Deal of the Day Sites - Is Groupon Right for You?

1/25/2011

- Danielle Leitch, EVP, Client Strategy

There is a lot of buzz currently surrounding "Deal-of-the-Day" networks, especially Groupon and Living Social. Groupon has gained attention for a few reasons, including being mentioned by Oprah on her TV show, which caused their website to go into overload mode. In addition, their supposed nixing of a monumental offer from Google, as well as heavily rumored talk of an upcoming IPO has also increased their exposure. Living Social is doing their best to keep pace, with their recent offer of half price Gift Cards by investment partner Amazon.

Who are Groupon and Living Social and how can they help your business?

These networks are all about providing a catalyst between businesses and new customers, primarily on the local level. It's very similar to a couponing site, except the deals are better and the reach is highly targeted. These networks build up a following of people interested in great deals in specific areas or cities. Subscribers opt-in to receive daily offers by email and sometimes through social media updates. There is the opportunity to fine-tune the offers you receive based upon selected interests. Then the networks identify willing businesses to partner with to provide fabulous deals. The offers typically accepted are better than any other coupon or deal the business already has offered. Thus, the partnership helps to secure a strong response rate for both parties.

So why are Groupon and Living Social so concerned about providing a great offer? That's how they get paid! The financial model is based on a revenue split between both parties. Example: Your offer is for half off a $30 gift card - thus bringing the sale price to $15. The actual ecommerce transaction goes through the networks' websites, so any business can utilize the service (regardless of whether they sell gift cards on their own site). The network then collects the money for the transaction and handles any customer service issues or inquiries regarding the sale or offer. In exchange for the reach, visibility, marketing and customer acquisition - the network retains a portion of the fees collected. Typically, it is a 50/50 split -the network will send the business a check for half of what was collected from the transactions of each offer.

Will it benefit you? There are a few factors to consider; the biggest concern is if your company can afford it. Although there aren't upfront costs per se, as with other marketing mediums, there is the cost of fulfillment. You should carefully consider whether your company can afford to offer such a steep discount, and even then, only make half that amount in revenue. If you are working on tight margins, this could be a losing proposition. On the other hand, if your business tends to see repeat business from new customers and has a high lifetime value of customers, then it could be a great acquisition tool.

Many of the deals allow small business, some who don't even have websites or an online presence, to penetrate a new audience they otherwise wouldn't reach through more traditional couponing or advertising channels. However, online businesses or multi-location retailers aren't excluded from success, the structure of the offer and deal just need to be more creative.

In an age where everyone is looking for a deal, these networks have nowhere to go but up. Their strategy to date of working with small, local businesses and shops (spas, salons, restaurants, gyms, etc.) has proven effective, while also appealing to national sellers like Nordstrom Rack and Amazon. Given the popularity, and the financial winds on Wall Street of late, these networks should only get stronger. If you have a business that would be able to sustain the offer and potential volume, it may be worth a try!

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