Make Daily Deal Sites Pay Off: 4 Steps
Don't mention Groupon to Rachel Brown of the Need a Cake bakery in the U.K.—she's heard quite enough after 8,500 people took the 75 percent off deal that she offered on a dozen cupcakes and losing thousands of dollars in the process. Brown had only expected a few hundred orders. The discount made each sale a net $4.50 loss. Plus, Brown had to pay close to $19,000 for extra staff and shipping charges for the 102,000 cupcakes.
There have been other big daily deal fiasco stories. But it is possible to make a daily deal or flash promotion work for you—if you take the following four steps.
1. Know your finances and metrics cold
It's necessary to be a true master of cost accounting. This may sound fundamental because it is, but getting tripped up is easy. Be hyper aware of the difference between the actual money you're out of pocket—cost of goods and fulfillment expenses—and the opportunity cost of getting only a portion of your usual full product price.
Also, do your best to track who uses the coupons and if they ever come in again. That's a tall order for many businesses, but the better your customer relationship management (CRM) system, the better you can see if there is extended value to the new customers, which helps determine whether any marketing campaign was worth doing. (Rule of thumb: If the lifetime profit from a customer exceeds the cost of attracting the person through a given promotion, then the campaign was a money-losing proposition.)
2. Expect to negotiate with the deal site
Many entrepreneurs mistakenly assume that the daily deal sites have a take-it-or-leave-it approach to business. Salespeople will likely try to convince you that handing over half of the money that actually comes in is standard operating procedure. And it is—if you're the salesperson working on commission.
But there's a lot of competition among the deal sites and none of them can afford to write off potential business. Talk to enough business owners that have used the sites and you'll hear of paying 25 percent or 30 percent rather than half of the money from the deal buyers. Remember, the deal site might well need you more than you need it.
Also consider other factors that you may have to negotiate. For example, a restaurant could welcome discounted business only if it comes in Monday through Wednesday because on a weekend it would displace customers paying full price. You might also want to limit the number of deals you sell (like Brown clearly wishes she had done).
If you can't get the conditions that makes a deal work for you, don't do the promotion. You can also offer something in return to get what you want. For example, maybe you agree not to use another daily deal site for six months or a year.
3. Plan a winning promotion
One big problem with daily deal promotions is that you get a lot of opportunistic consumers whom you may never see again. Your business is not a charitable venture, so stack the deck in your favor. Instead of offering an unrestricted discount, give one on some sort of package deal with something that will have appeal and a set of associated high-margin add-ons. The additional elements boost margins enough that you can give consumers a significant price break and still make some money and avoid the "we lose money on each product but make it up in volume" nightmare scenario. Also, be targeted in what you're trying to achieve. Maybe you run a promotion to get traffic into a new location or get word of mouth for a product line you're testing. Focus will cut down the number of potential customers, certainly, but it will help make things work for you.
4. Get the customers back in
The biggest sense of futility in a daily deal promotion comes if you go to the expense and effort of bringing people in only to see them never return. So be sure that you don't write them off. You're dealing with people who are motivated by a deal, so consider offering a follow-up one—nowhere near as steep, but something that might bring a portion of them back. Maybe it's a second coupon or a frequent customer program that kicks in with the second visit. Most won't take you up on it, but some will, which increases the lifetime average value of the group and helps make the promotion make better fiscal sense.
Take care and plan a successful campaign and you may find that daily deals can become marketing tool that can help improve business.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.