Daily deals have become wildly popular in recent years with consumers, and it’s no wonder. After all, who doesn’t love getting something at a 40-50% discount? For a small business, running a daily deal such as through Groupon or LivingSocial could help bring in new customers. So should your business run a daily deal?
The short answer to that question is: it depends. For some businesses, a daily deal may in fact lead to new customers who in turn become loyal customers. On the other hand, there have been many businesses that have lost tremendous amounts of money because of offering a daily deal and went out of business afterwards. The truth is, there are many factors that a business should consider before diving in and offering a daily deal. The first thing that a business needs to learn is how daily deals work and how the daily deal-merchant agreement is structured.
How Daily Deals Work
Groupon is arguably the most popular daily deal company in the U.S., so we will use it as our example. Groupon, like most other daily deal sites, recommends that a business offers its products or services at a 40-60% discount, with 50% off deals being the most common. To run a deal, it does not cost the business anything. Groupon will feature the deal and market it to those in its database at no cost. However, Groupon’s take of the deal is half. So in other words, let’s say a restaurant is running a daily deal and offering a $50 voucher for $25. Groupon keeps half of everything that it takes in, or $12.50 for each $25 voucher sold. So now the restaurant is essentially offering its food at a 75% discount, receiving only $12.50 for what it normally charges $50 for. But because consumers purchase the vouchers directly from Groupon, the daily deal giant receives its portion immediately. And here’s where it gets even trickier for a business running a deal.
Groupon does not send out a check to the business immediately after the deal runs and the vouchers are sold. Businesses receive the funds owed to them in three separate payments. The first payment is for 33% of their portion, sent out 7-10 days after the deal has run. The second payment is for another 33% of their portion, sent out after one month. The final 34% of what is owed to the business is sent out two months after the deal has run.
So to use the above-mentioned example, a restaurant that is selling a $50 voucher for $25 on Groupon receives only $12.50 per voucher sold. After one week, they receive $4.13, after one month they receive another $4.13, and after two months they receive the final $4.25. Meanwhile, the business has had to front the entire cost of its products and services, including employee wages. There aren’t too many businesses that can make money, let alone survive, by offering its product or service at a 75% discount. But it certainly hurts it even more when their revenues are broken into payments.
Other Factors to Consider
Groupon and the other daily deal sites preach that by running a deal, a business will be able to attract many new customers and boost business almost instantly. That may be true, but only to a certain extent. A recent Raymond James survey of roughly 115 merchants who ran a daily deal during the fall of 2012 found that 32% lost money and 39% said that they were not likely to run another deal over the next couple of years. Businesses that run deals hope that daily deal customers will become regular, loyal customers paying regular prices. But statistics show that this is not always the case. Many daily deal customers are bargain-hunters and they will always be looking for the next best deal.
Besides these issues and concerns, a business also needs to consider other potential problems before running a daily deal. For example, a business cannot always control when daily deal customers redeem their vouchers. So this may cause a surge in customers at inconvenient times and you and your staff may not be prepared to handle the influx. A business also needs to consider what the sudden increase in customers may do to the morale of its employees. A large influx of customers may demand a lot out of employees, who in turn will have to work harder and perhaps longer to try to keep up. If the business is a restaurant, it has also been noticed that many daily deal customers will base their tips on their final bill, after their voucher has been applied to the bill. And interestingly, daily deal customers tend to view businesses through a more critical eye. Statistics show that a business’ Yelp ratings are actually lower after running a daily deal.
So Should Your Business Run a Daily Deal?
To be fair, not all companies lose money or suffer negatively after running a daily deal. Some have reported a tremendous boost in business. But there are several factors that every business should take into consideration before offering a deal. Some businesses are just not well-suited for daily deals, such as restaurants, which incidentally are the most commonly sold deals. Restaurants have high marginal costs, low fixed costs, and are generally unable to schedule when daily deal customers redeem their vouchers. But there are other businesses that can do well with daily deals. Service-based businesses tend to be better suited for daily deals because they have low marginal costs, high fixed costs, and they generally have the ability to schedule customers. Some businesses that would fit into this category are spas, salons, health and fitness centers, or businesses that offer classes such as yoga or cooking. The cost to add new clients might be next to nothing, but the potential to add new regular customers might be high.
If your business does decide to run a Groupon or other daily deal, it would be a good idea to cap the deal so that you do not end up selling too many vouchers and negatively impact your businesses or employees. For certain service-based businesses, such as those in health and beauty or those that offer classes of some sort, Groupon does offer Groupon Scheduler. This feature allows the business to have control over when customers can book appointments, and the customer can schedule their appointment directly from Groupon’s site. However, this feature is not available for restaurants or hotels.
It’s difficult and even expensive for small businesses to attract new customers. Running a daily deal may seem like an easy answer. However, each business needs to carefully weigh all of the factors involved in running a daily deal, both the positives and the negatives. By doing so, you can be confident that your decision to either offer a deal or not will be one that is in the best interests of your business, your employees, and you.