What Makes Gpn Promos Profitable

8/3/2019 What Makes Gpn Promos Profitable

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Effectiveness of Social Promotions

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Running Head: EFFECTIVENESS OF SOCIAL PROMOTIONS

What Makes Groupon Promotions Profitable For Businesses?

UTPAL M. DHOLAKIA*

Rice University

March 12, 2011

* Utpal M. Dholakia is the William S. Mackey, Jr. and Verne F. Simons Distinguished AssociateProfessor of Management at the Jones Graduate School of Business, Rice University. The authorgratefully acknowledges Anita Dholakia for inspiring this study, Rice University for providingthe financial support to help conduct it, and the many small business owners who gaveunstintingly of their time to provide their responses to the studys questions.


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Abstract

Although social promotions are wildly popular with consumers, it is unclear how businesses

running such promotions fare. We develop and empirically test a conceptual framework

specifying the determinants of a profitable Groupon promotion. Features of the promotional offer

and employee satisfaction are hypothesized to affect customer behavior on the occasion of

Groupon redemption and longer-term, respectively, which in turn impact profitability of the

promotion. A survey-based study of 150 businesses that ran and completed Groupon promotions

between June 2009 and August 2010 provides support to the proposed framework. Businesses

suffering unprofitable promotions reported significantly lower rates of spending by Groupon

users beyond its face value (25% vs. 50%) and return rates to purchase from the business again at

full prices (13% vs. 31%). Many respondents reported disillusionment with the extreme pricesensitive nature and transactional orientation of Groupon users. Based on these findings,

suggestions to modify social promotion offers to better balance the value offered to consumers

with positive outcomes for businesses are provided.

Key-words: Social promotion, Groupon, social media, price promotions.


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What Makes Groupon Promotions Profitable For Businesses?

It's a great marketing tool. just not great with making profit. small business owner

Business circles have been abuzz in recent months with the sky-rocketing popularity of

social promotion sites (e.g., Fowler 2011; Lyons 2010; Underwood 2010). Groupon

(www.groupon.com) is currently the best known and the largest one of these sites. Launched in

November 2008, the site has grown to cover more than 300 markets in 35 countries as of

February 2011. Groupon currently features one or more daily deals for each market it operates in,

offering consumers significant discounts mostly for small and medium-sized local businesses,

such as $40 worth of sushi for $20, or a $175 facial at a spa for $59. When purchasing a

Groupon, consumers pay for the product up front, and then have a stipulated amount of time, up

to a year, to redeem it at the business.

Groupon promotions have a strong social component. Each promotion is valid only if a

certain minimum number of consumers, pre-specified by the business running the promotion,

purchase the offer. Not surprisingly, the news of Groupon promotions spreads virally through

Facebook updates, Twitter tweets, and text messages on a daily basis, as consumers encourage

family members, friends and acquaintances within their social networks to tip the deal (i.e.,

reach the critical mass stipulated by the business) so that everyone can get the offer. Fueled by its

popularity, the label Grouponer has entered the contemporary lexicon in recent months to

describe deal-savvy, socially networked online shoppers.

Groupons and other similar social promotions provide compelling utilitarian and hedonic

benefits to consumers (Chandon, Wansink and Laurent 2000). Not only do these promotional

offers possess many of the most appealing features of traditional paper or online coupons, but

they also have additional innovative benefits. First, Groupons offer substantial --- at least 50


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percent, but often as much as 70 or 80 percent --- discounts off regular prices, providing

consumers with low-risk opportunities to try out new products and services such as restaurants

and spas that have just opened or ones they have not tried before. Furthermore, most offers are

from small, locally-based brick-and-mortar businesses, a retail sector that has suffered in the past

decade as consumers have migrated to online channels (e.g., Dholakia et al. 2010).

