Less than half of businesses running a daily deal promotion for the first time report profiting from the deal, according to May 2012 results from an ongoing Rice University study of deal websites such as Groupon and LivingSocial. But the study also shows that profits increase for businesses with more deal experience, while about 80% of deal buyers are new to that business and one-third become repeat customers.
By giving deal buyers at least 50% off services, these sites are not engineered for businesses to make a profit on every coupon purchased. They are a marketing tool. These sites only take profits on deals that are sold, so you don’t lose anything if no one buys your deal. But with an average commission of almost 45%, according to the Rice University study, their cut is steep.
You may have heard about the woman who sold more than 100,000 cupcakes through a daily deal site and spent a year’s worth of profits trying to serve each one. So how do you avoid that type of story and pull off a successful daily deal promotion?
Initiating the Deal
As seen in this screenshot of an archived deal on Groupon, deals offer at least 50% off services and products. MPG Car Rental in Los Angeles offered the standard 50%.
All the operators interviewed report that daily deal companies help guide you through the deal process. And since a few horror stories broke headlines, the sites are sure to vet your company. Groupon, for example, will check your Better Business Bureau listing for any negative reviews. The site also checks Yelp reviews, according to Paul Hernandez, manager of MPG Car Rental in Venice, Calif., which offered a car rental deal on Groupon.
Ryan Safady, co-CEO of luxury rental company Imagine Lifestyles, says Groupon checked his whole system, down to how many dates he had open for reservations. Though some initial pains were felt during one of the first deals offered, “we made sure to maneuver them now in a way it doesn’t take away from our normal business,” he says.
In the luxury and exotic space, Groupon and companies that have done deals say that offering an experiential package is the most successful. Imagine Lifestyles' Ryan Safady says his company has found that these deals work best because it doesn't interfere with regular renters.
And that’s the learning process. While daily deal sites help you create the deal, only you can figure out what succeeds specifically for your business. For example, Hernandez says that Groupon helped him figure out his deal’s pricing structure, showing him that tiered pricing works the best. MPG Car Rental quickly learned, however, that while the tiered pricing structure worked, a two-tiered structure would be best — keeping deal values equivalent to MPG’s price for a one- to three-day rental at the most.
Capping the Deal
“Capping the deal” is an important first step in the process. MPG Car Rental capped its deal at around 100, which was sold in December 2011 with a one-year expiration date. Those 100 people have been trickling in, Hernandez says, and as of this writing, 30 of those deal buyers had not yet used it.
ACE Rent-A-Car has also played in the daily deal space, but for its new parking brand in Indiana and Illinois, Easy Airport Parking. Kevin Stutz, business manager for ACE Reservations Systems, says that the Groupon parking deal sold in July was capped at 1,500 purchases and managed to sell out.
ACE Rent-A-Car's new parking brand, Easy Airport Parking, in Indiana and Illinois has done one Groupon deal so far. Kevin Stutz, Ace Reservations Systems business manager, says he wishes the company had done more of them sooner.
For new brands such as Easy Airport Parking, daily deals can be the perfect marketing tool. “It exposed us to an entirely new demographic of people,” Stutz says. And while it’s too early to tell the success of the campaign, he says the promotion has been going without a hitch. “The fact that it sold out and we got through the busy month without problems means we passed the test with flying colors,” he says.
Stutz acknowledges that there were concerns going into the deal. “The last thing we want to do is have so many Groupon customers coming through the door that we can’t properly service our loyal customers,” he says.
So how do you calculate the number of deals that should be sold? Groupon reports that most deals are cashed in during the first and last months of the offer, with about 20% coming in the first month.
For ACE’s parking deal, if 20% of the 1,500 people used the deal in the first month, ACE’s team needed to figure out if Easy Airport Parking could supply enough spaces. “We looked at what our parking capacity each month was and our utilization — and we went back and forth for a while,” Stutz says, but eventually calculated that 1,500 spaces were doable.