Groupon, Living Social, Google Offers, and many other daily deal sites have popped up recently, with the concept being portrayed as the holy grail for small businesses looking for a simple way to increase revenue and traffic. Although the concept is simple on the surface – offer a paid coupon for access to discounted services/goods at your company – the daily deal model has been a lightning rod for backlash from merchants and consumers alike due to confusion on the ends of the merchants and customers.
One of the main principles leading business owners to offer steeply discounted deals is the belief that by luring new customers into your store, they will be more likely to become repeat customers down the road. In reality, however, many businesses who offer daily deals have taken financial losses significant enough to the level of companies being on the verge of bankruptcy. Additionally, failing to be able to keep up with demand, dealing with customers who are not the ideal demographic of the company, and many other aspects, also are significant reasons for business to stop and pause before jumping aboard this massive trend.
Before signing with a daily deal website there are a few points for business owners to consider before taking the plunge. The first aspect being that offering a daily deal is advertising and will cost your company money. Unlike traditional ads where you pay up front for the coverage, daily deals work by having a merchant agree to take a loss on sales. As oftentimes, the coupons can be redeemed over a large window, it becomes easy for companies to lose track of the outstanding losses. Additionally, since in many cases deals are not limited to first time customers, the amount of new customers learning about your company will not always equal the amount of vouchers sold.
This reverse methodology requires planning, and a bit of math to ensure your campaign is fully effective. The initial crucial considerations are: do you have sufficient capacity to handle a surge of business, do you believe offering a huge discount will be beneficial for your brand; and also, the math pertaining to the offers is crucial to evaluating whether this form of campaign is ideal for your business. Although, at this point, signing with Groupon, Living Social, Google Offers, or any other group buying website sounds intimidating, for some businesses it can be a great way to boost revenue, while other companies might have less success.
In terms of the math, the key calculations to keep in mind are: the incremental cost of sales, the amount of the average sale per customer (emphasis on whether the amount spent is greater than the voucher value), redemption percentage, percentage of voucher users who are already customers, how many coupons are allowed per individual (higher caps per person means less exposure overall), and the percentage of voucher users who will turn into regular customers.
Additionally, the two crucial figures commonly overlooked by merchants are the value of being featured on the deal website even if customers do not purchase vouchers, and the average to advertise to customers via traditional forms of advertising.
Overall, the success of these types of campaigns lies heavily in the variables pertaining to the merchant, which is why such offers have led to mixed reactions from merchants who have had mixed experiences. By being able to adjust the formula for making money, group deal websites provide significant room for merchants to rake in profits or take losses. Additionally, the steep commission from the deal sites (the common benchmarked figure is 30% per sale) is an aspect which must be factored into any projections.
Unfortunately due to uniqueness of all companies, it is impractical for to try creating a generic formula for evaluating the merits of signing with a deal website, however this thread and this on Quora provides valuable insights into the debate.