Second, the Groupons short time frame, usually a single day, creates a sense of urgency

to purchase the offer, and makes the anticipation of waiting for the next Groupon an exciting

daily ritual for many consumers. As one industry expert observed, It's a cents-off coupon

married to a Friday-after-Thanksgiving shopping frenzy (Steiner 2010). Not surprisingly, Urban

Dictionary has coined the phrase Groupon Anxiety to refer to the preoccupation and feeling

of anxiousness and not being able to sleep knowing that a new Groupon will be released after 1

a.m.1 Furthermore, the promotions social aspects encourage many groups of friends or family

members to buy Groupons together and share a positive experience like taking a cooking or

wine-tasting class, or enjoying a meal at an upscale restaurant (Armando 2010).

For many small and medium-sized businesses, particularly for ones that are new or

struggling, hordes of new customers flocking in because of a social promotion may seem

particularly appealing during times when consumers have cut back on so many products and

services (Dong-Hun 2009; Kotecha et al 2008). Some prior research also supports the

effectiveness of price promotions in drawing new customers to businesses (e.g., Walters and

MacKenzie 2008). Consequently, it has been argued that a social promotion can provide valuable

exposure to a small business, with the efficacy of the exposure increasing as social promotions

become more and more popular (http://www.grouponworks.com). Furthermore, as Greenleaf

(1995) has observed, one powerful reason that firms use price promotions is that they can

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http://www.urbandictionary.com/define.php?term=groupon+anxiety


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increase profits. Not surprisingly, Groupon recently reported that it has a waiting list of over

35,000 businesses wanting to be featured on the site nationwide, and that it can currently promote

only about one in every eight interested businesses on its site (Sherr 2010). Fueled by this

popularity, numerous social promotion sites such as LivingSocial, eWinWin, SocialBuy, and

BuyWithMe have been launched in recent months, and the whole industry represents a beehive

of venture capital and technology startup activity.

Research Objectives

Despite the media frenzy and investor enthusiasm surrounding the social promotion

industry, there is little actual evidence regarding the effectiveness of social promotions for small

businesses. This issue is particularly relevant because small and medium-sized businesses

constitute the core customers for social promotion sites, and the success of these sites over the

longer term hinges on the profitability and repeated use by small and medium-sized businesses

for running promotions.

Accordingly, our goals in this research are two-fold. First, we develop and empirically

test a conceptual model that elaborates on the determinants of social promotion profitability.

Drawing upon existing price promotion research (Alba et a. 1999; Blattberg and Neslin 1990;

Carol 1976; Lewis 2006), studies of relational marketing program efficacy (Dholakia 2006), and

theories linking employee and customer satisfaction (e.g., Koys 2001; Schneider, White and Paul

1998), our proposed model includes key components of the Groupon promotion that impact its

profitability for the firm. Specifically, we include features of the promotional offer such as the

Groupons face value, the depth of price discount offered, and offer redemption duration, as well

as the role played by the satisfaction of the firms employees with the Groupon promotion. We


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also take into consideration measures of relevant customer behavior both on the occasion of

Groupon redemption (the offers efficacy in attracting new customers and their spending beyond

the Groupons face value) and over the longer term (repeat full-price purchases by Groupon

users). These three factors are hypothesized as influencing the Groupon promotions profitability

(see Figure 1). Our model also includes the two key consequences of Groupon promotion

profitability that are of interest to social promotion sites, the venture capital community and to

small and medium-sized businesses: whether the business will run another promotion in the

future and whether they will recommend a Groupon promotion to other businesses. These

outcomes are indicative of the longer-term viability of the social promotion business model.

Finally, in the absence of available theory, we also conduct an exploratory investigation of the

determinants of number of Groupons sold during a particular promotional offer.

Second, informed by the results of our empirical study, we provide a number of

actionable insights to marketing practitioners. In particular, our findings are expected to be useful

to the many small and medium-sized businesses considering whether they should run a social

promotion and how to prepare for such an offer, to venture capitalists weighing investment

opportunities and strategies in the social promotion space, and to the founders and managers of

social promotion sites. Finally, we discuss the issue of sustainability of social promotion sites in

the longer term and provide specific suggestions regarding how social promotions might be

structured in the future so as to be beneficial to both small businesses and consumers in a more

equitable manner.

