Profit Minded

Daily deals promos better suited to certain businesses

Daily deal promotions are not sustainable marketing strategies for most businesses

Many business owners who offer "daily deals" promotions wind up losing money, failing to win new customers, or driving away loyal patrons when the coupon crowds descend. Nevertheless, the marketing trend is here to stay. That's the opinion of Utpal Dholakia, professor of management at the Jones Graduate School of Business at Rice University, who has become something of an expert on the expanding industry that includes companies such as Groupon and LivingSocial.

Dholakia, who first began researching and writing about small businesses' use of discounted online coupons two years ago, says he was pessimistic about their sustainability. "People are offering their products at half price and only getting one-quarter of the revenue," Dholakia tells Yahoo! Small Business Advisor. "I wrote an entire article this time last year looking at specific deals, and I was extremely negative."

A year later, however, Dholakia says he has found some business owners who are happy with their returns on daily deal coupons and concedes, "It's not as bad as I thought it was going to be." In a study he published last month (which he is careful to note was funded entirely by the university) Dholakia reports the results of surveys and interviews he conducted with 641 small- and medium-sized businesses between April 2011 and May 2012.

Key among his findings is that between 55 and 61 percent of daily deal promotions are profitable, and the likelihood of a business enjoying a profitable promotion is linked to the operator's experience with the deals. "Less than half of the businesses running their first daily deal report profitable promotions, whereas more than three-quarters of those running seven or more deals do so," Dholakia reports. He concludes that "daily deals appear to be sustainable programs for approximately 30 percent of businesses" and that "newer and relatively smaller businesses have even higher sustainability rates of close to 40 percent."

Dholakia found that some business types fare better than others using such promotions. Photographers, health and fitness services, tourism-related services, and doctors and dentists all experienced greater-than-average success of 67 percent or higher rates of profitable deals. But cleaning services, restaurants, bars, and retailers fare poorly, he found, with 50 percent or lower rates of profitable deals. "Daily deals appear to function as sustainable marketing programs for only about one-fifth of restaurants/bars and retailers that try them," he reports. Two-fifths of salons and spas find them to be sustainable.

Are there strategies for success in daily deals promotions? Dholakia offers these tips:

1. Plan carefully. You've got to be careful in calculating your margins, Dholakia says. Think about the terms of your offer and be sure you have a high margin on the item being offered. "The daily deal salesperson tries to get the business to run a deal that will be attractive to the daily deal customers, but that is not necessarily in the interest of the business."

2. Place a restriction on the number of offers available. Businesses that sell a lot of deal coupons can get into trouble when they outsell their own capacity to fulfill the deal. That can result in service quality issues not just for the deal coupon holders, but for regular customers, Dholakia warns. Figure out what you can handle, and limit your offer accordingly.

3. Consider a dollar discount rather than an item discount. For instance, Dholakia suggests, if you run a salon or a spa, offer $20 off of beauty services rather than a particular service for a set price. That way, he says, customers can be enticed to buy higher priced or additional items.

4. Lower face-value daily deals can be just as effective as high-value deals in getting new customers. Dholakia says two years ago, deals in the restaurant category were commonly "pay $20 for $40 worth of food." Now he is seeing $8 coupons for $15 worth of food. The restaurant doesn't lose as much revenue, but they're "still getting the customer in the door."

That last tip might mean less short-term revenue for deal vendors like Groupon. "But it's in everyone's best interest for the deals to be sustainable," Dholakia says. "When a small business runs a deal and gets wiped out, it doesn't do anyone any good."

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