28/January/2011 8:30 AM

Daily Deals Websites: Are They Too Good To Be True?

http://www.powerretail.com.au/insights/editorial-daily-deals-websites-are-they-too-good-to-be-true/

Daily deals websites are exploding. From its inception in November 2008, Groupon, the world’s biggest daily deals site, has grown into a billion dollar company, which has over 50 million subscribers in 40 different countries.

Earlier this month,  Spreets, an Australian daily deals site, was bought by Yahoo!7 for $40 million – not a bad return for a business that was started just under a year ago!

The obvious benefit to businesses is the potential to reach untapped audiences through the established subscriber networks of these daily deals sites, some of which are in the millions. Dominic Gluchowski, Search Director of SEO Falcon and Co-Founder ofIlovecoupons.com.au, comments, “Daily deals websites can be of benefit to smaller retailers that don’t have sizeable email lists, Facebook and/or Twitter followers.”

Though very popular and a great deal for consumers, how are these websites working for retailers? Does offering enormous discounts on products and services attract and build loyalty with new customers who are purchasing these deals? Or are they facilitating an unrealistic expectation with customers around the actual value of these products and services?

Behind The Scenes: The Hidden Costs

Online daily deals websites, such as Groupon present great value for consumers, but what about retailers?

Recently speaking to my hairdresser, she commented that she was at a loss to understand how businesses could afford the discounts offered, for the quantity of products and services offered on the daily deals websites. This concern is not unfounded, with many stories emanating from the US about retailers that, in some cases, have been bankrupted by the campaigns run on various daily deals websites.

Case in point, Jessie Burke, owner of Posie’s Café in the US, posted a blog about her experience with Groupon, stating that it was the ‘the single worst decision I have ever made as a business owner thus far…’

As Burke explains, she was encouraged by Groupon to offer a deal that entitled customers to a 50% discount. Although the amount for the deal wasn’t extraordinarily large ($6 for $13 worth of coffee and cookies), when it was taken up in epic proportions (1000 deals sold), the figures told a different story. That’s $6000, less Groupon’s 50% commission (No, I am not making that up!), leaving Burke $3000 revenue to supply $13,000 worth of product. Hardly a winning campaign!

All of a sudden this becomes a very real problem for a retailer with “overheads of $25,000″ per month, as Burke put it.  I’m not sure how many small businesses can afford to spend $10K on a marketing promotion – by any standard, this amount is quite a large chunk of budget for a branding and promotional exercise with no real measure for long term return on investment.

It’s generally expected that consumers will seek out the most competitive prices possible for their purchases, especially during times of financial hardship and uncertainty. No doubt this is what has aided the growth of the daily deals websites, offering consumers great discounts, as well as building confidence back for struggling retailers. This may now be a double-edged sword for the latter, who have trained their audience (in effect) to devalue their own products and services.

World renowned fashion store, Gap offered a similar nationwide offer through Groupon which  according to Mashable sold 441,000 deals. However putting this in perspective, the retailer offered $50 worth of apparel and accessories for $25:  assuming the same rule was applied as for Posie’s Café (which was not confirmed by Groupon), Gap would get total revenue of just over $11m, give Groupon half leaving them $5.5m but a fulfilment liability of $22m worth of product. Though the campaign gained much press and publicity, attracting national attention to the brand, does this classify as a success?

Too Good To Be True?

Though providing the opportunity for exposure to new markets and large populations of consumers, are the daily deals sites providing retailers with genuine marketing and promotional opportunities that will be sustainable in the long term?

For those companies who spend copious amounts on above the line advertising, this tactic enables not only instant engagement and return, but guarantees foot traffic to their bricks and mortar stores. However, as raised by Burke, there are many other considerations for businesses in terms of overheads and resources.

Gluchowski advises that, “Retailers need to ensure they cap the number of daily deals that can be sold based on what stock they have available. In addition they need to check that they can deliver and have product available in all of the places where the daily deals are offered.”

In a recent kerfuffle in Japan involving a Groupon daily deal, where demand outweighed production, Andrew Mason, Founder and CEO, was forced to issue an apology stating that “Groupon had started educating its customers on ‘capacity planning’ to avoid problems’ such as the one that occurred with the Bird Café in Japan, which could not only meet consumer demand for its deal, but provided a less than acceptable product to consumers”.

Is this a sign of things to come? As demand exceeds supply and advertisers struggle to offer products and/or services to the expected standard – they may be doing their business more harm than good in the long term.

“There are additional risks associated with service industries as they are not as scalable. These industries need to ensure they are targeting new clients within their local areas and have a very tight cap in place for the total number of deals to ensure that they can service everyone exceptionally well in order to retain these clients and to be able to service their existing customer base,” says Gluchowski.

He strongly recommends that retailers should initially try these offers through their own websites, e-mail lists,  social networking as well as coupon sites. “Customers love great deals and offering discounts through your own channels should significantly increase your email list subscriber numbers as well as Facebook and Twitter followers,” he says. “Daily deal sites should be considered if there is no response to a retailers’ own initiatives.”

The Final Word

As a consumer, I’m wrapped with these deals.  Being the eternal bargain hunter, there is something satisfying about knowing I’m getting 50% or more off a product or service. However, there is another side to the ‘silver lining’ of daily deals for ill-prepared retailers, who can be swept up in the daily deal craze only to find themselves completely incapable of fulfilling the deal on offer when group buying momentum takes hold.

As with any marketing tactic, serious thought needs to be given before committing to these campaigns – which though offering the opportunity to engage with potentially millions of customers, could be detrimental to a retailer’s reputation and overall business in the long term.

Have you gone the group buying route yet? Share your thoughts and experiences.