The Conceptual Model of Social Promotion Profitability

In the present research, our focus is on the assessment of a Groupon promotion program

from the standpoint of the businesses running the offer. Our theorizing is done in the spirit of


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Gupta and Zeithamls (2006) recent framework linking firms actions to customer behaviors,

which in turn impact the firms performance metrics. Consequently, a useful starting point for

developing our conceptual model of social promotion profitability is with a consideration of the

key metrics that firms employ to evaluate a social promotions success. Prior research (e.g.,

Blattbergy and Neslin 1990; Mela, Gupta and Lehmann 1997; Walters and MacKenzie 1988)

indicates that key metrics relevant in determining a price promotions profitability include: (1) its

efficacy in bringing new customers to the firm, (2) the degree to which customers redeeming the

promotion buy beyond its face value (often called upselling; Aydin and Zia 2008), and (3) the

degree to which redeemers make repeat purchases from the business at full price in the future.

These three profitability drivers play central roles in our proposed model of social promotion

profitability, which is graphically summarized in Figure 1. Each one is discussed in greater detail

next.

[Insert Figure 1 about here]

Determinants of Groupon promotion profitability

New customer acquisition efficacy. A primary purpose of many price promotions is to

encourage trial of a new product, or of an existing product among new customers. Short-term or

one time discounts such as offers made through a Groupon promotion can reduce the consumers

risk and make the products trial more attractive to novice consumers (Blattberg and Neslin

1990; Lewis 2006). For social promotions especially, exposure to a new customer base is one of

the primary goals that many businesses seek to accomplish through the promotion. For example,

in a video directed toward small and medium-sized businesses on its Grouponworks website,

Groupon pitches the influx of new customers as a key consequence of running a Groupon

promotion. Acknowledging its importance, new customer acquisition efficacy is a key driver of

the Groupon promotions profitability in our proposed framework (see Figure 1).


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Spending beyond the Groupons value. A second measure that is useful in assessing a

price promotions success is its ability to generate spending among users beyond its face value.

For example, a Groupon to buy $20 worth of food for $10 might yield average tickets of $40. In

this case, the restaurant has succeeded in selling twenty additional dollars of its food and

beverages at full price due to the Groupon promotion. Furthermore, a distinct and explicitly

acknowledged function of many Groupon promotions is to serve as a loss leader, with the goal of

getting customers in the door and have them spend beyond its value (e.g., Gerstner and Hess

1990). In our proposed framework, because we cover small and medium-sized businesses across

a range of industries, we include the percentage of customers that spend beyond the Groupons

value to operationalize upselling, rather than the value of the products or services sold at full

price, which will be heavily dependent upon a particular industry. This measure is also expected

to be available to a larger number of businesses (at least as an estimate) when compared to the

measure of actual additional dollar sales, which requires a sophisticated customer tracking

database that many small businesses may not possess (Payne and Frow 2005).

Repeat full-price purchase. Whereas the first two measures characterize the consumers

behavior on the occasion when the Groupon is used, the third measure in our framework

operationalizes longer-term behavior of customers towards the firm. In essence, a price

promotion succeeds when it entices new customers to try a particular offering through a

compelling offer, and they like it so much that they buy it repeatedly, becoming the firms

relational customers (Dholakia 2006). Based on this premise, Groupon promotions create the

promise for small and medium-sized businesses that Groupon users will come back and purchase

again. In fact, it is this allure of future repeat purchase from the new customer base which

justifies the loss that is incurred by the business on the occasion when consumers redeem the

promotion (e.g., Reichheld 2001; Scott 1976). In our framework, we operationalized this


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construct with the percentage of Groupon users that return to the business and purchase its

products and services a second time by paying full price for it.

