What’s the Big Deal? How Daily Deal Sites are Bad for Business.

The latest dot.com startup craze to sweep the globe is undoubtedly the growth of daily deals sites. Groupon led the way as the fastest growing company in history, others have followed suit in a bid to make a quick buck.

Struggling businesses, eager to get bums on seats, have thrown traditional marketing values firmly out of the window in a bid to buy the customer: at any price. And when it comes to daily deals sites, it’s a heavy price to pay.
For the customer, it’s a great deal. Savings in excess of 60% – and you can’t deny that it’s driving purchases that would have otherwise not been made.
But for business in general, it’s bad news. Very bad news.
The costs of marketing are roughly between 70% – 80% of revenue. How many businesses can operate AND turn profit when 80% of their cost base is a marketing cost? Very few I would think.
Compare this to a “traditional” marketing approach of spending roughly 10% of turnover on marketing activity (and that’s what I would recommend for a start up who needs to spend just a little bit more). See, business forgets that marketing is simply the process of buying a customer. And savvy businesses know that you make money when you buy and not when you sell. In other words, buying as frugally as possible is the recipe for successful business practice.
If you don’t believe me, watch any episode of The Apprentice and note the near obsessive attention to purchasing costs applied by Lord Alan Sugar and his aides. Costs which, on more than one occasion, have been the difference between success and failure of a task.
But these sites don’t care about business. They care about making money. Their business model is sound. You make the product (at your cost), you give it to them to market, they’ll slash your retail price to something undeniably palatable (not profitable), and they’ll take half the proceeds.
They don’t negotiate. They pretend to, but really a few percentage points here and there will not make a massive difference to either them or to you.
Their terms and conditions are anti-competitive. Try and suggest amendments to their contract and all hell breaks loose. Ummmmm, last time I looked a contract was meant to be an agreement between two entities. Emphasis on the word agreement.
They like to dictate the price (and therefore the discount). I’ve had it suggested to me on several occasions that £19 would work better than £21, or would bring it into line with competitive offers. In any other industry, we’d call this price fixing and report them to DBERR.
And even after all that, even if your product or service is great, if you are even slightly off the beaten track, they’ll make the decision that their customers are unlikely to travel to get it, and exclude you from the party. Whatever happened to the concept of free market? This is a level of screening that is ALL about generating the maximum profit for them and nothing to do with the customer whatsoever.
Now, I’m not advocating that businesses should avoid daily deals sites altogether. They can have their uses in driving new customers to the business. However these should always be part of a wider marketing mix, ideally with other marketing activities that generate positive returns on investment and cost a lot less.
There’s room in this crazy developing discount market for a sustainable operator to come in and deliver. However everyone’s currently off on a “me too” escapade – publishing giant DC Thomson contacted me last week about their new Beezer Deals which will launch in January. Their business model? Exactly the same as Itison and LivingSocial. Their unique offering? The ability to to advertise the deal in their daily print titles. I can barely contain my excitement.
In the same hour, DiscountTown also contacted me. Yet another discount site. Yet another similar business model.
Where’s the innovation? It’s not enough just to draw a pretty logo, stick it on a website and call yourself the next big thing. Yawn. Where’s the true differentiation?
Businesses are getting much savvier when it comes to daily deals sites. They’ve been round the block a few times now and know the pitfalls and the questions to ask. They want the reach of these discount sites, but not the costs. They are trying to negotiate deals that work for them. They are walking away from deals that are not going to work for them. That suggests to me that this media is about to grow up – it’s no longer about getting business at any cost, it’s about strategic, effective marketing activity.
And their growing pains are evident.  Every week I receive desperate phone calls from all the main operators trying to get my clients to give them offers to sell. They are crestfallen when I say no.
With maturity, comes wisdom, and it’s only a matter of time before a wise operator looks at the business model of these daily deals sites and recognises it is ultimately flawed. It’s simply not sustainable. For businesses to survive, they need to make profit. Profit will simply be unattainable if your marketing costs amount to 80% of turnover.
This starts a viscious downward spiral. Less profit = less business development = less businesses = less jobs = less customers = less. Just less.
I really hope someone’s going to jump into that space and soon. Before it’s too late.