. Those who bought these types of coupons were likely and significantly younger, married, and with a higher income than non-buyers. With these statistics as background, the researchers' study tried to develop a description of these customers who use "daily deals". Although discounts are a motivation, there is something else that motivates buyers of this type of coupons. Kimes and Dholakia describe this as a "market investment."
Many of the people who bought the coupons wanted to feel like they were at the forefront of market trends and pricing information.
Only with their own admission, buyers of "daily deals" used to be generous with tips and their generosity was reflected in the final account, before the discount. They also claimed that they appreciated the value offered by the restaurant they chose, even without the discount.
The phenomenon of cannibalization
The study did find evidence of cannibalization. 44% of people who had purchased one of these coupons identified themselves as frequent customers. On the other hand, many of the customers who identified themselves as new customers would not have rehearsed the restaurant without the coupon offer. In addition, the business also attracted infrequent customers. Again, both groups claimed they would return to the restaurant and pay the full price.
Now, let's talk about the business strategy. What seems clear is that the restaurant or other type of hotel business requires carefully structuring its "daily deal" coupon to ensure that the offer generates enough revenue to cover its costs, but while still offering value to customers. A case study in which one of its authors is Professor Chekitan_Dev (of Cornell), demonstrates how a tour operator in New York's Finger Lakes worked with Groupon to develop a business that gave money, even though Groupon's normal standard was 50% off.
If the tour operator had offered only one of its existing finger lakes wine cellar tours packages through the "daily deal" coupons, the 50% discount would have resulted in a loss for each redeemed coupon. For the business to fully function, the tour operator had to increase value and reduce costs. Although the operator did create a business that could be profitable, the fact was that each coupon with 50% discount represented a considerable income not received for the operator.
Daily deal companies are popular with customers, but research on traditional types of coupons has found that customers eventually show some kind of indifference to the face value of the coupon. The literature on coupons indicates that it is the presence of a discount that seems to be a trigger for the purchase, rather than the amount of the discount. Hotel operators can then seek to enhance the value of a particular service to incentivize customer purchases in conjunction with the discount. For the tour operator, the added value was an additional bottle of wine and tours inside selected wine cellars in Finger Lakes.
So far there is nothing new regarding the value-added strategy. What's different today, however, is that hotel companies' customer databases allow them to strictly target promotions to niches where they will offer the most benefit. As challenging as it can be, hotel companies must continue to look for ways to separate frequent customers, potential new customers, and those looking for a business. Even when competition is tough and incentives have become a lifestyle, if operators continue to focus on analyzing the profitability of a potential business, they may come to find ways to stop emphasizing price and be able to offer value that promotes the return of recent customers.
