When the ‘Daily Deal’ Isn’t a Good Deal

Why is everything half price now?  To answer this question, let’s take a quick look at the rise of the ‘daily deal.’

Groupon, probably the most prominent and perhaps even eponymous name in the daily deals market, entered the scene in 2008, followed closely on its heels by Living Social and most recently by Google Offers. And the business model makes perfect sense. Businesses pay nothing up front to participate in their deals; they negotiate the number of customers required to purchase the deal and the percentage that the daily deal company will take of the sales. They lure potential buyers through witty and compelling descriptions, hoping that by purchasing the deal they’ll build and grow a loyal customer base. They tout this is a risk-free alternative to traditional advertising, and it can be especially enticing for small businesses, many of which have had to slash advertising budgets in a tight economy or never had an advertising budget to begin with.

Seems like a win-win, right?

Not exactly.  Here’s the rub:

The daily deal space has seen mixed success lately (read: Groupon’s nearly $10 million loss in the fourth quarter) for a number of reasons.  First, the actual customers aren’t the millions of people who receive email offers, but the businesses — often small ones with little margin for error — that agree to partner with these companies on deals.  Oftentimes, after a business — especially a small business — moves forward with a deal, it is inundated more customers than it can handle, negatively affecting the level of customer service it is able to provide and ultimately damaging its brand for future potential customers.  And, perhaps most importantly, this new customer base often isn’t the loyal one these businesses are pining for.

Another problem: many small businesses either don’t know or grossly misinterpret their limits.  One U.K.-based cupcake company almost had to shut its doors after it was forced to make 102,000 cupcakes — at a loss — when too many people bought a reduced-price offer through Groupon.  Basically, your potential losses can increase with every daily deal customer who walks through the door, and that can put the very existence of your business at risk.

Advocates of the daily deal will tell you that it’s a short-term loss for a business in exchange for the long-term gain of repeat customers.  Opponents will tell you that the cost-benefit analysis doesn’t balance out and that Groupon and others are poised for collapse, along with the daily deal itself.

And there’s good reason to believe the opponents are on to something:

Businesses are starting to figure out that, while they may get cash up-front by participating in a daily deal, they pay for it through deep discounts over time.  So they’re starting to leverage their own, already-loyal customer base — cutting out the middle man, slashing prices, and offering their own deals directly, a concept call disintermediation.  Take a look at JC Penney’s new ad campaign, “Best Prices,” for proof.  Forget double-coupon Mondays, half-price Wednesdays, 30% off holidays.  Their “3 kinds of pricing” strategy promises low everyday prices and month-long values, fair and square.

Further, these daily deal companies typically reject nine out of the 10 proposals that come their way because they don’t think it will pan out, leaving many small businesses to fend for themselves in a daily deal-focused world.

The daily deal may continue to be a viable option for some, but its utility over the long term is certainly up for debate.

Must-reads:

Beyond Groupon: Daily Deals Evolve, New Competitors Emerge

In Race With Groupon, LivingSocial Raises $400 Million

Groupon Posts Loss of $9.8 Million