Daily Deal sites offer merchants quick access to cash with the potential to attract new customers. On the surface the offer seems too good to turn down, as combining marketing with convenient working capital is an ideal situation for the typical small business. Unfortunately, many find that the end result is less than ideal.
A typical Daily Deal offer is fairly straight forward. A merchant agrees the site selling number of coupons which provide a deep discount, 50% or more, for goods and services. Usually the deal site will keep one half of the proceeds from the sales with the merchant receiving the other half.
Negative Profit Margin
As many businesses find it very difficult to absorb the costs of doing this type of promotion. If your product or service does not have a large profit margin, you can find that each of these transactions comes at a significant loss. If there are no additional sales made to the customer, it is hard to justify the deep discount, as the business is unable to recoup the loss from the deeply discounted coupon. The simplest solution to overcome these cash shortfalls is often engaging in another Daily Deal offering, continuing the cycle.
Low Customer Retention
The goal of doing a daily deal coupon is to influence first time customers to try the business’ product or service. Many businesses also do not see the repeat business they anticipated, as a large portion of the Daily Deal customer base simply moves from discount to discount, rarely returning without another coupon. Many small businesses note there is an uptick in business when the coupon is first issued and another when the coupon nears expiration. Otherwise, volume remains consistent.
Loss of Value
Existing customers are put off to find that other customers are paying significantly less, and are less likely to continue to feel paying the established price is a good value. While Daily Deal site users tend to drive activity and increase discussion of a business, a recent study found that they are more likely to leave a public review, and on average, will rate a business 10% lower than a traditional customer. As a result, many businesses see their rating scores on sites like Yelp! drop noticeably.
Decrease Product or Service Quality
Businesses have found that more coupons are sold than they can realistically manage. Unless the deal is properly structured, businesses have often found that the number of sales exceeds their capacity. In one instance a flight school had to end sales on a deal early because 2,600 lessons had been sold and their capacity for all lessons over the prescribed time frame was only 2,000. Another merchant found themselves forced to bake 102,000 cupcakes, at a loss of $3 per dozen, as a result of a “successful” offering.
In service industries, there can also be increase in job dissatisfaction among employees, particularly those whose income relies on tips. Customers will frequently base tips not on what the cost of the food would have been without the discount, but on what they actually paid. In many cases, customers used only the value of the coupon with, ordering no extra additions, and left no tips. If they did, they were well below what is appropriate for the service provided. In essence, employees find themselves also forced to offer their labor at a discount.
The important thing for merchants to consider before accepting an offer from a Daily Deal site is to view the whole picture and determine if it fits with the image, business model, and financial reality of the business. If the sales are going to come at a loss, the question becomes, can the business absorb that loss? Do the benefits outweigh the cost? While the information and analysis provided by the site may be impressive, a merchant is strongly advised to do their own research, in regards particularly to how similar businesses have fared. While there is a place for these kinds of offerings, they are not something to be taken lightly.