Daily deal programs provide a quick influx of cash--but what happens after that? Here's what you need to know.
While daily deals work well for some merchants, for others the positives are outweighed by operational hassles and, more importantly, the costs – and many of those costs only become apparent after the fact.
“If you’re investing your advertising dollars for the long term,” says Toby Scammell, CEO of Womply, “daily deals are often an unsustainable strategy. In fact, for many merchants a daily deal is the equivalent of a payday loan –it’s great to get the cash now, but you definitely regret it later.” (Womply recently launched Loyalty Cloud, a merchant-centric business loyalty program that for a set monthly fee allows businesses to reward customers for repeat purchases, but instead of requiring coupons, discounts are credited directly to the customer’s credit or debit card.)
According to Toby, these are the most common hidden costs of daily deals:
1. Onslaught survival. Some customers rush in immediately to redeem their coupons. Others wait until the days just before the coupon expires. (Only one in five people who buy a deal redeem it in the first month.) Either way, it’s definitely not business as usual. You’ll need to ramp up, and in fact, some daily deal provides push merchants to ramp up by adding phone lines, email addresses, employees, website capacity, and inventory, resulting in higher costs on discounted sales.
2. Existing sales cannibalization. According to Forrester Research only about 30% of daily deal buyers are new customers. Many merchants offer deep discounts hoping to capture lifetime customer value, but the majority of the time the discount goes to current customers instead – many of who would have paid full price.
3. Operations changes. On average it takes two to three minutes to accept and verify a daily deal – and that’s after training staff to input codes, answer questions, and deal with capacity problems, over-booking, and complaints. Daily deal customers are often incremental-plus customers: The daily deal processing steps get added to your normal customer transaction activities and costs.
4. Reputation damage. According to a Harvard Business School study, the total revenue lost for every star a merchant loses on Yelp! Is 8%. On Yelp!, Groupon customers rate merchants almost a full star lower than non-Groupon customers.
5. Existing customer displacement. Daily deals typically stretch – or break – capacity. Repeat customers who cannot be served – at full price – may go elsewhere, possibly for good.
6. Decreased staff income. If your staff is predominately paid through tips, the effective tip if a buyer only tips on the discounted amount is approximately 9%, not the standard 15%. That decrease in income may not show up on your books, but your staff will definitely notice the hit.
Daily deals can still make sense for businesses with high gross margins, no product costs, and low incremental costs. For example, if you run a skydiving company, filling a half-full plane with new daily deal customers generates additional revenue against minor incremental costs.
But if you own, say, a restaurant, a retail store, a florist – any business where product costs make up a sizable percentage of your overall costs – make sure you go into a daily deal program with your eyes open. The discount you offer will not be the only cost you incur.
JEFF HADEN learned much of what he knows about business and technology as he worked his way up in the manufacturing industry. Everything else he picks up from ghostwriting books for some of the smartest leaders he knows in business. @jeff_haden