Are daily deal websites the right choice for retailers?

New Hampshire’s daily deal market has become totally saturated with players, from small, locally based sites to international powerhouses, and you’ll be hard-pressed to find many spas, restaurants or retail shops in the region that haven’t been courted by


Published:

In the last six months of 2011, nearly 800 daily deal websites -- offering bargain-basement specials on everything from massage to pizzas to hotel getaways -- shut down worldwide.

I used to write for one of those sites. It was called LocoLocal.com -- "loco" for the "crazy-good" deals it offered, and "local" for, well, obvious reasons. For 14 months, the site hawked deeply discounted deals at businesses throughout southern New Hampshire three or four times a week.

When it launched in June 2010, it was one of the only, if not the only, daily deal games in the southern New Hampshire market. At its outset, most local business owners were totally unfamiliar with the business model, said Richard Dweck, my former boss, who was general manager of the Cambridge, Mass.-based website.

"I had to educate 98 percent of them about it," he said. "It was completely virgin territory."

Now, more than two years later, New Hampshire’s daily deal market has become totally saturated with players, from small, locally based sites to international powerhouses, and you’ll be hard-pressed to find many spas, restaurants or retail shops in the region that haven’t been courted by one of these deal sites.

There’s the Amazon-backed LivingSocial, which began offering southern New Hampshire deals in August 2011. Groupon, the daily deals behemoth that had its initial public offering last November, isn’t in New Hampshire technically, but regularly offers deals in the state through its Greater Boston site. And most of New Hampshire’s big newspapers have a daily deal arm too: the Nashua Telegraph -- corporately related to NHBR -- launched NHDailyDeal.com in November 2010; the Portsmouth Herald started Limelight Deals in June 2011; the Union Leader teamed up with the locally owned deal website Couptopia last August; and the Concord Monitor began offering its own daily deals last September.

Varying results

The daily deal model works like this: A business agrees to run a highly discounted deal -- say, a $10 coupon good for $20 worth of goods or services -- on a daily deal site. The site emails its subscriber list promoting the deal, which can be purchased in a limited window of time, ranging in most cases from 24 hours to a few days. The business gets exposure to local consumers, and the sites get a cut of the sales. (Some sites take up to 50 percent of revenues, though a recent survey of the industry found the average take about 44 percent.)

Whether offering daily deals is an effective marketing tool for small businesses has been the subject of many studies, often with widely varying results.

One comprehensive survey of more than 600 business owners who had run daily deals, released in June by Rice University professor Uptal Dholakia, found a mix of findings that pointed to arguments in favor of both sides.

The survey found that deals tended to bring in about 80 percent new customers, and on average, 34 percent spent more than the deal amount. Also, it found, about 22 percent of deals are never even redeemed, which is money that goes right into the merchant’s (and website’s) pocket.

But it also found that, on average, only one in five people who come in with a coupon will become a regular customer; that about 38 percent of businesses have no intention to run another daily deal after their first; and that daily deals "only appear to function as sustainable marketing programs for only about a fifth of restaurants/bars and retailers that use them," compared to about two-fifths of salons and spas.

"I think sometimes people can do them because they need the money, and that’s not a reason to do these. I take it out of my marketing budget when I do it -- sometimes you make money, sometimes you break even, and sometimes, if you don’t do it well, it will cost you money."

Many business owners shared similar concerns when thinking of running a daily deal, said Dweck. They worried that customers would become accustomed to discounting, and thus only come in when there was a deal; that the deal would attract coupon-clippers who spend little if any more than the coupon’s face value; and that discounting in general can reflect poorly on the company’s brand.

For these reasons, Charles Gaudet, CEO of the Portsmouth-based marketing firm Predictable Profits, generally discourages businesses from using daily deal sites if they don’t plan to follow up the deal with a concerted marketing effort.

"For the most part, if you’re going to sign up for a daily deal site and you don’t have a marketing piece in place to follow up with those leads, then I don’t recommend daily deals at all," he said. "You get people purchasing a product solely for the cheap price, they’re solely focused on the price with no intention of really having repeat business with you."

Plus, he added, if a business sells lots of coupons, it may become so overwhelmed with new customers that it risks alienating its existing customer base. Those regulars "end up generally feeling some pain along the process, because they’re not being treated with the same level of service as in the past."

Foot traffic

For Priscilla Lane-Rondeau, though, the deals she has offered are geared as much toward existing customers as they are to new ones.

Lane-Rondeau, who owns 900 Degrees, a pizzeria in Manchester, has offered deals through Groupon, Living Social and Couptopia, and said she thinks of the deals not just as a way to bring in new diners but also as a "thank you" to give back to its customers.

