Forbes magazine called Groupon the fastest-growing company in history. In anticipation of its initial public offering, the Wall Street Journal reported that Groupon could try to raise $1 billion, putting its valuation at around $20 billion.
Groupon’s skyrocketing growth has led to a number of copycat daily deal websites that all promise a swarm of new customers to any business willing to use their services. This blog post is not intended to be negative towards either Groupon or Living Social – in fact, they are both good businesses and can deliver positive results for local businesses that strategically approach this form of advertising.
Before your business dives into the world of daily deals, it’s important to consider the pros and cons of this type of marketing.
A Few of the Pros
Expanding to a new city? Introducing a product line? You’ll be hard-pressed to find a quicker way to make a large splash than a daily deal. If you’re running a daily deal to introduce new customers to your product or service, make sure you have the capabilities to handle a large influx of new business. You should also give customers an incentive to come back and do business with you again.
Moving slower moving merchandise
Rather than take a loss on merchandise that didn’t sell as well as you thought it would or that you could not promote effectively with traditional advertising, consider a daily deal to clear it from your shelves. Whether you’re selling tickets to a less known concert or a service that you’ve heavily invested in, the broad reach and steep discounts of daily deals could help you recoup some of your loss by moving product off your shelves.
For low or fixed-cost services or to utilize excess capacity, daily deals can be a great way to get more customers in the door and boost revenue. If you can still make a profit even when you’re making less than 25 percent of what you’d usually make from a customer, a daily deal may be right for you.
A Few of the Cons
Attracting the wrong customers
Daily deals hold the most appeal for “bargain hunters” who might not be in your typical target audience. Often, these customers are not likely to spend extra money at your establishment or turn into loyal repeat customers. If your deal only attracts bargain hunters, you might lose money in the long run, especially if it negatively impacts services or product availability for your regular non-deal prone customer. Think carefully about your offer and how you can best convert these “bargain hunters” into long-term “brand fans” once they enter your store.
Hurting your brand
While daily deals can generate plenty of quick interest, they can also do long-term damage to your brand. After customers get a great deal on your product, they might hesitate to pay full price for it down the road. Also, if the influx of new business is more than your company can handle, the poor customer service you’ll provide can leave a bad taste in customers’ mouths. Take care of this problem by knowing your limitations and capping the deal at a number you can comfortably handle. You never get a second chance to make a first impression.
To post a deal, you’ll have to offer a discount, sometimes as much as 50 percent off or more, plus split some of the revenue with the daily deal provider. This often leaves little room for profit. And while many business owners believe they’ll make up for the loss in repeat sales, they’re often disappointed in the percentage of daily deal customers who return. Also take into consideration the number of loyal repeat customers who would have paid full price for your product today, but instead snatched up an unbelievable deal. Do the math and carefully consider the offer you’ll provide, the quantity and how the deal might impact existing customers. Consider offering a deal with greater upsell potential. For instance, instead of offering $20 worth of merchandise for $10, consider offering a discount on one product or service that customers are likely to purchase in combination with other coordinating products/services at full price.
Before you sign a contract with a daily deal site, make sure you understand how the program will work and put together clear goals for the promotion. In the right situations, a daily deal might be exactly what your business needs but it should be considered as part of your overall local marketing strategy. And if you do decide a daily deal is right for you and test the waters, do your best to track and measure the campaigns success so you can improve your results next time.
Have you participated in a daily deal or are you planning to? Please feel free to share your experiences.