A product strategy for daily deal campaigns utilizing demand expansion and consumer leakage

Daily deal campaigns help local service merchants expand their market demand, which also result in consumer leakage concerns. This paper investigates how to exercise product strategies, i.e., price and quality decisions, for daily deal campaigns through a systematic exploration of demand expansion and consumer leakage. We consider a local service merchant who currently sells a product in his or her local market and who might contract with a platform to introduce daily deal campaigns. We document how the demand expansion and consumer leakage effects jointly affect a merchant’s product strategy. Particularly, we find it not always profitable to introduce daily deal campaigns amid relatively low levels of the demand expansion effect. Moreover, a merchant should adopt the product strategy of overlooking (inhibiting) consumer leakage amid relatively low (high) levels of the consumer leakage effect. In addition, we discuss the strategic role of a platform’s agency fees on leveraging a merchant’s product strategy. Based on this, we take a platform’s perspective to examine how to establish optimal agency fees amid various market conditions. Our results provide useful insights for firms in the daily deal business on how to carry out more intelligent marketing strategies. Our conclusions also cater to other businesses, wherein offline merchants could adopt online platforms to expand their demand while addressing the issue of consumer leakage.