To help deal with the influx of coupon-wielding customers -- particularly in the crunch periods right after the deal goes live and the weeks before it expires -- Lane-Rondeau said she sometimes brings in an extra server to handle the rush.

"It’s a little confusing for my servers," she said. "They don’t always love it, but they understand it brings in business, so they deal with it," she said.

Daily deals also can be a good way for small businesses to attract foot traffic, particularly new businesses looking to build their customer base, said James Basbas, vice president of the Bedford-based Altos Marketing. But, he added, "you really want to be in a growth mode -- you have to have the staff and the ability to grow your business, (otherwise) there’s no sense in bringing all these new people in."

To make the deals successful, Lane-Rondeau said she caters them to specific areas where she wants to boost business. For example, after 900 Degrees revamped its lunch menu, she offered a $15 deal good only at lunchtime for $7 and sold 439 coupons on Couptopia.

For a retailer, she said, it’s important to think of the money spent as coming from the marketing budget.

"I think sometimes people can do them because they need the money, and that’s not a reason to do these. I take it out of my marketing budget when I do it -- sometimes you make money, sometimes you break even, and sometimes, if you don’t do it well, it will cost you money."

These deals are often crafted in such a way to encourage consumers to spend more once they’re in the door. For example, said Basbas, $15 for lunch is high enough that it practically guarantees the coupon holder will bring a friend along -- and then, if they get drinks or an appetizer, their tab might come to $20 or $25.

When determining the terms of a deal, Couptopia marketing director Steve Spain said he sits down with business owners to discuss their break-even points and to individually tailor the deal to suit the business.

"We’re trying to do the daily deal business the right way, if that makes sense," he said.

The goal, he said, is never to overwhelm businesses, but to get them new customers. "If we don’t take care of locally owned businesses the right way, we won’t have businesses to work with."

Judging by its Facebook fan base, Couptopia’s average customer is a young mother in her mid-30s with a couple of kids, which is reflective of the company’s frequent family-friendly offerings, said Spain. But its partnership with the Union Leader helped it to attract "a completely different base than we started with -- the retiree base, empty-nesters. It’s very diverse."

After several requests from its subscribers for a deal at Bert’s Better Beers, a craft beer store in Hooksett, Couptopia finally convinced the store to run its first-ever daily deal promotion -- $5 for $10 worth of beer. The deal took off, selling 807 vouchers.

Since the deal’s 90-day window just expired, co-owner Ron Parker is still crunching the numbers to determine whether it was profitable. Preliminarily, though, he said it seems to have been a success. Both new and existing customers purchased the deal, and he estimated that about two-thirds of them spent more than the $10 face value of the coupon.

Another 15 to 20 percent of them "spent significantly more." But, he added, it seemed the return customers were more likely than the first-time customers to spend more than the voucher’s face value.

Cautious about frequency

That a deal might attract serious penny-pinchers is certainly a concern when offering deals, said Jason Lyon, CEO of the Common Man Family of Restaurants.

"That is always your concern, that you are taking up seats with discounted diners, but we try to hedge that," he said. "We probably put more restrictions on our Groupons and Couptopia deals so we are not actually taking up those seats on high-volume nights, like Friday and Saturday evenings, offering them during the week instead."

Like 900 Degrees, the Common Man crafts its deals in such a way that it complements the company’s business needs, said Lyon. It has offered deals for its inns in Plymouth and Claremont to fill overnight lodging in the slow season, and has sold last-minute tickets to performances at its Flying Monkey Movie House and Performance Center -- seats that otherwise would have sat empty.

"We look at it as a very targeted marketing approach, as opposed to some entities that continually put out a daily deal over the course of the year," said Lyon, "We look at that as not necessarily the smartest thing to do for your brand, because you tend to become synonymous with always having a deal going on, which in the long run can detract from your sales."

The point of being cautious about the frequency of running deals is an important one, said Basbas.

"I think there’s definitely a chance to overkill this thing," he said. "I wouldn’t run one more than every six months."

Businesses that run a daily deal should follow up with their new customers by getting as much contact information as possible and offer something like another coupon, a limited-edition product, or even just an invitation to return, said Gaudet.

Looking in the rear-view mirror, Dweck said he’s not sure the daily deal is a long-term, viable business model, pointing, for example, to the tanking of Groupon’s stock price. But, he added, "For the right businesses, it’s really a panacea -- a really great method for them to get a lot of market penetration for really no money out of their pocket and for very little cost."

And for him -- and for me too, really -- "it was a great experience meeting all the business owners feeling like I was helping people to come out of the recession."


 

NHBR Poll