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Daily deals: profit or poorhouse?


Atough economy is a great place to grow a discount.  Just look at the
explosion of offers in excess of 50 per cent off available through daily
deal companies such as Living Social. Just in case you aren’t familiar
with the daily deal group buying model, here’s the gist: The deal site
creates an offer by first doing a deal with a merchant who will provide
the steep discount to its subscriber base.

Atough economy is a great place to grow a discount.  Just look at the explosion of offers in excess of 50 per cent off available through daily deal companies such as Living Social. Just in case you aren’t familiar with the daily deal group buying model, here’s the gist: The deal site creates an offer by first doing a deal with a merchant who will provide the steep discount to its subscriber base. Offers are then redeemed through the merchant, with a commission from each voucher going to the daily deal site. Subscribers to these sites receive a new offer in their e-mail every day for services or products offered at usually 50 to 90 per cent off their regular price.

 
With more than 500 daily deal companies calling Canada home, there are plenty of players to knock on your door.


 

Merchant tales of their “offer” experience range from extreme enthusiasm to downright horror show. The deals can bring in new customers and grow brand awareness, but also cripple a company into closure. Love them or hate them, you need to understand them. If a sales rep from one hasn’t called you yet, it’s probably only a matter of time before one or 10 will. Let’s look at the lay of the land: how it’s shaped, where it’s headed, what it means for you as a pizzeria operator and, of course, what to consider before participating.

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Boyan Josic, founder and CEO of Michigan-based Daily Deal Media, which provides news, data and intelligence for the social commerce and daily deal industry, says there are between 1,200 and 1,500 daily deal companies in North America, with just over 500 calling Canada home. In the first six months of this year, big guns such as Groupon, Living Social and Gilt Group attracted more than $1.69 billion in venture capital and other investments, reported the 2011 Daily Deal Investment Index released in July by Daily Deal Media.

The number of launches has doubled in the last 12 months and then really picked up steam in about the last six months, says Josic. This has left the landscape with some big players and a whole bunch of copycat offspring running around trying to compete; some legit, some not-so-much. The top three products for deals are restaurant/bar, spas and health care (teeth whitening, etc.), says Josic, so your pizzeria is high on a daily deal company’s directory list of merchants to call on.

At the Daily Deal Media conference in Chicago this September, Canada was highlighted by an expert panel as an exceptional market for the daily deal business, with the city of Toronto second only to Chicago in the North American daily deal market. As you can see, this industry is hot and Canada’s a gold nugget. But is this industry going to go from trailblazing startup to sustainable?

Groupon, perhaps the most well known of the daily deal behemoths, shelved its planned initial public offering (IPO) when revised accounting showed the company to be, apparently, unprofitable after showing huge losses in customer acquisition, reported the Globe and Mail in August. The Globe also reported that Groupon was working on a plan to get its financial house in order and get its IPO back on track. They need to raise money, no questions there. In the meantime, Facebook and Yelp have backed out of the daily deals space while Google has jumped in with Google Offers.

“’Daily deals’ is a hot phrase now,” says Josic. “Do I think it will be three to four years from now? No. But do I see it going away? No. . . . We see it evolving and being integrated into the greater good of social commerce [e-commerce through social media] and local commerce.”

So we’ve established that we’ve got an infant industry growing fast. If history rewrites itself, as it tends to do, we’ve got changes on the way.

When I ask Josic if he thinks the industry is a little like the Wild West right now, he says yes, and he hears that all the time.

“There’s lots of stuff going on with class actions, fraud incidents and potential government legislation. We’re headed towards regulation of some sort and at the end of the day that’s probably a good thing.”

Industry rules and standards are a natural evolution of industry maturation. The Wild West is not sustainable but we know it can be domesticated into a suburb, which may be less thrilling but far more harmonious for all involved.

Somebody getting the shaft is an inevitable consequence of a Wild West landscape. Right now, it’s the slim-margin merchant feeling the big squeeze of the steep discount, the commission and the potential for attracting scavengers in customer clothing.

“Eventually you’ve got to start treating the merchant a little better, says Josic. “One of the things we hear is a lot of talk of how we can make this a value proposition for the merchants.”

It’s comforting to know the industry is not oblivious to the pitfalls it carries for the livelihoods of the very people it relies on to do its deals. No suppliers, no deals. It’s simply not sustainable to ignore the complaints of those you depend on to exist.

Another evolutionary step is the incorporation of location-based marketing technology: How can the retailers reach you when you’re near their store? 

“Pop-up deals in the area when you are looking to have lunch – that’s what we’re all talking about,” says Josic.
Canada has home grown a step in this very direction Josic points to. Toronto-based Mobile Fringe launched Push a Deal in September, billed as the “first mobile service that pushes offers to consumers as they cross the ‘geo-fence’ and enter a participating store’s immediate vicinity.” Starting in Toronto, Vancouver and Montreal, Push a Deal plans to roll out to Canadian cities and universities in the ensuing months. Mobile Fringe is the company behind retail shopping initiatives such as the Toronto Eaton Centre and Yorkdale Shopping Centre apps.

Mobile Fringe CEO Steve Sorge says the market research done to launch Push a Deal brought to light flaws in the sustainability of daily deal companies as a business model.  

“The business model is not sustainable conceptually because it’s not a tool you can use more than once, as it can cripple your business,” says Sorge.

