Ever since flash sales sites like Groupon became popular around 2010, there have been as much harsh criticism as there have been fans of the daily deals these sites conveyed. A quick search with Google using “flash sales” instantly provides over 233 million links, including this Wikipedia definition for the phenomenon:
Deal of the day (also called flash sales, one deal a day) is a type of ecommerce in which a website offers a single product for sale for a period of 24 to 36 hours. Members of deal of the day websites receive online offers and invitations in postal mail, email and social networks. As of 2011, deal of the day sites have continued to grow in popularity, while new fears have arisen over the longevity of the concept and financial viability of one day deals for small businesses.
While many tend to think this is one fad that will go away, a recent study conducted by Rice University surveying 650 small and medium businesses, and published in June 2012 shows that daily deal sites are actually thriving. Shocking? No, but certainly not what many, including myself, expected.
PROS AND CONS OF THE CONCEPT
Since many articles have been written on the subject, allow me to summarize the generally accepted pros and cons of having your product or service featured on a daily deal site.
- No marketing expense: It’s all taken care of by the flash site provider, i.e. Groupon, Jetsetter, LivingSocial, etc.
- High visibility: Showing up in a Groupon campaign, with its millions of subscribers can provide much needed awareness, specially if you are a start-up.
- High traffic: Because of the deep discounts, the sites promise and usually deliver heads in bed, bums in seats, or whatever metric you use in your niche to drive business through the door.
- Cash flow: Because people pay up at the time of purchase, this makes for interesting cash flow ahead of time. A parallel benefit comes from breakage, as it is estimated that up to 30% of coupons or deals never get redeemed.
- Low yield: The classic model goes as follows: A product with a regular price of 100$ gets sold at 50% discount, so 50$ on the daily deal. Groupon takes 50% of this amount, which leaves the restaurant, spa or hotel owner with 25$.
- Finicky customers: Research suggests, and experience in the tourism industry demonstrate that clients referred through flash sites are more picky, and tend to write harsher reviews on user-generated content, i.e. Yelp, TripAdvisor.
- Low retention: With all this volume of new clientele, one would think there will be some retention, bringing in clients for life or at least some repeat business. This is where some suppliers are faring better than others, but in general the conclusion is negative as customers simply move on to the next bargain.
- Brand impact: This is perhaps the most potent threat and the one most general managers or director of sales tend to dismiss. The fact is, showing up on a deal site sends out a price-driven message, not only to potential new customers but also to existing ones who are missing out on the deal. For more on this, read here
Now these generally accepted truths are not universal, and there are some instances where companies can really take advantage of daily deals and are able to retain customers after their purchase or stay. Hotels and restaurants have also been savvy in packaging a price that’s opaque, making it difficult for customers to have a real comparison point, specially when using a hefty rack rate as the starting point.
Check out the video on the topic, produced by the research team at Rice University:
Another important point is that many flash sales sites have adapted their business model to address suppliers’ concerns with the 50% commission level, which was considered too deep and affecting margins. It’s not uncommon to see 30%, sometimes even 20% commission levels nowadays, as deal sites opt for higher volume rather than margins per sale.
IS THERE FATIGUE?
As this recent study demonstrates, it’s not all black or white, and it depends on your industry, whether you are start-up and what kinds of margins you can play with. However, the biggest concern remains: how long will consumers accept to have their inbox filled with daily emails? The most common complaint I hear is: there’s just that many cupcakes I can buy, spa packages or laser removal I can get done in a year!
The challenge this represents, just like in most marketing communications, is how to stay relevant. With so many players in this sphere, reproducing each others’ content over and over, consumers will weed out those newsletters that resonate less with them, and consolidation should be expected within the industry. Groupon remains the uncontested leader, but Jetsetter has carved its own niche within the travel industry, while LivingSocial targets more urban clientele. In Canada, sites such as wagjag.com and travelalert.ca remain market leaders, while Tuango.ca holds the dominant position in the province of Quebec.
Indeed, it looks as if the death of daily deal sites has been greatly exaggerated… for now!
Thanks to Adi Gaskell for the inspiration for this post. You can read his post The death of daily deal sites has been greatly exaggerated for his take on the topic.