Small Merchants ‘Bah Humbug’ Daily Deals

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Discussion
Nov 29, 2012

A RetailWire story back in July of 2011 looked at plans by consumers to use daily deal offers from companies such as Groupon, LivingSocial, etc. to save money on their holiday purchases. While the benefit for consumers was clear, it was less certain that the same applied to the merchants behind the deals.

Doug Fleener, president and managing partner, Dynamic Experiences Group and a RetailWire BrainTrust member, observed, "I guess commoditizing gift giving is just a natural extension of commoditizing retail and restaurants. It’s like saying I love you … well actually I love you half-off."

Now comes a report that small retailers have decided to take a pass on offering Groupons this holiday season as they cite a lack of return on investment.

According to a survey by Manta released last month, only three percent of retailers said they got repeat customers out of daily deal promotions.

"They’re doubling down on things that work, and leaving things that are less proven or they’ve had experience with and didn’t work off to the side," Pamela Springer, CEO of Manta, told USA Today.

Is there a place in the daily deal space for special offers that satisfy customers while making business sense for merchants? What do you think is the future of daily deal companies such as Groupon, LivingSocial, etc.?

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20 Comments on "Small Merchants ‘Bah Humbug’ Daily Deals"

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Debbie Hauss
BrainTrust

I sympathize with the small merchants that suffered during the initial daily deal frenzy. Many received so much interest in their deals that they could not handle the demand. Additionally, as reported, many of the initial purchases did not result in repeat customers, so it was a lose-lose.

I think there will be a shake out in the daily deal space. Some larger retailers are now finding ways to create their own deals and offers and are skipping the third-party partner.

The daily deal companies that come out on top will figure out how to create offers that work for both large and small retailers. They also may need to do a better job helping to market the participating retailers in order to encourage repeat shopping.

Steve Montgomery
BrainTrust

The Manta report would indicate the value proposition provided by daily deals in terms of repeat business isn’t there. The implications for the small retailers and the daily deal companies are far greater than their simply saying we are going to use that marketing tactic for the holidays. It seems to indicate an underlying issue with the daily deal concept.

If true, then perhaps daily deals will prove to be something good for the consumer, but not for the retailer. The market may have recognized this as evidenced by the very steep decline in Groupon share price and the fact the board is very publicly considering a new CEO.

Bob Phibbs
BrainTrust
Gratifying to hear that finally retailers are waking up to a phenomenon I warned against over two years ago here. It seems fitting that the day after Zig Ziglar, who taught me 30 years ago that customers forget price after the sale, but remember how it made them feel forever, that we are discussing discounting. Retailers have never had a clearer choice—if you are big enough to be on Wall St. and can use their shareholder money to buy customers—you will because its not really your money. And if you’ve given up on having compelling merchandise and enough employees who are well trained to goose sales, you’ll still use discounts to pay customers to come to a less than exceptional experience. If it is just you and you try to buy customers with your own money, you’ll have less of it which could render you out of business. The hard work, the gratifying work, and the work that makes most retailers profitable is continually looking to see how they can brand their customers’ butt using exceptional service so they will drive past competitors screaming 40% off 24/7. Stay the course and be profitable as 97% of those surveyed businesses have… Read more »
Tony Orlando
BrainTrust

Consumers want everything half off these days, as they now expect it. Retailers continue to fight it out to the death for retaining their customers, while trying to gain some new ones. Loyalty is pushed aside, as temptation for the hot deals is everywhere online, and in other social media events.

The winner as always is the consumer, and small businesses can not continue to sell things at losses in order to sway loyalty their way. With tons of businesses fighting for the ever shrinking dollars, it is a scenario that will not end well for the small undercapitalized businesses out there. Great service is crucial, as all of us have stated time and time again, but price is really the motivation for consumers to pull the trigger on a sale these days. Stay Thirsty My Friends!!!

Ian Percy
BrainTrust

I’ve lost count of the horror stories about Groupon and the like. It’s not even about no return on investment, it’s about significant loses ON TOP OF your “investment.” It was our own Bob Phibbs who best explained the sheer stupidity of this strategy to me. When you lose money selling one item at a huge discount, what exactly makes selling a thousand of them seem like a good deal?

