The daily deals market has rapidly grown in the last three years, with market leader, Groupon, now present in 48 countries with an estimated 33m customers.

In late 2011, Groupon’s IPO valuation was an estimated $12 billion. Despite this immense growth, the industry suffers from perception problems, with some even claiming the bubble has already burst.

However, the market is still relatively immature, and the industry faces many challenges before it establishes itself as a credible component of the marketing mix.

It was only a couple of weeks ago that Groupon was told to clean up its advertising practices by the OFT.

In particular, the industry needs to address its cases of failure head on and work with merchants to optimise the effectiveness of daily deals and prevent high-profile disasters (particularly those involving cupcakes).

Last week saw the launch of the Daily Deals Summit 2012, Europe’s first conference dedicated to the online discounting market.

Perhaps tellingly, the majority of delegates present at the conference were people working within the industry, including people who ran their own daily deals websites. There were relatively few brands present at the event, something which is expected to change as daily deals websites evolve and merchant interest in the sector increases.

In the first keynote, Roy Blanga, Managing Director of Groupon UK reported that the daily deals industry has rapidly grown in the last few years, going on to claim that such websites are no longer simply about the discount or aimed at bargain-hunters, but rather about providing a unique customer experience, acting as a source of inspiration, and offering a deeper level of engagement.

However, it is difficult to see the rationale for this, particularly as the number of websites offering online discount vouchers has grown exponentially in the last three years. The sector is now flooded with a wide range of different types of websites and business models, which inevitably means the market is becoming increasingly commoditised.

The growth of such websites means that consumers have a greater range of options when looking for the best price, so the claim that customers are less price sensitive seems difficult to justify.

To differentiate themselves in this increasingly competitive market, companies need to improve relevance and personalisation by making better use of customer data. Many companies present at the summit reported that the future of online discounting lies in the ability to target offers to specific groups of customers in order to get the best bang for your buck.

Personalising daily deals using consumer data

In the afternoon, Gerard Doyle, CEO of DiscountVouchers, presented a good case study highlighting the effective use of data for segmenting offers tailored for different target markets.

DiscountVouchers analysed the results of a deal that offered buyers a discount on Slim Lift Bras, drilling down into not only basic demographic data, but also looking at the income index and Mosaic index, Experian’s geo-demographic classification system.

The data showed not only showed that there was a bias toward lower income consumers, but indicated the deal performed better with certain groups in the Mosaic index, as the chart below shows:

DiscountVouchers used proprietary software to analyse more than 100 variables, including demographic data, average spend, favourite brands and much more.

By analysing six different deals, the business found that simply targeting each income bracket with their respective highest performing deals would have resulted in a performance increase of 250%.

It’s clear from these results that when optimised for the right audience, daily deals can be highly effective for engaging customers through the sales funnel.

The use of data is vital for the online discounting market, in order to avoid “daily deals fatigue” and prevent customers from unsubscribing as a result of receiving too many untargeted emails.

According to Doyle,

Personalisation will be the biggest barrier to entry for new deal sites by the end of 2012. In 2011 new daily deal sites started to target niche verticals as a way to compete with the scale of Groupon, but through personalisation, large scale websites like Groupon and can win this battle too.

Are daily deals risk-free for merchants?

In his earlier keynote, Blanga went on to state that Groupon’s daily deals are “virtually risk-free” for merchants, because businesses only pay for the customers they acquire.

While this may be true, some merchants remain unprepared for the volume of customers that come through daily discounting sites. While some may argue that the onus for optimising the deal falls on the shoulders of the seller, it is arguable that a bad customer experience reflects poorly not only on the end merchant, but also on the discounting site offering the deal in the first place.

In any industry, particularly one that is still in infancy, ethical business practices are crucial for long-term growth. Discounting websites would do well to remember that their customer is not only the end consumer, but also the business that is advertising the deal on the website and paying for acquiring new leads and customers.

In addition, it is of mutual benefit for both the merchant and the discounting website to ensure that the deal is as successful as possible.

Allowing the merchants to effectively sign their own death warrant will tarnish the reputation of the online discounting industry and lead to more cases of high-profile failure, bolstering the belief that daily discounts are bad for small businesses.

There may even be an opportunity for daily deals websites to provide services and consultancy to help merchants make the most of online discounting and educate them about rules of engagement and best practices.

What’s clear is that the global market for online discounts is thriving because consumers like these types of websites. However, there’s still long to go before the industry matures.

In order to avoid the bubble bursting, companies in this sector must address the pain points now, in order to challenge misconceptions about the discounting business model and fuel further growth

Image credit: Mr. T in DC on Flickr, presentation by Gerard Doyle at DD Summit Europe 2012