As the preceding discussion suggests, we hypothesize that each one of these three

constructs will increase the likelihood of a profitable Groupon promotion, as summarized in the

following hypothesis:

Hypothesis 1: (A) New customer acquisition efficacy, (B) spending beyondthe Groupons face value, and (C) repeat full-price purchase will each have apositive impact on the Groupon promotions profitability for the firm.

Effects of Groupon promotion variables on profitability drivers

In our framework, the three profitability drivers are, in turn, affected by features of the

promotional offer including the Groupons face value, the depth of price discount offered, and

the duration of the redemption period (see Figure 1). Each of these characteristics is considered

in depth next.

Face value of Groupon. Face value indicates the total value of the product that can be

purchased through the offer. A higher face value provides a greater amount of discount (in dollar

terms) to the consumer. For instance, a Groupon with a face value of $40 (purchased by the

consumer for $20) will yield a discount of $20 whereas one with a face value of $20 (purchased

by the consumer for $10) will only provide a $10 net benefit, even though both Groupons offer

the same percentage discount. Thus, a higher Groupon face value provides important utilitarian

benefits to consumers in the form of increased perceptions of savings (Chandon et al. 2006) and

reduced financial risk of purchase (e.g., Conchar et al. 2004). Because of this greater offer

attractiveness, a higher face value Groupon is expected to be more efficacious in acquiring new

customers in our proposed framework. Such a prediction is also in line with the large body of

research showing that higher value coupons are more likely to be redeemed than those having

lower face values (e.g., Bawa and Shoemaker 1987; Reibstein and Traver 1982).


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However, when the face value of the Groupon is higher, it is more likely to approach the

amount that the customer normally spends during a store visit. Consequently s/he will be less

likely to spend beyond the Groupons value when redeeming it. As prior retailing research has

shown, consumers are good at adjusting their spending to account for a coupons use (Hess and

Gerstner 1993); using a coupon does not necessarily increase the customers overall spending in

the store during the visit (Russell and Petersen 2000). Thus, although we expect a positive effect

of the Groupons face value on the promotions new customer acquisition efficacy, we also

hypothesize that the higher is the Groupons face value, the lower will be the customers

spending beyond this amount on the occasion of Groupon redemption.

Depth of price discount. An important characteristic of the social promotion is the

percentage discount offered off the Groupons face value by the firm, usually referred to as the

depth of the price discount (Alba et al. 1999; Raghubir and Corfman 1999). From the firms

standpoint, this is a key decision variable, with conventional wisdom suggesting that a deeper

discount is not necessarily better: in fact, a greater discount depth if considered by itself

invariably means that the firm will lose money on the promotion (e.g., Porter 2011). However,

when the effects of discount depth on consumers behaviors are considered explicitly, the net

effect could be different.

From the consumers standpoint, prior research has shown that discount depth reduces

price expectations (Kalwani and Kim 1992) and reference prices (Greenleaf 1995), directly

contributing to the offers appeal for the consumer. This effect is even more pronounced for new

customers because their level of risk is higher and is likely to diminish significantly upon

receiving a deeper discount to try the product (Lewis 2006), making them more willing to

purchase the Groupon and engage in the trial. In contrast, existing customers can find deep

discounts to be off-putting (Dholakia 2006). Thus, the deeper the discount, the more will be the


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number of new consumers willing to try the product that they otherwise would not have tried,

thus increasing the promotions efficacy in acquiring new customers for the firm.

Furthermore, receiving a deeper price discount lowers the price perceptions of consumers

regarding the product being purchased (Alba et al. 1999) and unlike face value, this can

encourage more spending, leading to a greater likelihood of spending beyond the Groupons

value (e.g., Hardie 1996). In a nutshell, consumers may feel that because they are getting such a

good deal, it is acceptable to spend more than they normally would. To summarize, this

discussion captures the key trade-off involved in making the Groupon promotion work

effectively for the firm: by itself (that is, without a consideration of its effects on customer

behavior), a deep discount can be viewed as eroding profitability, but by attracting new

customers and getting users of the promotion to spend beyond the Groupons face value, the deep

discount can be contributory to a profitable promotion.