From the customer’s perspective these discount programs are a gift-horse. From the retailer’s perspective it’s a self-inflicted scam.

Now, it might work if the discount was a reasonable 10-25%…but then who would bother with that? These days it’s 80% off or nothing!

Demeaning your product or service will never generate loyalty.

Ryan Mathews
BrainTrust

Retail is evolving so rapidly—especially with respect to the use of new media and platforms—that the honest answer is, “Who knows?”

The Devil is in the execution and consumer acceptance.

if daily deals can be made to align with enough consumers’ lifestyles, Groupon et. al. and/or their successors will have a bright future. If not, they’ll become yet another footnote in the history of retailing.

Rick Moss
Staff

I do believe there is a place for daily deals within the marketing toolkit, but only for retailers that know how to use them. The fallacy being perpetrated is that daily deals are a panacea for all operators. In truth, only some have the wherewithal to use a deal as a springboard for growth.

It’s incumbent upon the retailer to convince deal-takers that it’s worth coming back and purchasing at full price. For me, personally, some companies turned me off completely when we tried them on deal. No amount of discounting could convince me to return. Others, on the other hand, impressed me greatly and we’ve become customers. The lesson: use the deal effectively to convince customers that price ISN’T everything.

Camille P. Schuster, PhD.
BrainTrust

The Groupon-type specials have the possibility of attracting new consumers who might want to “try” something new. However, that is not the only tool that can be used to generate new consumers. The process, however, continues to train consumers to find deals and pay less for services and products. That approach does not create long term, loyal consumers. So the tool needs to be used in a targeted way as part of an overall strategy.

Nikki Baird
BrainTrust

RSR’s eCommerce benchmark survey found that daily deals was a tactic favored only by the worst-performing retailers (desperate times call for desperate measures?). Absolutely no high-performing retailers had interest in such deals. Groupon and its ilk need to drastically rethink their value proposition, as a result.

Doug Fleener
BrainTrust

I’m not automatically against daily deals…I’ve bought plenty of them!

I do think the daily deals make sense for service businesses where the operators can choose to make less on their labor, but they rarely make financial sense for retailers. Selling something for less than you pay for it is called losing money.

Matthew Keylock
Guest
Matthew Keylock
3 years 8 months ago

This doesn’t surprise me at all.

There could be a place for deals like these to support major events like an opening or re-opening/branding where acquisition and traffic is vital.

Otherwise I only see a future in these program if they can change the model to drive loyalty and not cherry-picking.

Charles P. Walsh
Guest
Charles P. Walsh
3 years 8 months ago
Daily Deals are a great win for ever deal-hungry consumers, however, they usually don’t provide long-term wins for the merchants as expressed by many on our panel. I’ve heard countless tales of woe from companies who’ve used Daily Deal advertising with intentions that included; publicizing new products, services or their business itself, to drive volume at key times of the selling year or as a way to increase local market share. Most of those whom I’ve spoken to have indicated that the experiment was a net cost to them with no long-term benefits and probably wouldn’t consider the daily deals approach again unless there was a way for the customer to purchase a discounted coupon that would require a purchase when it was redeemed. This approach is commonly used by sites such as restaurant.com (I have no affiliation with this company) where a coupon can be purchased at a discounted price (e.g. A $50 coupon for $25). The Merchant usually sets a minimum purchase so that they are receiving some guaranteed value for their marketing efforts. In order for Daily Deal companies to survive they will need to ensure that there is value for their customers. There will undoubtedly be… Read more »
Herb Sorensen
BrainTrust
I signed up for Groupon back in the day, and found I didn’t like the addition of all the SPAM. Of course, I asked for it, so then I unasked for it! I know I am no kind of expert on money promotions, and don’t rue that. As a salesman, paying customers to buy seems inimical to the purpose of the sell. On the other hand, it’s been around for a very long time, and in the past century the monster has been fed by retailers using mostly “other peoples money” to pay shoppers to come to their stores—AKA promotional fees. A consistently low and fair price drove one retailer to be the world’s largest business. Consistently low and fair prices are driven by Every Day Low Prices, or, as one retailer insists, Low Prices Every Day. 😉 Those low prices are driven by relentless attention to costs, continuing long term. However, shoppers do not necessarily like EDLP. See: “No, the Customer is NOT Always Right!” Many shoppers actually prefer what I call “casino shopping.” They are always looking for a deal, and would rather invest their limited time in looking for deals, rather than whatever their main contribution to… Read more »
W. Frank Dell II
BrainTrust

