Daily Deals are not a Bargain

The daily deals coupon market made popular by Groupon and copied by many others (with mixed results), reached a saturation point very quickly. Consumers are bombarded with offers from restaurants, spas, service providers, and retailers offering 50% off on a "hot deal." The novelty of daily deals wore off as numerous competitors joined Groupon in vying for customers. Yesterday, Groupon's stock price closed at $4.37, an all-time low. Groupon's stock value today is a far cry from the $26.11 per share close on the day of its IPO last November.

In less than four years, Groupon has gone from start up to category creator to a troubled business. What happened? Reality has hit businesses using Groupon that the bargains consumers receive come at the expense of their profitability. Groupon's revenue sharing model typically calls for a 50-50 split in revenues deals sold. Given that deals are usually a 50% discount off regular price, a business has effectively given away three-fourths of potential revenue for every Groupon-bearing customer walking through the door. It is hard for the math to work for low-margin businesses that forsake significant revenue to attract buyers.

Deep discounts like those offered by daily deals are detrimental to building brands. They are gifts to buyers, at least that is how I feel when I am able to get a 50% discount at a restaurant. But, it does little to foster long-term loyalty between customer and brand. In theory, coupons are an incentive that attracts buyers to sample a product. Assuming they see sufficient value, potential future purchases might occur without an incentive. Unfortunately, the glut of daily deals gives consumers leeway to shop around for the best deal rather than buy from brands because of a relationship anchored on something other than a discount.

Customers are the lifeblood of a business. But, attracting them with unprofitable daily deals will cause bleeding that harms a business. Instead, explore how to strengthen relationships with your best customers by rewarding their patronage. It likely does not require a 50% discount, and they will reciprocate your gesture with continued support of your business.

Labels: , ,