Businesses with Low Customer Loyalty Patterns Thrived Using Daily Deals

 

In a survey involving 127 businesses that used daily deals, one of the categories I investigated was how daily deals fared with businesses that tended to attract one-time customers (i.e those with low customer loyalty). For such businesses, daily deals typically fared well for the business as long as they ensured that a profit was made on their initial deal offering, and that they were not pricing deals below cost to attract future loyalty from deal users.

Examples of businesses that fell into this category included travel/tourism related businesses that have many one-time customers who may only utilize their service once. Such businesses tended to fare well with daily deals, since knowing that their product was not one that impels a customer to come back for multiple visits, they offered their daily deals with the main intention of making a profit, and structured the deal so that it would be profitable from the onset. As long as the business was able to handle the influx of customers that came into their store from the deal, and provided good service so online reviews were positive, they were satisfied were their daily deal offerings.

On the other hand, when businesses selling products that attracted little loyalty on the part of the consumer, structured a deal that was profitable only when customers would come back for multiple visits, such businesses often fared badly with daily deals. An example of one such business was a bakery that priced a Groupon at below cost, hoping that their would be enough customer loyalty to make their deal profitable. However, there was not enough loyalty from daily deal customers to make the deal profitable, and the business had a miserable Groupon experience. One of the biggest factors that attributed to the lack of a successful daily deal campaign for this business, was the fact that only after offering the deal did they discover that the product it sells (baked goods) did not attract as much loyalty from its consumers as it had initially hoped, and they had mispriced the Groupon by overstating its expectations of the caliber of customer loyalty it would receive. When pricing a daily deal it’s extremely important to understand the type of customer loyalty your product carries, and use that to price your product accordingly.

How Businesses Selling Goods Online Fare with Daily Deals

http://www.zippycart.com/ecommerce-news/wp-content/uploads/2011/12/shopping-cart-mouse.jpg

Many businesses selling goods online had much different experiences from that of the  brick-and-mortar businesses I’ve spoken with, when it came to offering a daily deals. Unlike brick and mortar businesses, which have an opportunity to make an impression on customers that come in using their daily deals, websites offering daily deals were unable to meet their customers and make any sort of lasting impression that their brick-and-mortar counterparts had the opportunity to do. Consequently, the majority of the businesses I spoke with that sold daily deals only to be used on their websites had the primary goal of ensuring a profit be made on the initial deal by itself, and not account for any customer loyalty that may result from using the daily deal. Not surprisingly, the loyalty that such businesses received from their actual deal was greatly inferior to that of the loyalty which businesses with brick-and-mortar stores received. In addition to the loyalty such businesses received from daily deal customers, another area that differentiated businesses using daily deals through their websites was the caliber of customer reviews such businesses received online. Businesses that offered daily deals through their websites tended to be more sensitive to the possibility of receiving inferior customer reviews online, and for those businesses that did receive more negative online reviews from daily deal subscribers, it tended to weigh greater on the business’ view of whether the deal was successful.

Why Google Should Buy Groupon

http://www.dailydealmedia.com/wp-content/uploads/2012/12/google-groupon1.jpg

Note: This article was originally posted on Daily Deal Media

About two years ago today I remember sitting at my desk, hearing about Google’s six billion dollar rejected offer to takeover Groupon, a nascent up and coming company at the time, whose growth prospects were hailed across the blogosphere and among technologists. It was the big news of the day in the tech scene, and the fact that Groupon rejected the loftiest offer Google has ever made to acquire a company, opened the gate for a community of skeptics that began to question the fundamental viability of Groupon’s business model.

At the time, I was one of those skeptics, and believed strongly that had Groupon accepted the offer it would have provided a win-win scenario for both ends. With Groupon struggling to make a profit on its deals business due to rising customer acquisition costs and costs incurred from scaling up its operations, I saw Google as an excellent candidate to take over the firm and reduce costs, helping ensure financial viability for Groupon.

Today the outlook for Groupon is much more bleak than it was at this time two years ago. After debuting as a public company with an IPO that valued the firm at close to a whopping thirteen billion dollars, negative investor sentiment soon kicked in, and Groupon’s stock took a nosedive to a price that most recently valued the firm at close to three billion dollars, a number that is half of what Google offered to take over the firm for at the time.

Subsequently, it was recently reported that Google may be back on the stomping block looking to acquire Groupon, news that investors lauded, sending Groupon’s stock price up over twenty percent the day such speculation was revealed. While sentiment among the investing public about Groupon as a business has decreased significantly from that which it was when Google made its initial six billion dollar offer, my hunch that Google would be an excellent candidate to take the firm over has only increased over the last two years.