Daily deals are one of those items that look good on paper, but fail in the real world. Small retailers are finding they don’t create regular or repeat customers. Large retailers have problem executing daily deals. Due to the short cycle a consumer must be technology connected to follow daily deals. It is kind of like if deals are good then daily deals are better.

David Slavick
Guest
David Slavick
3 years 8 months ago
For the holidays, it is a bad deal. A retailer is not going to achieve a profitable year end by giving it away at 50% or more. Leading up to holiday, daily deal sites do make sense for small business retailers as the targeted and sometimes broad reach of the sites helps them to gain awareness they could not afford any other way plus acquire new customers. That is the ideal scenario. What drives me crazy about this deal channel is too often the retail operator does not have the foundation in place to identify/capture the new customer or if a repeat customer (to the restaurant, spa, car wash, etc.) to get their info/updated info. Thus, you can be one and done—the next communication to drive repeat traffic is on your terms and certainly not 50% off or buy one get one free. I agree, for categories where capacity can be managed, daily deal space makes sense. A hotel chain can offer a deep discounted room rate within a constrained timeframe because those dates are typically less than say 75% of capacity. With new guests, they can gain additional revenue through room service, drinks/meals at their facility. Leveraging the data,… Read more »
Craig Sundstrom
Guest

“Only three percent of retailers said they got repeat customers out of daily deal promotions….” ‘Nuff said.

The future of Groupon and Living Social? They will be the <<insert name of silly, failed dot.com concept here>> of the 2000’s.

Al McClain
Guest
Al McClain
3 years 8 months ago

I don’t see a bright future for the daily deal industry. Consumers have by and large figured out that businesses making these offers are typically not “A list” businesses in the first place. So, consumers are less likely to purchase deals, and less likely to return, because the business is likely not that well run. And, as retailers and others running deals have been losing money, they have been reducing the size of the offers. I’ve seen this in particular with hotel and restaurant offers.

Long story short, I’m betting there will only be a few daily deal companies left, and/or the industry will morph into something we haven’t thought of yet.

Jonathan Marek
BrainTrust

Not much of a place. As many of us have been saying for awhile, the daily deal business model just doesn’t work most of the time. Does it work for a niche set of businesses sometimes? Sure, but so does sticking flyers on windshields and advertising on airport security bins. Those aren’t bad things for some retailers to do. But rightly, neither of those ever got the hype or the valuation that Groupon did.

Kai Clarke
BrainTrust

Maybe. However, LivingSocial and Groupon are fads at best. People will continue to evolve, as our retailers become more sophisticated at marketing in the digital (and connected) age, taking their shopping preferences with them. The stalwarts of marketing will not change, and great retailing will continue to reinforce this every day. Product, price, promotion, place and great customer service will continue to be the backbone of great retailing, great retailers, and great business.

Dan Frechtling
BrainTrust

Yes, there absolutely is a space for daily deals that are appealing to both consumers and merchants. That “space” is deals that don’t require repeat purchases to generate profit. Two rules:

1. Don’t discount so deeply you can’t afford it. For sellers of goods with high variable costs like retail goods, 50% off is a risky bet. For sellers of offerings with lower variable costs like event tickets, ebooks, and streaming entertainment, 50% off works in spades as long as they don’t over promote and devalue their base prices.

2. Activate overspend. Successful merchants have figured out how to deal at a level where the discount, even at 50%, is a small amount of the overall price. Restaurants with average checks of $50 or more offer $20 vouchers for $10 with required gratuity. The discount is only 30% rather than the 75% it would be if customers only spent $20 ($10 less 50% commission = net $5 on a $20 check). Some require a minimum overall spend to validate the voucher.

Like direct mail, magazine ads and other local media, daily deals have indeed passed their peak. But they will settle in with the business categories and circumstances where they provide returns.

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