Offer redemption duration. The redemption duration of the offer captures how long the

consumer has to redeem the purchased Groupon before it expires. Offer redemption duration is

another important decision variable for the firm, and in the case of Groupon promotions, the firm

has considerable latitude in choosing the duration. For instance, in our dataset (described in detail

in the next section), the redemption duration ranged from two weeks to one year. Just like

discount depth, redemption duration has different implications depending on whether consumer

behavior is considered or not. By itself, a longer redemption duration is undesirable for a firm

because it may leave outstanding unredeemed Groupons as a potential liability that must be

honored (at least at the value the customer has paid) as and when customers choose to redeem

them (Inman and McAlister 1994; Kile 2007), and also potentially affect full-price sales

adversely during this time (Krishna and Zhang 1999).

However, from the consumers standpoint, a longer duration for redemption is likely to


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act as a risk-mitigating mechanism and increase the promotions attractiveness to new customers.

Furthermore, for firms which have relatively low market shares in the category (which is likely

to be the case for most small and medium-sized firms running Groupon promotions), using a

longer redemption duration can relax redemption pressure and even attract customers who may

otherwise prefer other brands in the market place (Krishna and Zhang 1999). Furthermore, in the

case of a Groupon with a longer redemption duration, more consumers are likely to redeem it at a

time point which is distant from the time of purchase; consequently, the pain of paying for the

Groupon is likely to have diminished (Gourville and Soman 1998), we expect more redeemers to

spend beyond the Groupons value when the offer has a longer duration. Based on this

discussion, our hypotheses are:

Hypothesis 2: (A) The Groupons face value, (B) the depth of the pricediscount, and (C) offer redemption duration will each impact new customeracquisition efficacy for the firmpositively.

Hypothesis 3: (A) The Groupons face value will impact the consumersspending beyond the Groupon valuenegatively, and (B) the depth of the pricediscount, and (C) offer duration will each impact the consumers spendingbeyond the Groupon valuepositively.

Effects of employee satisfaction on repeat-full price purchase

An important purpose of price promotions is to initiate what businesses hope will be

longer-term profitable relationships with new customers (Dholakia 2006). To that end, as

discussed earlier, a key metric to evaluate the promotions success is the degree to which coupon

users return and purchase from the business again at full price. We argue that although the social

promotions characteristics can bring new customers to the business and influence their behavior

on the occasion when the Groupon is used, how they employees view them and treat them will

influence whether longer-term benefits accrue to the business. Prior organizational psychology

research indicates that employee attitudes and behaviors can significantly influence business


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outcomes. For instance, in a longitudinal survey conducted in cooperation with a regional

restaurant chain, Koys (2001) found that employee satisfaction at time period 1 had a significant

effect on customer satisfaction at time period 2. Schneider, White and Paul (1998) similarly

found that employee perceptions of a climate for service lead to subsequent customer

perceptions of higher service quality. In line with these findings, we hypothesize that the degree

to which employees of the business are satisfied with the promotion will positively influence the

longer-term behavior of Groupon users.

This discussion implies that adequate employee preparation may be necessary for new

customer acquisition to translate into relational customers over the longer-term when a social

promotion is run by the business. Such preparation may entail advance notice regarding heavier

burden of work, training, and even appropriate additional compensation for the longer hours and

potentially lower gratuities that employees might earn during the promotion period. Based on this

discussion, our hypothesis is:

Hypothesis 4: The satisfaction of the firms employees with the Grouponpromotion will impact the repeat purchase of Groupon users at full pricepositively.