Two key areas Groupon is struggling with, include rising customer acquisition costs, and the rising costs of scaling up its business. With Google’s powerhouse of resources and leverage in the online realm, I see incredible opportunity for Google to reduce such costs, and be able to revive Groupon into a profit-bearing company.

Rising Customer Acquisition Costs

According to a study conducted by Yipit.com, a major daily deal industry data provider, when Groupon entered the market initially, it paid around $8 to acquire a user, whose retention rate was fairly high due to the lack of other daily deal players in the market. However, once daily deals took off and grew in popularity, Groupon’s cost to acquire customers skyrocketed, costing the firm close to fifty dollars per customer at one point, and its revenue from such customers was much lower than that of its initial subscribers.

The result of this was a net loss for Groupon for multiple quarters, though many investors at the time brushed off such losses as necessary expenses to grow its subscriber base. However, Groupon’s income statements today can confirm the fact that such customer acquisition costs may not have materialized into profits for the company.

Enter Google: A large chunk of Groupon’s customer acquisition costs consist of online advertising, an avenue they have used to gain new customers. With Google’s ownership of one of the largest online display ad networks in the world, such costs would be greatly reduced, and Groupon could reel in new paying subscribers, at a rate significantly lower than that which the firm is currently paying. Additionally, Google has the leverage of being the world’s most popular search engine, and can easily integrate Groupon daily deal offerings in search results, similar to that which they did with zagat online reviews.

Costs of Scaling

The nature of being the broker connecting the businesses offering daily deals to interested consumers, is that it entails a significant amount of labor from a large sales force that recruits local businesses to offer a daily deal. What this means for Groupon is that in order to expand to new markets it must first deploy a sometimes extraordinarily large sales force to tackle these new cities. Such costs have proven to be detrimental to Groupon’s bottom line, and its growth into new European markets has been especially challenging for the for the firm.

Enter Google: The procedure of recruiting small businesses to offer Groupons is far from an automated process, especially given the additional due diligence and servicing daily deal sites like Groupon offer their clients. And creating an algorithm that takes care of this most crucial part of the daily deal sales process is surely an extremely challenging, if not impossible, task.

That being said, if there is any company that can utilize its technological aptitude to increase efficiency, I would put my money on Google. While Google may not be able to replace the role of the salesperson in selling a deal to a local business, perhaps it can automate the process a little bit more than the current model, and in turn reduce the amount of labor required to sell a daily deal.

For example, Groupon is currently employing a workforce tasked solely with doing due diligence on local businesses, ensuring that businesses wishing to offer Groupons are legitimate. If Google can automate this task a little bit more using information it may have about such businesses from search engine results, it may be able to reduce costs in this area of the firm.

With Google utilizing its resources to minimize Groupon’s high customer acquisition costs, as well as making the process of selling deals to local businesses more efficient, it can ensure that Groupon’s margins increase, and help bring about profitability to this currently financially-stressed firm.

If Google is able to successfully lower the costs that Groupon currently incurs to sell its goods, it can also potentially reduce the high commission fees Groupon charges local businesses, a major pain point for many merchants interested in offering a daily deal. For Groupon, the result of a Google takeover can lead to increased synergies that allow for the company to grow, while simultaneously ensuring the sustainability of its business model.

4 Key Factors for Merchants to Consider when Offering Daily Deals

A merchant offering a daily deal is one of the key stakeholders in determining whether a deal will be a success, and over the last few months I’ve had the opportunity to hear from over 150 merchants, and hear about their daily deal experiences to better learn about the sustainability behind the daily deal business model. Some of the most  important areas merchants stressed as being instrumental in determining whether deals they offered were successful, included the following four categories: customer loyalty, new customer acquisition, customer reviews,  and the profitability of individual daily deals for the business.

1. Customer Loyalty – For many businesses offering daily deals, customer loyalty among deal users was  primary concern of theirs. Whether or not one-time deal users translated into loyal customers  often determined whether a daily deal was successful or not for these businesses. For such businesses, customer loyalty is a big driver of sales, and without such loyalty these businesses would be unable to survive. For high-loyalty businesses, customer loyalty is an inherent aspect of its business model, and marketing efforts are often made to not only acquire just any customers, but to acquire specific customers that they know will visit the business repeated times. Businesses of these sorts, included doctors, custom treatment centers, and hair salons.

On the other hand, there were other businesses in which customer loyalty was less instrumental in determining the success of daily deals and other online promotions. For such businesses, they were able to thrive with a small amount of repeat customers. Such businesses often rely on a high enough volume of customers to bring in new sales. Among the businesses I spoke with,  tourism related businesses fell best into this category, since they often catered towards new and different tourists as their sources of revenue.

