The current daily deal model for local offers is imperfect – it is unprofitable for many merchants and unsustainable in the short and long term.Daily deals have quickly shifted the local marketing landscape from traditional advertising to blanket discounts aimed at driving first-time customer acquisition en masse. While this new marketing technique has transformed today’s shopping experience and increased awareness of local stores, restaurants, spas and other services, it hasn’t yet proven to improve merchants’ bottom lines.
In fact, a large number of merchants that have partnered with daily deal sites have lost money; of particular concern are businesses that operate with variable costs, expenses which are sensitive to the amount of money a customer spends, like food items or beauty services. In such cases, patrons must spend over a certain threshold for a merchant to be profitable. By cutting prices to make offers attractive to deal site users, these merchants – largely local restaurants, spas and salons – can easily realise significant losses during promotions.
Many merchants that have previously offered daily deals are now avoiding the spaces. And those that haven’t ventured in the space are increasingly reluctant to do so.
The effects of this widespread merchant attrition are grim: deal sites have turned to saturating our inboxes primarily with offers from merchants with non-variable costs, like discounted tickets for museums, shows and walking tours. In the case of some daily deal sites, offers from variable cost merchants such as restaurants have dropped more than 40% since last year, and beauty and spa offers are also down by 18%. Local service deals, however, have seen an unbalanced increase by more than 100% over the last year. This means the variety of high-quality offers available to customers is declining, and the most desirable patrons are clicking “please remove.”
Another serious issue with the existing model is that it does not encourage customers to spend more than an offer’s discounted value when in-store. Daily deal sites operate under a strategy historically recognised as a ‘loss-leader approach’, which attracts customers to a business by offering steep discounts on particular items or services. As such, the approach involves selling goods and services at a loss (often significant), and only benefits variable cost merchants when first-time customer leads result in additional purchasing upon redeeming an offer, as well as in return visits.
Unfortunately for these merchants, reaching repeat customers who spend beyond an offer’s value is not what most deal sites are set up to do. In fact, a recent Rice University study shows that while 80% of coupon-redeeming customers come to a merchant for the first time through deal promotions, only 20% become repeat customers. Also troubling is the fact that many of the most popular platforms get paid simply based on the number of ‘loss-leaders’ they sell.
Void from the space, as we know it now, is a way to establish truly profitable, measurable, and mutually beneficial relationships between merchants and patrons.
Daily deal sites, while having set an important foundation for the next generation of local marketing, will increasingly fail to serve the needs of many local merchants. Some deal sites may survive by exclusively serving merchant partners without expenses that are sensitive to customer spending, but the key to succeeding in the evolution of the local offer space will be a site’s ability to meet the varying needs of all merchants, while simultaneously benefiting customers.
What’s most needed in the local marketing space is a true alignment of interests between merchants and customers, and a platform that establishes it.
Here’s how we get there:
1. A Better Business Model
Local offer platforms must begin to create performance-based business models that work in tandem with merchant objectives. Further benefits, like profit guarantees to qualified businesses, would be an added incentive for high-quality merchants to extend more compelling offers. Most merchants would agree that local offer sites should only make money when promotions are profitable, not the other way around.
While many daily deal sites provide a merchant dashboard – a unique page detailing sale numbers, such as vouchers sold – no site currently promotes transparency of deal profitability, which is crucial for merchants to measure offer success. Merchants have become increasingly sceptical that they are making money from the current model and have struggled to calculate gains or losses from deal site promotions. In order to continue acquiring and maintaining merchant partnerships, companies in the local offer space must track transactions and prove to participating businesses that their platforms are closing the redemption loop and driving profits.
3. Good Customers
Companies should allow merchants critical visibility into customer transaction behaviour and provide them with opportunities to engage those patrons who will actually help achieve a measurable return on investment. Contrary to the practices of ubiquitous deal aggregators displaying all offers to any consumer on the Web, the future of the local offer space depends on a platform’s capacity to tightly control the quality of its subscriber base, as well as the distribution and availability of its offers. In doing so, those platforms with the most high-quality members will have access to the best promotions. The logical extension of this approach will ultimately be the provision of private offers to customers based on patrons’ history of profitable behaviour with merchants.
A perfected model can – and should – be an effective marketing tool that drives real value to all merchants and customers. Satisfying merchants is the only way for local offer platforms to evolve; without making measurable profit, merchants will stop partnering with sites to make good offers. And without good offers, consumers will stop buying deals. Local merchants have worked tirelessly to build businesses that their customers love. As an industry that profits from merchant-customer relationships, the local offer space has a heightened responsibility to connect only the best patrons with the best merchants and deliver significant value to their bottom lines.