Effects of promotion profitability on intentions to repeat and recommend

Finally, an important managerial issue for both social promotion sites such as Groupon

and LivingSocial, and for venture capital firms currently making investment decisions in this

industry, lies in the sustainability of the social promotion business model. As explained earlier,

social promotions are extremely popular among small and medium-sized businesses at present,

given their novelty and also because of the extensive press coverage these promotions have

garnered in the past year. However, a more grounded measure of future potential lies in the

assessment made by firms that have run such promotions regarding: (1) whether they will run


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another a social promotional offer again in the future, and (2) whether they will recommend a

social promotion to other small and medium-sized businesses. In our proposed framework, both

these assessments are positioned as consequences of the promotions profitability. Specifically,

we expect that when the firm enjoys a profitable Groupon promotion, it will indicate a greater

willingness to run another such promotion in the future, and also be more amenable to

recommending such promotions to other businesses. This is in line with ample customer

satisfaction research which has established strong linkages between the level of the consumers

satisfaction with the firm and his or her loyalty and recommendation intentions (e.g., Oliver

2010). Thus:

Hypothesis 5: The profitability of the Groupon promotion will impact (A) thefirms intention to run another social promotion in the future, and (B) itswillingness to recommend Groupon promotions to other businessespositively.

Exploratory investigation of the determinants of the number of Groupons sold

A managerial issue of considerable significance is what determines the popularity of a

Groupon promotion among consumers. Groupons for a particular offer are sold during a

relatively short time period, usually a single day, and are different from traditional coupons or

price discounts offered by firms through other channels in at least one important respect: when

buying the Groupon, the customerpurchases the right to obtain the product or service according

to the terms of the offer up front and then has a certain time period in which to redeem this right.

In this sense, a Groupon resembles a gift card more than it does a traditional coupon (Horne

2007). Unlike a coupon, the firm (and the social promotion site) earns the revenue at the time

when the Groupon is sold not when the customer redeems it at the store. The number of

Groupons sold during the promotional period is therefore the crucial determinant of the revenue

earned by the small business. Even more important, the greater the number of Groupons sold


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during the promotion period, the more is the amount of exposure received the firm. As discussed

earlier, this is one of the primary objectives of the firm in running a Groupon promotion, and

consequently most firms would like to sell as many Groupons as possible.

Prior research on price promotions suggests that the firms brand image and its standing

in the local community will play significant positive roles in influencing the number of Groupons

sold (e.g. Chandon et al. 2006). For instance, in an early study on this issue, Reibstein and

Travers (1982) found that stronger brands (as measured by their market shares) enjoyed higher

coupon redemption rates. Similarly, the breadth of appeal of a particular product is also likely to

have a positive impact on number of Groupons sold. However, neither of these factors is under

the direct control of the firm offering the Groupon (at least in the short term). What the firm can

do is choose the characteristics of the Groupon such as its face value, the depth of discount

offered and redemption duration. As such, an important question is whether these decision

variables impact the number of Groupons sold. Given the newness of Groupon promotions and

their differences from traditional coupons, previous research has not shed light on this issue.

Accordingly, we conducted an exploratory analysis of the determinants of the number of

Groupons sold. Specifically, our research question was:

Research Question: Which characteristics of the promotional offer influencethe number of Groupons sold?

Study Method

To test our conceptual model and answer the exploratory research question, we conducted

a survey of firms that ran and completed Groupon promotions between June 2009 and August

2010. The survey was conducted in late August and early September 2010 in multiple stages. In

the first stage, we called four small firms in one large US market that had recently run Groupon

promotions and conducted 45 minutes to one hour long in-depth interviews with their owners to


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gain a qualitative understanding of their experiences with Groupon promotions. This helped us

formulate the specific questions to ask in the survey. It is worth noting that at this stage of the

project, we intended to include social promotions from other sites, in particular, LivingSocial, in

our analysis, to test the proposed conceptual model across a broader set of social promotions sites

rather than just Groupon. However, very quickly we realized that all the other sites were largely

new and did not have enough completed promotions to be able to conduct a meaningful analysis

as we were able to do for completed Groupon promotions. We acknowledge that this broader

investigation is an important research endeavor to accomplish so as to study a larger pool of

businesses across different social promotion sites in the future.

