Daily Deal Marketing: Effective Business Marketing, or Lopsided Deal?

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by on November 5, 2011

Are daily deal coupons effective business marketing, or lopsided sales eroding your profitability? Daily deal marketing is popular with many companies that want to grow. The wildly successful stock offering of Groupon (NASDAQ: GPRN) brings even more visibility to the trend, since they are the leader in marketing deals at massively discounted prices, in limited quantities. Their whimsically worded deals range from cosmetic surgery to spa packages to dining to tourist tickets. Other daily deal marketing competitors abound, websites like Living Social and Google Offers, and a plethora of other websites.

The opportunity has magnetic appeal to many local business owners because they attract new customers, but not all are pleased with their results. Besides, your local business may already use other ways of attracting new customers, or encouraging repeat sales: printed coupons, email coupons, or a free consultation or e-book on your website. The special allure of daily deal websites, however, is vast exposure to prospects that are not visiting your website or walking into your business.

The biggest mistake that small businesses make is not negotiating favorable terms, ones that fit their margins and budget. Daily deal marketing does not suit all businesses, so you should identify your costs and then determine what terms are needed to yield a return, before negotiations start.

Too many merchants negotiate poorly due to lack of experience, according to Arash Pirzad-Allaei of Crowd Cut, a Groupon competitor:

Most merchants participating in daily deals do not have much deal experience. This leaves them at a disadvantage to the daily deal sites when it comes to negotiating the terms of running a daily deal, and can lead to stories like “Groupon Was ‘The Single Worst Decision I Have Ever Made As A Business Owner” (also on TechCrunch). Interestingly, I find that most of the daily deal horror stories come from merchants that

a) negotiate terrible deal structure/terms
b) do not accurately track redemption or customer spend and
c) do not clearly understand the true economics of running a daily deal.

A recent report by Rice University found that more than half of businesses earned money (56%) using daily deal promotions, the remaining lost money (27%) or broke even (18%).

The cost structure of a deal is also discussed by Pirzad-Allaei,

This particular post references a story about a coffee shop that signed a 50/50 deal to sell $13 value vouchers (an atrocious 2.5-times their average ticket) for $6 and claimed to have lost $10,000 after selling 890 vouchers.

But, let’s take a look at the real economics:
Total Voucher Value = (890 vouchers) X $13 = $11,570.00
Total Food Cost = $11,570 X (85% redemption rate) X (30% food cost) = $2,950.35
Income From Groupon = (890 vouchers) X ($6 voucher price) X (50% split) = $2,670.00
Cost of Deal After Food Cost = ($2,950.35 food cost) – ($2,670.00 income) = $280.35

When getting started, investigate the terms of multiple dealers. You may want to use only those offering a 70/30 per cent revenue split (70% for your business), rather than a 50/50 split. To create a winning plan, consider what quantity to offer, and develop a process that will track redemptions and collect contact information, since the best way to earn a profit is making upsell offers and/or bringing in repeat sales. You might also consider ways to structure your deal so that it minimizes bargain hunters, or other unprofitable buyers.

Finally, consider how the offer will be viewed by a new customer: Will you require a reservation or expiration date or other fine print terms? What is its perceived value, and how will it measure up to reality when all buyers contact your business around the same time?

The onus is on your business to plan and negotiate daily deal marketing terms that make it an effective business marketing program, one that produces new satisfied customers, some who become repeat customers.

Have you tried daily deal marketing? Why or why not? If so, what did you learn from your experience ?

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