For a business offering a daily deal, understanding what type of loyalty their businesses need to succeed is essential when structuring an online promotion or daily deal.

2. Online Customer Reviews – Customer reviews are often an important source of information for consumers looking to buy specific products, and consequently, the difference between good reviews and bad reviews has the potential to create or break a purchasing decision. Many businesses I spoke with that offered daily deals were quite conscious about the reviews they receive on the web and how their daily deals would affect such reviews. Additionally, the fact that daily deals  cater to large volumes of customers, offering a daily deal gives a business the opportunity to either significantly increase or decrease the caliber of  online reviews they receive on sites such as Yelp. Structuring a deal so that a customer is satisfied with the complete experience he receives, is essential in striving to set his business up for positive online reviews.

 3. New Customer Acquisition – One of the most commonly cited reasons businesses gave me for offering daily deals, was to bring in new customers. Daily deal sites often offer businesses an unprecedented reach to massive subscriber bases, and consequently the potential to bring in new customers through such sites was a major appeal to many of the businesses we spoke with. When offering a daily deal it’s important for businesses to recognize the incredible reach that daily deals have to new customers, and be ready to be able to handle a potential influx of customers that may come about through the offering of a daily deal/ online promotion.

4. Daily Deal Profitability – Ultimately, the biggest factor affecting the success of  daily deals among businesses I spoke with, was whether or not the individual deal was profitable for the merchant. Profitability can sometimes be most important for the company in the short term, while other businesses offering daily deals may be more concerned about the long term profitability of an individual deal. An example of a business concerned with a daily deal’s short-term profitability is one that may be strapped for cash, and may benefit from a daily deal through a quick cash inflow that helps  ensure liquidity for the business. Alternatively, business that require quarterly quotas may be interested in a daily deal for the immediate cash influxes it provides the business. Conversely, businesses concerned about the long-term profitability of a daily deal may utilize a deal in the hope that the  lifetime value of daily deal customers would be attractive. Many of these businesses often carried loyalty-heavy products,  and often used daily deals as a form of a marketing expense, hoping that the deals would bring about enough loyalty among its deal users to justify losing money on individual deals.

Daily Deal Top 10: Merchants’ Greatest Benefits and Complaints from Using Daily Deals »

Here’s my latest post on Daily Deal Media:

http://www.dailydealmedia.com/789daily-deal-top-10-merchants-greatest-benefits-and-complaints-from-using-daily-deals/

A Daily Deal Letdown: Milwaukee Cupcake Company Groupon Case Study

 In July of 2010, Milwaukee Cupcake Company decided to use Groupon as a method of promoting its brand and bringing in new customers to its business, which was new at the time. Its owners decided to utilize daily deals as a promotional method, since they believed that the reach possible through daily deals would bring in a ton of new customers into its business in a short period of time, which would be great for a new store on the block. The deal the company offered was $15 for a dozen cupcakes, a 50% discount off the original price of $30 for the same dozen cupcakes. When the owners of Milwaukee Cupcake Company decided to offer such a steeply discounted coupon, they did so with the hopes that a few positive effects would come about. Firstly, they had hoped that the customers who bought the Groupon would enjoy their cupcakes so much that they would develop into loyal customers, and help spread the word about Milwaukee Cupcake Company. They were also hoping that their Groupon customers would see all the other products the bakery carried, and choose to buy additional merchandise besides that which they redeemed with their Groupon voucher. While a quick cash influx was beneficial for the business at the time, what was most important for the business was that they develop loyal customers, whose lifetime value would exceed that which it cost the business to offer the Groupon. The reason why these aspects were so important for the Milwaukee Cupcake Company was because the business would not have made much money, if any, if all these consumers did were redeem their Groupon vouchers. The cut the company paid to Groupon just to offer the discount was close to 50% of how much the Groupon sold for, which had already been discounted heavily, leaving little room to profit on the Groupon deal. In addition, the Milwaukee Cupcake Company sells a product that involves a high amount labor, and commodity pricing for its cost of goods. These two aspects of the business’ production process led to little room to make a profit by selling a Groupon alone, and Milwaukee Cupcake’s consequently agreed that a positive return on their investment would only come about if the Groupon brought about loyal customers that over time would buy enough merchandise to make the Groupon deal worth doing.