Next, we identified 360 small and medium-sized businesses throughout the United States

and contacted them by telephone and/or email, inviting the owner or marketing manager of each

firm to participate in our study. The firms were identified through a combination of searching on

Groupons recent deals web-pages for various cities, and also conducting key-word searches

using the Google, Bing, and Yahoo search engines to discover other past deals that were not

listed on the Groupon site. Respondents were offered a $10 Starbucks or Wal-Mart gift card for

completing our survey.

In the study, we asked respondents a number of questions regarding their experience with

the Groupon promotion. We asked how effective the Groupon promotion was in bringing new

customers (using a ten-point scale anchored with 1 = not at all effective, and 10 = extremely

effective), what percentage of these customers spent more than the Groupon face value, what

percentage came back to the firm a second time and purchased its products and services at full

price, and how satisfied their employees were with the Groupon promotion (using a ten-point

scale anchored with 1 = not at all satisfied, and 10 = extremely satisfied). We also asked whether

the Groupon promotion was profitable for their business (using a yes/no question), whether they


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would recommend it to other small businesses (using a yes/no question), and whether they would

run another Groupon promotion again in the future (using a yes/no question). Finally, we asked a

number of open-ended questions regarding the promotion. The survey took ten to fifteen minutes

to complete for most respondents.

If we were unable to reach the firms owner or manager the first time, when contacting by

email, we sent one additional reminder email approximately ten days after the first one. When

using the telephone for the survey, we tried two additional times to reach the person. By the time

all attempts at contacting respondents were complete, a total of 150 businesses, spanning 19 U.S.

cities and 13 product categories completed our survey, resulting in a response rate of 41.7% for

the survey. Note that the total includes four firms which had gone out of business since running

the Groupon promotion. Excluding these firms, our response rate is 42.1%.

Our respondent sample covered a number of large US markets. Chicago (16.7% of

sample), Houston (10.7%), San Francisco (10%), Atlanta (8%), Seattle (8%) and Los Angeles

(6%) were the cities with the largest number of study respondents. Considering industry

categories, restaurants (32.7%), educational services2 (14%), salons and spas (12.7%), and

tourism (8%) were the largest product/ service categories represented in the sample.

For each firm, we matched data from the survey to information regarding the promotions

characteristics and performance (date of the promotion, the face value and offer value of the

Groupon, offer redemption duration, and the number of Groupons sold). Based on these values,

we calculated the depth of promotional discount for each promotional offer. These variables were

collected directly from the Groupon website so they are actual observed variables instead of

being self-reported by the survey respondent. All of the analysis described next is based on the

2 Educational services includes businesses offering an educational class or classes of some type such as learning a

particular language, cooking classes, flying lessons, etc.


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sample of 150 businesses that completed our survey.

Results

Procedure

The variables to test the conceptual model of Groupon profitability are a mix of

continuous (face value, price discount depth, redemption duration, employee satisfaction, new

customer acquisition efficacy, spending beyond Groupon face value, and repeat full-price

purchase) and categorical (promotion profitability, repeat promotion, recommendation) variables.

Furthermore, simultaneous estimation of the model paths is necessary to obtain unbiased

estimates. Mplus 6.0 (Muthn and Muthn 2009) is uniquely suited to accommodate these

conditions. Not only does it allow the simultaneous estimation of a path analysis model with a

combination of continuous and categorical variables, but it also provides estimates that are robust

to non-normality.

To test our hypotheses, we estimated a combination of linear and logistic regressions

using Mplus 6.0 simultaneously, employing a maximum likelihood estimator and theta

parameterization3. All continuous variables were standardized for inclusion in the analysis.

Results of research hypotheses tests

Hypothesis 1 was tested via a logistic regression of promotion profitability on its three

predictors. Results revealed that of the three, new customer acquisition efficacy ( = .761,p

What Makes Gpn Promos Profitable

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