An article written by CNBC goes into detail on how Groupon and other daily deal sites are not beneficial for businesses. The return on investment varies by business, but in the majority of cases, merchants do struggle to run a profitable campaign. However, I can see both the pros and cons for using such a marketing service.
Let’s take a look at how the funds are dispersed. Let’s use the following as a mock service business in the health and wellness industry.
Kyle’s Yoga House
Daily Deal: 10 yoga classes for $50 (usually $100) *Note: 50% minimum discount. I’ve seen them as high as 85% off*
Cost breakdown: $25 to Groupon and $25 to Kyle’s Yoga House (plus a 2.5% credit card processing fee to Kyle’s Yoga House) *Note savvy merchants will negotiate this fee be paid by the daily deal site*
Profit: Typically, the Yoga house makes $10 per class. With the Groupon promotion, the Yoga house now receives between $2.25 and $2.50 per class*.
*Now you see why they depend on repeat customers.
There are still a few pro’s that come along with running such a promotion:
- New business? Perfect! Daily deal site land in thousands of e-mails every day. The exposure received by running a promotion can sometimes bring awareness to an otherwise unknown business.
- Repeat customers! Technically speaking, merchants take the risk that their initial deal will lose them money. This is because they rely on the repeat business from customers that continue to spend money at their business well after using their coupon. If merchants can cultivate a lasting relationship with these customers, they may be in luck.
- Sometimes you can actually make money! Service business (spas, etc) tend to run on lower margins than say, restaurants. The odds of running a successful campaign vary slightly depending on your industry.
- Too much product? You can move inventory! A deal is a quick way to liquidate inventory that may be obsolete or simply gathering dust on the shelf.
- It’s difficult to make a buck. As you read in my Yoga house example, there’s not much money to be pocketed once all the fees are split up.
- It attracts the wrong type of customer. Daily deal customers are a breed of their own. The majority will utilize the deal and then you’ll never see them again. Especially with the increase in popularity among these sites, there’s usually another similar deal to be found by simply scrolling down the page.
- It doesn’t help your brand. Once you launch a 50% discount, many customers place a lower value on your product or service. Would a quality and successful business run a daily deal? (Perhaps, but that’s the argument). Customers become reluctant to pay full price for what you’re offering. Would you pay $60 for a massage from a spa that just ran a special for $25 massages? What if there were seven other $25 massage deals on the same site? This also detours customers who would or currently do pay full price for your product or service.
What can businesses do?
- Try to grow organically. Social media and word of mouth are the two most popular and low cost means of advertising.
- Run your own deal. Run a $5 or $10 off on your social media and website. You don’t always need to run a 50%-75% off promotion to attract customers.
- Negotiate, negotiate, negotiate! Be sure to do the math and incorporate many variables. Know your cost of goods and then compare these numbers to your potential profit after running a promotion. Try to structure the deal in your favor through negotiating the percentage discount, number of coupons, length of campaign, and those annoying credit card processing charges!
- Partner up! Professional Fitness Consulting provides the partners in our Grand Rapids wellness network client referrals at a fraction of the cost than what daily deal sites charge. Work together with other business and leverage social media power to help grow one another’s business.
What can customers do?
- Personally, I use a unique technique when I see a promotion that interests me on a daily deal site. I’ll call the merchant before I purchase the deal and ask if they’ll honor the 50% off price. It’s a win-win. I receive 50% off and the merchant receives 50% rather than 20-25%. I don’t pay any extra and the merchant doesn’t need to pay the daily deal site 50% of their revenue. It’s my way to bypass the middle man and help to support local businesses!
Hopefully this article provided you with some new knowledge on how daily deal site function as well as some of the pros and cons for using this promotional strategy.