As a consumer I love deal-of-the-day (DOD) sites! Bought 2 Groupons, a Bloomspot deal and a HomeRun this week alone! But as a marketing expert I recommend companies, especially small businesses, to BE CAREFUL!
With the explosion of these deal-of-the-day sites I’ve had a lot of small businesses asking advice about jumping on the bandwagon to boost their business during these tough economic times. Particularly, it seems that service-oriented, luxury-purchase small businesses, such as spas, restaurants, hair salons, etc., are looking to these new outlets to draw in new clients. One spa owner told me, “Had I understood all of the implications that running a deal-of-the-day would have on my salon, I would not have done it!”
So, what went wrong for this salon owner? Why wouldn’t a small business want to run a Groupon or other deal-of-the-day?*
Word of Caution Before Running A Deal-of-the-Day
Ask Yourself, “What Will It Really Cost My Business?”
These online companies offer businesses “no upfront costs” to do this type of advertising, but that doesn’t mean it’s free!
Most DOD sites require that your company offer products or services at a minimum of 50% off. So already, your revenue is cut in half. Then, the DOD site takes a split of the commission on the sale for each deal sold. Standard cuts seem to be about 50-50% up to 70-30% split between the business and the DOD site. Then, many of these DOD sites charge a credit charge fee per transaction of 2 or 3% on the price of the deal. So what is the math on that?
- Your company offers products or services which are typically worth $50 for 50% off.
- The DOD site gives you a commission contract of 60-40% split.
- The DOD site charges you 3% of each transaction (deal sold), 3% of $25 = 75 cents each for processing or charge fees.
- 100 deals are sold.
- Retail value of all… $50 x 100 = $5,000
- Your company actually makes on the deal… ($25 x 100) – 40% commission to DOD site = $1,500. Oh, but wait… Minus 3% processing/charge fee which works out to 75 cents per deal. You’re left with $14.25 per deal.
So, the retail value of $5,000 is out the door and you’re company has just made $14.25 (oops, typo) $1,425. Or did it?
- Are you a service-providing business? If you’re a salon or spa, you may have contract employees and you’ll still need to pay them according to their contract at the full retail value. Example: Your hair salon business uses contractor stylists who split the income of each service with your business 50%. So, your $50 haircut sold on a DOD site bringing in only $14.25, but you have to pay your massage therapist $25 to perform the massage.
- If you sell products, be sure your profit margin is high enough. Example: You sell $50 worth of product for $25 and actually only bring in $14.25, you’re profit margin must be high enough to at least cover that cost. Did the $50 product you sold cost your company more or less than $14.25 ?
- And then there is the cost of hassle or angry customers. If your business offered something for $25 for $50 in product/services, but the consumer comes in and buys something that is only $48, they don’t receive the $2 change. Seems reasonable as the business, right? But for a consumer who didn’t read the fine-print…
- But you’ll get repeat business, right? That’s what you really wanted from the deal, new regular customers. Well, maybe, but likely not. 1st, does your business have a client retention plan? How can you help ensure this new customer is going to come back? And, is your DOD offer something that most people just want to get a deal on or where they looking for a deal to try out a new place and then decide to become regular customers? (My 2 cents… I have yet to return to even one place where I bought a DOD from! Not that they were bad, but I just wanted a deal!)
Stay tuned for tomorrow’s post on “Getting the Most from a Deal of the Day offer”.
*Disclaimer: The salon owner did not use Groupon for their deal-of-the-day. Sorry, Groupon, you just happen to be the most well-known of these sites. In addition, the examples of DOD sites are cumulative, general examples and do not reflect Groupon’s exact policies/programs, nor that of any specific DOD site.
