Deal or No Deal - That Is the Question

Advertising has undergone its evolutionary equivalent of punctuated equilibrium with the rapid shift from print classified ads to so-called social daily deal sites. Is coupon-based advertising the new normal? Maybe, but it is still early to say. There are some serious downside risks to the coupon approach to marketing. 

First, some stats that may surprise you:

  • There are nearly 500 daily deal sites, according to online consolidator yipit
  • 23 million Americans, or 10% of the adult population, have made a purchase from these sites in the past year, according to a survey conducted by AICPA
  • More than half of Internet users subscribe to at least two daily deal e-mails, according to Yahoo!, and 61% of those users said they read all the messages. 
  • The newest trend in the coupon space appears to be deal sites for small businesses, which is really just an extension of traditional consortium buying

Anti-Social Deals
First of all, I disagree that what Groupon, LivingSocial, and the vast universe of deal sites are promoting are actually “social”. This is not simply a matter of semantics but a worthwhile question in light of how information is ideally shared and promoted (in other words: advertised).

In the last decade, we have witnessed a shift from push technologies (tv, traditional advertising, magazines, etc.) to pull technologies (sharing sites like Facebook and niche online interest groups). Deal sites are still very much positioned to push us information, but they should be aspiring to help us find what we are looking for based on our needs not their supply. In other words, rather than telling people when and where we want to eat, they should be asking for inputs to direct us to an ideal outcome, and price isn’t the only consideration that most of us have in mind. 

The Downside Risk of Daily Deals
For those of you who do not know, this is how online deals tend to work: Groupon or other deal purveyor sells online coupons for around half the value of the product (food, hair salon visit, yoga class, etc.) and then takes an additional 50% of the discounted sales, leaving the restaurant/salon/studio with around 25% the original value of the sale. There is no cap on how many coupons are sold to help protect the business control the cost of participation. 

Not all deals are structured this way. PeopleDeals, for example, charges frequent users a subscription fee of $80 a month or $649 a year that lets them run a maximum of 10 deals simultaneously (they are charged more for each additional deal above 10).

Daily deals can be a decent marketing and advertising play for some businesses, but not for all. Some restaurant owners have argued that the discount doesn’t bring any more money to the bottom line. As many small business owners know, discounting can also hurt their pricing model in the long run as it shifts customers’ expectations of price and downgrades the value of the product or service in their minds. It’s a good rule of thumb to avoid offering bargains since customers get used to the idea of lower prices. 

For high-end businesses, social deals can undermine their value proposition. Consider the case of a serenely run yoga studio that has a committed following offering a deal that brings many new customers through the door. If the crowds aren’t likely to stay past the expiration date on the coupon, then it may not be worth the crowding and discomfort the studio is causing to its longer-term customers.

The Upside of Daily Deals
It’s fair to say that daily deals aren’t for everyone, but they can help some small businesses. Deals can be cheaper than advertising for new or slow-to-grow businesses. The trick is to treat deal promotion like an advertising campaign: make sure that you have the resources in place to ensure that coupon-bearers have a great experience, try to entice them to come back (tell them about upcoming specials), and pursue secondary benefits like getting them to like your business on Facebook or say good things about you on Yelp.

For some, deal sites offer a level of publicity that they otherwise couldn’t afford. Daily deals are equivalent to a massive marketing campaign, and the upside is that you only pay when the message is received - and customers come through your door.

If you’re thinking about engaging a daily deal purveyor, weigh the costs against the going rate for public relations and advertising in your sector. Keep in mind that deal sites are not a marketing and advertising panacea. Small businesses must consider the potential cost to their brand and determine if they can cover at least one month of payroll and other costs before they enter into an agreement. 

Read on: 
A cautionary Groupon tale from Posies Bakery and Cafe in Portland
Facebook Deals promises social activities