The outcome of the Milwaukee Cupcake Company’s use of Groupon as a method of promotion was far worse than the expectations the owners had when they initially signed up for the service. They described the customers that came in through Groupon as “rude,” “unfriendly,” and “deal-hungry.” Unlike its regular customers, the customers that came in with Groupon vouchers didn’t care about buying anything else than that which the Groupon deal provided them, and some of them were even unsatisfied with what they received with their steeply discounted Groupon. Perhaps the biggest letdown among Groupon users though, was the fact that barely any of them came back to the business for a second time and developed into loyal customers. For a business that depends on loyalty among consumers to help drive sales, this was a prime disappointment, as the Groupon had barely provided any loyalty among the consumers that it referred. Additionally, another negative part of Milwaukee Cupcake Company’s daily deal experience was working with the Groupon salespeople to develop the perfect deal. The Groupon salespeople had cared mainly about driving the price of the deal down as much as possible, and showed little concern towards making sure that it would be an overall success for the business. Ultimately, Groupon was not a success for the Milwaukee Cupcake Company, and its owners have stated that they don’t plan on ever offering a Groupon deal again.

 

How Businesses with High Input Costs Fare with Daily Deals

One of the reasons businesses cite for the lack of success utilizing a daily deal promotion, is due to the difficulty of ensuring a profit when their products carry low-profit margins. While daily deals are great at bringing in new customers, they come at a cost of steeply reducing a product’s price, and for some businesses, the reduction is too great to make a profit on. For this reason, we decided to focus on how businesses with high-input costs and low –profit margins fared with daily deals, in a survey involving 127 businesses.

Businesses selling products or services that entailed a significant amount of input costs, had greatly mixed results while offering daily deals. The high amount of input costs for such businesses often allowed for only a minimal profit margin on their products, and many of them ventured into offering a daily deal in which they lost money initially on the coupon, hoping that additional loyalty would be spurred that would bring about a positive return on their investment. However, many of these businesses ended up being disappointed with what they saw as a lack of loyalty that ensued from their daily deals, in which their were little to any profits that were made in the eventual long term.

For example, one of the businesses we spoke with was a Cupcake company that sold a daily deal below cost, hoping that customer loyalty would be so great that in the long term the deal would be profitable. However, few customers that used the daily deal ended up coming back to the merchant to make future purchases, and the daily deal was not profitable for the merchant. According to the bakery owner, it was the “high commodity costs, and high amount of labor” that made her business unsuitable for offering a daily deal.

On the other hand there was a very similar business to that of the bakery, which we spoke with, that enjoyed great success with offering daily deals. This business was a cookie company that used daily deals to sell a package of holiday cookies and sold over 3,000 coupons that were extremely profitable for the business. While the cookie company’s products clearly resembled that of the bakery’s, the cookie company’s strategy allowed for their daily deal to be a much greater success. While the bakery priced their Groupon below cost, the cookie company chose one of the company’s most expensive products, with one of the highest profit margins to ensure that immediately upon selling the daily deal it would ensure a profit, without having to account for future purchases. The cookie company knew that given the nature of their product, customer loyalty would not be very significant, and therefore ensured that the price they charged for their daily deal allowed for a profit to be realized immediately upon selling the deal.

Based on discussions and surveys from numerous businesses in which we spoke with, for a businesses with high input costs, their were two primary variables that accounted for whether their daily deals were successful or not. The first was the extent of customer loyalty that develops from selling their product, and the second was whether the deal was profitable from the onset, without accounting for any additional loyalty. The case of the bakery having a miserable daily deal experience stemmed from the fact that the nature of the products they sell impel little customer loyalty on the part of the consumer, and therefore offering a deal at below cost proved to be a solution that was not profitable for the business. On the other hand, we spoke with a dentist that offered a daily deal for its business, significantly below cost, but because the customer acquisition cost was so high for dentist, as well as the fact that a dentists’ patients tend to carry a great deal of both loyalty and new customer referral potential, daily deals were an excellent solution for this business. From such cases we found that knowing how loyal your potential customers are was crucial as to whether a business with high input costs should charge a daily deal at below, at, or above the product’s cost.

Study Finds that Daily Deals are Profitable for Roughly 75% of Businesses

The following is a segment from a groundbreaking study conducted by DecodingtheDailyDeal founder Sam Neumark, which will be released in November 2012

In a survey involving 127 businesses that offered daily deals, roughly three quarters of the businesses polled, noted that over the long term daily deals were profitable for their businesses.

 75.8% of businesses reported that daily deals were profitable for their businesses over the long term

24.2% of businesses reported that daily deals were not profitable for them

Given that the long-term profitability of a daily deal was a major indicator of whether or not daily deals were successful for businesses, we see this as a telling statistic for businesses using daily deals. The fact that 24.2% of businesses surveyed stated that daily deals were not profitable for their businesses, confirms one of our initial assumptions, being that daily deals are not suitable for every business. This statistic also sheds led on the fact that there is a lack of transparency among businesses as to knowing whether or not daily deals are suited for them or not. This statistic is also consistent with the 26.1% of businesses that noted that they preferred to use different methods of promotion instead of daily deals.