Sorge launched a beta release of Push a Deal last spring, when the daily deal environment was going bananas (beta is the stage in the software release cycle when the program is available for testing to prospective customers and users). Sorge is setting an example of having a fair spin for merchants by providing access to a mobile marketing channel and the opportunity to do a deal that’s not a 50 per cent discount. Mobile Fringe takes 25 per cent of the deal amount, which is paid by performance, or when an offer is redeemed. Sorge says he doesn’t see how food service can survive on a ton of steep discounts when they operate with such tight margins.

“Let the market dictate if it’s a good offer or not. Don’t put a threshold on what the discount is. Fifteen per cent could be enough of a tipping point for a person that is 500 metres from your store. . . . These characteristics make the platform something you can use consistently.”

 Another evolutionary step going on in the daily deals space is consolidation, says Sorge. He notes that when the players get big they start to buy up the smaller ones, and he hears of consolidation going on in the daily deal industry. He says the same will happen for the Push a Deals of the world, but the platform is too novel to be there yet: “We are location-based marketing, they are group deal marketing,” he says of their differentiation as offer makers. Through sheer need for efficiency, smaller players will get eaten up and you will get fewer, but probably more powerful, deal companies knocking on your door. 

We may see a shift in what’s a popular deal. The high discounts are better suited to capital-intensive companies that need to fill space: golf courses, gyms, hotels. These exist with staffing as more of a variable cost than the use itself. But when you have a high cost of goods sold, says Sorge, it’s not a sustainable marketing channel and many merchants aren’t savvy enough yet about the daily deal industry to put the right terms on it.

“These are well-trained companies calling directory listings and they do know how to sell independents when it can be very injurious to their [independents’] business,” says Sorge.

Deal or no deal
One of the biggest hopes, THE big hope, for a pizzeria running a daily deal offer would be gaining new customers. Getting people in the door is definitely the name of the game. Turning people into loyal customers is critical to giving your pizzeria a long life.

These coupon clippers of 2011 are a tribe that has many members who just go from deal to deal with no intention of ever returning. Not all are like that, but as Diana Coutu writes in her column about her experience with Groupon, the offer buyers may not necessarily be your preferred species of customer.

There is market research to support the theory that your deal could create converts. As noted earlier, merchant experiences have been quite good and quite bad. Food industry research firm Technomic published a Daily Deal Watch on restaurant-goers’ attitudes and usage of couponing sites. The Chicago-based firm found that 67 per cent of the people polled claim they have returned to the restaurant without a daily deal and 83 per cent recommended it to family and friends.

“Consumers at all income levels appear to be very engaged in and satisfied with online daily restaurant deals,” notes Bob Goldin, executive vice-president of Technomic, in a news release. “They are subscribing to multiple services and purchasing multiple deals. The fact that 85 per cent of consumers plan to continue to purchase online restaurant deals and 79 per cent look forward to receiving them is a strong indication of the impact the online daily deal business is having and of its potential within the restaurant space.”

Lineups out the door can get a pizza operator excited too, and that’s a very real possibility should you sign up with a daily deal company and offer 50 per cent or more off to a huge subscriber base. The temptations to partake are chocolate sweet: new customers and big exposure. But can you handle the extra weight? If you don’t set a cap on the number that can be sold you could find yourself sinking. You’ll need extra staff and preparation. Take the case of The Butchers in Toronto. Unprepared for the onslaught of business their offers drew, the business was crippled into temporary closure and suffered a lot of bad publicity. Different daily deal companies have different terms. You really need to find one that lets you protect your business, then take a microscope to your agreement about 10 times.

Entreprenuer Rocky Agrawal wrote a guest post on Tech Crunch called “Why I want Google Offers and the Entire Daily Deals business to Die” that effectively outlines the potential hazards of daily deals for merchants. His most scathing line is especially articulate: “We have a brand new, overpriced, aggressively hyped, hard to understand product. We have no data on how it will perform over time. It is being sold to people with limited disclosures of important details. Sound familiar? It should. Daily deal providers are the moral equivalent of predatory lenders selling subprime liars loans to people they knew couldn’t afford it.”

Ouch.

On the other hand, I recently spoke with Keren Hadad, co-owner of The Canadian Pie Company in Toronto, and she relayed that she did two deals – Living Social and TeamBuy – shortly after launching the bakery. She said she was really happy with the results and found it helped grow awareness of the new store. There are many factors that come into play in determining whether your story is positive or negative in result, or perhaps even some varying shades of grey. One thing seems to arise from my research: new businesses often have a different outlook and satisfaction level with their deal than established, successful restaurants.

Jeff Bembridge of Bambino’s Pizza, established in 1986 in Nova Scotia, just couldn’t get the math to make sense.

“I was recently approached by what looked like a great deal, but the math boiled down to this: I’m not going to spend $35 to get $10. We’re not down in sales, we’ve been up for 25 years.”

Marina Rondinelli, our 2011 Pizza Chef of the Year runner-up and owner of Rondo’s/Pizza Plus, which just celebrated 25 years in business, says the deal companies have yet to touch down in Sarnia, Ont. But she is familiar with the format and buys the occasional deal herself from DealFind, available in nearby London.

“Personally, I think it’s a great idea for someone starting out,” she says. “My best thing I ever used was welcome wagon.”

Rondinelli included a coupon for a small pizza with welcome wagon. People always ordered more with that small a coupon, she points out, and they are still coming back 10 years later.

“It’s all about getting them in the door, whether it’s DealFind or anything else. It all depends on the cost, but you do have to spend money to make money.”

The question this leaves us with: Just how much are you willing to spend and what do you expect to make? The daily deal is a dotted line to be signed only after looking at not only their fine print but also yours.