July 6th, 2011 : posted in Commentary by M Bryant
Daily deals are certainly a hot topic at the moment, particularly since the announced IPOs of both Groupon and Livingsocial.
There’s a lot of press about daily deals not being a fruitful or sustainable strategy for merchants, though mostly it’s very one-sided and ignorant of a very basic rule in marketing: not every channel suits every merchant.
Does it suit your business?
Before preparing a deal and negotiating terms with an operator, you need to ask yourself this question. Many businesses just aren’t suited to daily deals: businesses, for example, that -
- have low margins
- have a low customer-return rate (or have limited way of tracking customer returns)
- are not equipped to service a significant increase in sales/business
- have high costs or time-investments when providing their service.
If any of the above sounds like your business, a group buying offer might not be the best channel for growth: focus on other channels for now and work out your customer acquisition cost so that you can compare the group buying cost.
Preparing for a deal
I recently spoke with a local restaurant merchant who ran a group buying offer as a kind of “loan“. He was quite fixated on the fact that the operator would pay him a significant portion of the total revenue within 48 hrs, with the rest paid after the expiration of the vouchers.
He had failed to equate, however, how much he was going to lose by fulfilling the vouchers – in fact, he didn’t know how much each of his dishes cost him, meaning he had no way of creating a package that promoted dishes with higher margins, for example.
It pays to be prepared for a deal. Here are some things worth asking yourself:
- What is your average customer-return rate? Is it measurable? Do you have a process in place to compare general customers against daily deals customers?
- How are you going to capture group buying customers to ensure they are return customers? Do you have social media properties (Facebook, Twitter, etc) or a mailing list?
- How much does a customer cost you through other channels (TV, print, PPC, business portals)?
- If you half the typical customer-return rate and assume this is going to be the return rate for group buying customers (for argument’s sake), is running a daily deal still a cheaper marketing channel than acquiring customers through other mediums?
Lastly, a very important question: do you need to?
Don’t ‘get in on it‘ because it’s the flavour of the month and all your competitors are.
You should be running a daily deal if you are not going to be reliant on the channel and have other marketing efforts in place.
If you need a cash injection, like the merchant above, you might be in trouble – it’s not going to be any cheaper than a bank loan: you’ll have less time to pay it off and it may just cripple you.
Packaging a deal
With a confident salesman on the phone it’s easy to get overwhelmed and offer a significant discount that you might not be able to afford.
It’s worth knowing that the discounts are becoming lower in this space – the 80-90% offers got the model moving, but it’s not sustainable – the average discount is now more like 50-60% in Australia (this figure is based on professional research that I have obtained).
Once you’ve worked out what you can afford to offer, look at identifying particular products or service packages that you have decent margins on (a set menu at a restaurant, for example, or a facial and massage package).
The total voucher value should always be lower than the average customer spend. That way there is an opportunity for you to up-sell the customer with additional products/services. There’s no point offering $15 value at a cafe if the customer will never pay more than $5 on any one return visit.
Negotiating the revenue split
The salesperson you deal with is going to start at a 50% revenue split, as per the industry standard that Groupon set when they launched.
They will go as low as 25% or less.
They require fresh deals every day of the year: they need you. Be firm and don’t be afraid to pass up the deal: it’s likely you’ll get a call from another operator in the near future, or another friendly call from the same salesperson.
Some operators will pass on the user data if you ask (names, emails, etc). I’ve heard discussion of this in the US, but cannot, unfortunately, offer a solid Australian example of this. It is worth asking, however, as capturing customer information gives you greater control over getting customers to return.
Always place a cap on the deal.
The salesperson will advise you not to, or else place a ridiculously-high cap, but again – be firm. There’s not point over-extending yourself in your first group buying foray. If one of the major sites won’t run your deal with a low cap, try out one of the independent sites that have smaller databases – you won’t get the same business exposure (Cudo, for example, offer some TV exposure), but at least you can dip your toes.
After the deal
Offer member cards; give them a business card (or send them a mail) with your Twitter, Facebook, etc; ask them to join your database or collect their business cards. Do whatever you can to begin dialogue with your customers after their visit.
Track everything possible.
Try and work out:
- how much each deal customer spends
- the customer return rate from daily deals
- whether the exposure has impacted on the general sales/interest volume.
We’d love to hear back from any Australia merchants that have recently run deals – particularly if they’ve found this article useful. If you have any recommendations or comments about what we’ve shared here, please get in touch!