Recommendations: The fact that a significant majority of businesses polled noted that daily deals were profitable for them over the long term, shows that daily deals can be an effective promotional tool for businesses. However, from the fact that it was only 75.8% of the businesses polled that expressed long term satisfaction with daily deals, it is evident that daily deals are not  the optimal promotional solution for every business.  It is crucial for a business to strategically map out the impacts that a daily deal can have on the numerous aspects of its business, before venturing into offering a daily deal. Before offering a daily deal, we recommend that a business evaluate the variables that are most important for the deal to be successful, and then tactically craft a deal that best ensures that it will be profitable for the business. For example, based on our survey, key areas that were important to businesses when offering a daily deal included customer loyalty, customer reviews, and new customer acquisition (among others). By evaluating the effects daily deals have on such areas of the business, a business can structure a deal that best meets its long term goals.

How Businesses Fare with an Influx of Daily Deal Customers

The following is a segment from a groundbreaking study conducted by DecodingtheDailyDeal founder Sam Neumark, which will be released in November 2012 

The idea to ask businesses how an influx in daily deal customers affects their businesses ability to offer quality service stemmed from numerous articles having come out in the last year about businesses finding it difficult to handle all of the customers that daily deal sites brought in.

When businesses were asked whether an influx in daily deal customers had a negative effect on their ability to offer quality service, 9.8% of the businesses agreed with this statement, 65.9% of the businesses disagreed, and 24.4% of the businesses neither agreed nor disagreed

From the fact that 63.7% of our survey respondents said that daily deals were more effective in bringing in new customers than other promotional methods, we know that daily deals are a very effective means of bringing in customers, which made it even more important for us to learn about how the businesses offering the deals are able to fare with this rush of customers.

While one’s assumption from articles online and business news may have been that the influx of daily deal customers is a major problem for businesses, only 9.8% of our survey respondents agreed with this statement.

From speaking with businesses and analyzing survey results, we were able to recognize a trend, which was that businesses new to daily deals were more likely to have this problem, whereas businesses that had experience using daily deals were less likely to have this issue. For example, one of the businesses owners we spoke with was the owner of a popular New York City Steakhouse that had sold thousands of daily deals for a certain Pri Fixe Meal over the last few years. Daily Deals subscribers became such a large portion of this business’ clientele that the restaurant hired specific waiters to only serve daily deal users. These waiters were extremely knowledgeable in the details of the daily deal, and were able to handle such customers even more efficiently than their non-deal subscribers. Also, the waiters made sure to treat daily deal subscribers no differently than any other customer, if not better, to entice loyalty from daily deal users. The result of this was that many of the daily deal subscribers translated into loyal customers for this business, and the restaurant was able to operate efficiently, even with a new influx of daily deal customers.

Study Reveals Daily Deals as Effective Means of Bringing in New Customers

The following is a segment from a groundbreaking study conducted by DecodingtheDailyDeal founder Sam Neumark, which will be released in November 2012

New customer acquisition is a major component of the appeal for a small business considering to offer a daily deal. In a poll distributed to businesses using daily deals before our official survey was sent out, one of the most commonly cited reasons that businesses gave us for offering daily deals was to bring in new customers. Daily deal sites often offer businesses an unprecedented reach to massive subscriber bases, and consequently the potential to bring in new customers through such sites was a major appeal to many of the businesses we spoke with that offered daily deals. We therefore included the amount of new customers businesses bring in through daily deals, as a factor in determining the success of such deals.

Our survey results show daily deals as an extremely effective method of bringing in new customers. Out of the 128 merchants that participated in our survey:

63.7% of the businesses said that daily deals were more effective in bringing in customers than other promotional methods

 

28.6% of businesses said daily deals were equally effective as other promotional methods

 

7.7% of businesses said daily deals were less effective

Results from this aspect of our survey may be indicative of the fact that businesses that were unhappy with their daily deal experiences for the most part were not dissatisfied due to a lack of new customers coming in from the deal, but rather through other effects that daily deals had for their businesses. As an example, another question included in the survey was how the influx in deal-customers affected daily business operations, and 9.8% of businesses polled said that daily deals had a negative effect on their business’ ability to provide good service. The fact that 9.8% of businesses polled said that the influx of new customers from daily deals had a negative impact on its business, shows that that there may be businesses dissatisfied with daily deals despite their ability to bring in new customers.

Follow

Get every new post delivered to your Inbox.

Join 81 other followers

%d bloggers like this: