Daily deals have become a popular marketing strategy for many smaller businesses. In large part, this popularity can be attributed to decreased discretionary spending in recent years due to economic downturns and uncertainty about the marketplace. These innovative new ways to use the power of social media to market products and services may seem like the answer for small to medium-sized businesses looking for greater visibility and increased business. While these strategies work for some companies, the daily deals marketing strategy can also generate significant risks in certain key industries.
Understanding the daily deals market strategy
Sites like Groupon and LivingSocial offer deeply discounted goods and services, but only if enough customers buy in to the particular deal and pay upfront for the particular deal. These promotional tactics rely heavily on email communications and word of mouth to ensure maximum participation. Groupon's strategy, in particular, is heavily dependent on humor and whimsical approaches and has been highly successful for the daily deals company. The potential revenues of this marketing approach have even lured Facebook into the fray with test marketing in a variety of major metropolitan areas. While these marketing approaches have been exceptionally lucrative for most of the leading daily deals companies, the picture for small business participants has not been so uniformly bright.
Risks and Rewards
Small businesses pay a fee for participating in daily deals promotions that typically comprises a percentage of the sales generated by the specific campaign. Combined with the deep discount offered to customers through the deal itself, these costs can constitute a major expense for businesses that may be struggling to stay afloat. Daily deals are typically loss leaders and can create significant revenue deficits for some businesses. The expectation is that these immediate financial losses will be compensated with increased visibility and repeat business from customers who initially discover the company when it is featured as a daily deal. In practice, however, that expectation may be overly optimistic for some companies.
Not Right for All Industries
An in-depth analysis of the daily deals industry by market research analysis firm IBISWorld indicated that several major industries had actually been hurt by their use of the daily deals promotional model in reaching their potential customers. Supermarkets were among the hardest hit due to their smaller profit margins and the degree of personal loyalty consumers demonstrate to their own preferred grocery outlets. While new customers did take advantage of the daily deals on a one-time basis, these sales were typically at a loss and did not generate new business for the stores over time. Similar results were seen for interior decorating firms, nail salons and coffee shops.
An unexpected drawback
Daily deals can actually harm the reputations of some companies according to a joint study by Harvard University and Boston University faculty members. Entitled "Daily Deals: Prediction, Social Diffusion, and Reputational Ramifications," the study indicated that these promotional techniques could actually result in lower ratings on Yelp and other review sites. Worse yet, reviews that referenced Groupon or coupon usage were, on average, ten percent more negative than reviews without such references. Since a Harvard Business School working paper recently indicated that a one-star boost in Yelp ratings can potentially trigger an increase of nine percent in corporate revenues, a commensurate drop can be catastrophic for smaller businesses struggling in the current economy.
Are Daily Deals Worth the Cost for Business?
Daily deals like those offered by LivingSocial, Groupon and Google can provide added visibility and sales for smaller companies, but recent studies suggest that these benefits may come with unexpected costs in terms of online reputation and potential later sales. Businesses and industries that operate on low profit margins may also find the upfront costs of participating in daily deals outweigh any potential benefits in increased sales and expanded customer base. However, for businesses attempting to acquire a larger slice of the coveted local marketplace, daily deals are likely to remain one of the marketing tools of choice for the foreseeable future.
You do not have to have a marketing degree to know that daily deals have their positives and negatives. What are your thoughts on this marketing model?