Daily-Deal Sites: Good Proposition for Business?

2
81

deal_smallADOTAS – A few years ago, the terms “daily deal” and “group couponing” were foreign concepts. Today, these business models are flourishing.

Maybe it’s good timing or maybe it’s because the business model is fairly simple: a business partners with a daily-deal site to sell a specified product or service at an extremely low cost. The site then offers that deal to consumers to purchase on a chosen day, and the site gets a cut of the revenue that the daily offer brings in. Whatever the reason, daily-deal offers are here to stay.

The Key Players

The leader in this market, by far, is Groupon. Groupon launched in November 2008 and has been labeled the “fastest growing company ever” by Forbes magazine. Even Facebook took longer to attain the rate of growth that Groupon is currently experiencing.

Image_1

With over 27.5 million subscribers, Groupon now covers over 160 cities in the U.S. as well as many international cities. In 2010, the company experienced phenomenal growth — so big, in fact, that Google attempted to purchase the business for $6 billion, which the company promptly turned down. Although there were, and continue to be, many other daily-deal sites in the space, none seemed to come close to Groupon’s size and reach.

That changed, however, when competitor LivingSocial offered a $10 for $20 Amazon deal earlier this year. LivingSocial gained a great deal of publicity from the offer, and as a result, saw its subscriber base grow substantially. While it still doesn’t match Groupon in terms of usage, competition is definitely heating up.

What’s in It for Local Businesses?

Whether you’re a large brand or an SMB, these daily-deal sites offer a great way to easily acquire new customers that may not have previously heard of your brand. Other benefits include:

  • Generate new customers; generate cash flow.
  • Gain exposure among new or existing customers.
  • Measurable results.

With every positive, though, comes a negative:

  • Deep discounts may hurt the business: With these daily-deal sites, businesses are required to offer a significant discount in order for these sites to accept the offer.
  • Commission vs. earnings: Sites like Groupon or LivingSocial will take a percentage in commission (usually between 25%-50%), which leaves the business with very little in actual earnings.
  • Deal-Seeker Syndrome: It’s inevitable that any business will attract customers that are “deal seekers,” as opposed to potential repeat customers.
  • Too much, too soon: Because these sites provide a large amount of new customers in a short period of time, businesses that aren’t properly prepared to handle the swell of new customers will be overwhelmed and negative consequences may follow (ex. lack of customer service, scheduling conflicts, overbooking, etc.).

Groupon or LivingSocial?

On the one hand, Groupon has the upper hand by being the market leader. With its high usage, local businesses are apt to reach a large pool of consumers. The site also reaches a desirable customer base —young, educated, higher income and employed. Furthermore, average Groupon users spend an average of 60% above the value of the Groupon purchased, which helps remedy the low profit possibility.

On the other hand, Groupon has a very narrow vision of what offers may be shown on their site. According to The Wall Street Journal, seven out of eight possible deals suggested by merchants are dismissed by Groupon, which can be frustrating. Finally, a recent study found that the renewal rate for Groupon isn’t very strong, which varies quite a bit from Groupon’s claims. In fact, 40% of respondents said they would not run such a promotion again.

LivingSocial, while similar in concept, has its own set of benefits and drawbacks. Although the site has recently increased its usage, it still only receives about half the amount of visits that Groupon gets. The plus side for local businesses, though, is that LivingSocial takes less in commission than Groupon, typically around 25%-30%. The company also just launched targeted deals to users based on life stages and/or interests. These include Escapes (travel), Family Edition (family activities) and Campus Deals (College-oriented).

The answer to which daily-deal site to go with is unique to each business. Businesses looking for a larger audience and more branding visibility may be more compelled to go with Groupon. Those looking to make the most out of the conversion, however, may be more enticed by LivingSocial.

The options don’t stop there, though. As of today, Groupon and LivingSocial are the two of the most popular options. However, because this business model is so simple, keep an eye out for a growing number of competitors in the space.

Daily deals: Here to Stay

Overall, daily-deal sites can be very useful in a brand’s marketing strategy, but businesses must go into the venture prepared for the outcome. Guidelines for success include:

  • Making sure the deal has clear limits on the number that can be purchased by each person, when the deal can be used and, if needed, limiting the number of deals to keep customer service at its best.
  • Alerting staff to the details of the offer, so that they can answer questions when the calls come in — as they undoubtedly will.
  • Tracking the results of the offer so the overall success can be measured.

Finally, the market will undoubtedly continue to transform. Right now, these platforms only offer one deal per city, but that means that each day, deal-a-day sites only pertain to part of their audience. For example – an offer for five yoga sessions misses the mark with all those not interested in yoga.

In the future, though, it’s plausible that as these platforms expand, more daily-deal sites will turn to even greater means of targeting by lifestyle segments, demographics, or interests (much like LivingSocial). For right now, though, businesses should consider the options available, but also stay on top of how these sites are growing and changing into even-more targeted platforms.

2 COMMENTS

  1. Michael, interesting article. One of the real challenges for businesses and consumers is up to 20% of deals go unused. We have setup a secondary market called redealize.com so consumers can buy and sell daily deals. Our site is live in Australia and New Zealand and launches in the US and UK in March.

  2. Michael, you’ve made some excellent points in this piece. These deal sites need to work on helping businesses set realistic expectations to reduce customer backlash.
    It’s not just the cost of commission paid to the deal sites, or the ability to set a deal at an appropriate threshold that need to be considered. There is also the follow up after the deal goes live. If customers are expecting to redeem their deals soon after and are told they have to wait two months, businesses will suffer the consequences. Some of them already have.

LEAVE A REPLY

Please enter your comment!
Please enter your name here