By Randy Smith, Mobile Wallet Media
Thursday, August 16th, 2012
Daily Deals have had their 15-minutes, or quarters of fame, but must change their behavior to live on. The gravity of dire profit reports is requiring the industry to seriously reconsider their business model.
Less than 5 years ago it seemed as though getting retailers to engage in selling mass offers of 50-90% off + paying 50% of vouchers sold to marketers, would never happen! But thanks to desperate merchants and cash-strapped consumers across the land, Daily Deals thrived.
The margins with deals for merchants is horrific, so why do they engage? Many retailers have had need to go 'All-In' and have exhausted all other options. Business lines of credit dried up in 2008 - 2009 and getting a refinance on the home was no longer an option. Who really wants to pay 40-60% for cash advance on 6-months of credit card receivables or for a 90-day hard money loan?
Also, if you have not noticed, Tier 1 & 2 retailers have steered far away from Daily Deals, with certain exceptions like Old Navy or Nordstroms Rack. My guess is they thought it a fast way to clear seasonable inventory and to just to dip their toe in the water to see how hot Daily Deals really were.
So if brand name, local, regional or national merchants have not engaged and do not appear they will any time soon, what deals are there to be sold? Does Daily Deals make sense for non-desparate merchants to do? Yes!
As a rule of thumb retailers and restaurants have margins near 15-25%, but some service business' like massage, or laser eye may have margins of 60%-80%. So giving 50% off services to get new customers in the door does make sense as long they do not sell too many deals and never offer a deal again for at least a year.
For business' with 25% margins it still can make sense if they offer small, or restrictive daily deals only good on slower days of the week. Also, up to 50% of deals are not redeemed. If a restaurant offers a small deal of $10 for $20 in product, but their customers still spend an average of $40 at dinner, then they still walk away with $25 + $2.50 for deals never redeemed. It can end up working like a 25-30% off coupon. But even this is steep discounting. I'll never forget the words I heard several years back from a loyalty guru named Steve Schroeder of AmeriCardGold: "Discount is a Dirty Word." He was hilarious! I kept saying the word discount and he scolded me like I had said a four-letter word.
Selling vacation packages makes sense for deals as well. With the 'Great Recession' still waffling, people still want to go on vacation and the cruise lines and resorts are desperate for business. They have massive investment in overhead and must fill the boat or resort at 50% off prices and then hope to make their profits by up-selling their guests once they arrive. It kind of works, because the guests feel as though they got such a great deal that they are more willing to spend more on food and fun.
By the way, as a rule of thumb that Priceline.com learned. The captain of the Star Trek Enterprise can never retire, but he must always come back and save the ship! Priceline recently as it saw it stock drop after they decided to end William Shatner's run as the "Priceline Negotiator" when he met his demise in the last commercial. But when they decided to bring him back Priceline's stock got a big bump. William Shatner became Priceline's spokesperson for zero cash and reportedly, according to CNBC, he cashed out with 20 million when they went public. I love America and the entrepreneurial spirit that is shown daily by small and big business owners alike. They just float and meander along, while eating chocolates on the couch and watch the government work their butt off to build their business for them. Not!!!
Daily Deals in reality are more like steroids than a sustainable way for small retailers to gain sales. In fact the Daily Deal relationship is a dysfunctional one. Successful merchants spend 1-15% of revenues for advertising and marketing costs. This does not include This wide variance is a function of margins and volume. Grocery stores and auto dealerships spend about 1% of revenues of marketing, while restaurants and clothing stores might spend 3-10% and services based business' may spend 15%.
For deals to survive they must more closely align with reasonable fees and lessor discounts, but they must do much more than this, they must go through a metamorphous to fly another day. And on another day coming soon, I will provide the next chapter (Daily Deals Manifest Destiny is set for publishing on August 29th).
Daily Deals in their current form are too dysfunctional and destructive to be sustainable. In any functional relationship, their is always a Win-Win and not Win-Lose outcome. Yes deals have their place in the world, but they are more akin to Check-Cashing stores. Like steroids used in temperance they can work to heal. But if deals are depended on they will permanently destroy margins and condition customers to only return with a great deal. Merchants that focus on sound core retailing fundamentals will always win in the end. See my "SEVEN main reasons why 20% of customers make 80% of purchases" in week 3 of our 7-week series: "The 7 S's Required for Success in Mobile Payments."
