Lessons learned from daily deals help small businesses reach new customers

Promotions can help small businesses market brands, reach new customers

vbridges@newsobserver.comDecember 24, 2012 

  • Daily deals •  The smallest businesses and the largest ones do relatively better with daily deals, while midsize businesses don’t do as well. •  Photographers (with a 7 percent rate of profitable daily deals), health and fitness services (69.3 percent), tourism-related services (68.0 percent), and doctors and dentists (66.7 percent) have significantly higher rates of success than average. In contrast, cleaning services (27.3 percent), restaurants and bars (44.2 percent) and retailers (50 percent) fare relatively poorly. Rice University study: “How Businesses Fare with Daily Deals as They Gain Experience: A Multi-Time Period Study of Daily Deal Performance.”

Frog Hollow Outdoors owner Banks Dixon’s first experience with daily deals was disastrous.

The Durham-based outdoor adventure service provider sold about 800 deals but was inundated with customers who waited until the end of the deal period to redeem them.

“It was kind of ridiculous,” Dixon said. “It was too hard on everybody.”

Dixon, who concedes that some of the challenges were due to his lack of foresight and planning, took lessons learned from that experience to make his latest daily deal campaigns more successful.

“I started to turn it back around,” Dixon said.

Daily deal companies, including The News & Observer’s DealSaver, Cary-based Twongo, Amazon’s Gold Box, Plum District, LivingSocial and Groupon, provide opportunities for small businesses to promote their brand, reach new customers and raise capital.

Nearly one-sixth of Americans 12 and older are registered users of at least one daily deal service, according to a 2012 Edison Research and Arbitron survey.

A 2012 Rice University study examined the performance of daily deals and found that the percentage of small and midsize businesses that made money from the deals increased with experience.

According to the study, “Less than half of the businesses running their first daily deal report profitable promotions, whereas more than three-quarters of those running seven or more deals do so.”

The study also found that 33.9 percent of customers spent beyond the value of the deal and 20.1 percent became repeat customers. Despite those numbers, daily deals carry a risk of losing money, taxing employees and alienating customers.

“There are negatives and there are positives,” said Jeremy Sisk, president of Xperience4Higher, a Durham marketing firm that focuses on small businesses.

Bad experiences, Sisk said, often occur for two reasons: a poorly structured deal and failure to do a return-on-investment analysis.

For example, a London bakery lost almost $20,000 after becoming overwhelmed by 102,000 cupcake orders that were placed through a daily deal.

“By not putting an upper limit on the deal, as well as going ahead and constructing a deal that was going to be a loss leader, they really set themselves in a hole,” Sisk said.

‘Let’s give this a shot’

Frog Hollow signed up for its first daily deal, a four-month promotion, in June 2011.

“It was ‘Let’s give this a shot,’” Dixon said. “I had no idea of what I was getting into.”

Frog Hollow and LivingSocial split the revenue 50-50, and Dixon was responsible for credit card fees. LivingSocial paid Dixon after the deal closed.

The challenges, Dixon said, started with the deal’s imprecise language, which was confusing to some customers who then asked for different services than the ones offered.

Time was also a challenge. Dixon had anticipated that customers would redeem the coupons throughout the four-month deal period. However, the majority of customers waited until close to the deal’s expiration date to schedule the kayak and paddle tours they had purchased.

Regardless, Dixon honored the requests. But to do so, he added sessions, extended the deal’s time period by a month, doubled up tours, asked staff to take on additional hours and watched employees struggle to accommodate customers’ scheduling needs.

“It felt like a scramble on our end,” Dixon said. “There was a lot of frustration.”

The deal didn’t make money, Dixon said, and it is impossible to measure how many customers were gained or lost in the hectic process.

What’s the purpose?

A successful daily deal requires business owners to determine the deal’s purpose, evaluate the rewards and risks, and prepare for the execution, Sisk said.

If the intent of the deal is to increase brand awareness, turn to big hitters, Sisk said.

With those companies, “typically the cuts are going to be anywhere between 30 and 50 percent of each sale,” Sisk said.

Owners who are trying a deal for the first time or are interested in a targeted market should turn to the smaller daily deal companies.

Before signing up, owners need to calculate the financial impact of the deal.

“You have to really take into consideration how much it costs you to offer that product or service that you are offering in the deal, and how big of a loss that would create if you sold out,” Sisk said.

If the goal is to make money, establish a profit margin before negotiating with a daily deal company.

“That way, when you go into that room, you know the bottom-line price you can offer that deal for,” Sisk said.

Business owners also should know how much they are willing to spend if they are planning a loss leader.

If you are a new business, a struggling business with some capital, or an established business with a new product, a loss leader may be appropriate. However, if funds are tight, the loss could push you out of business, Sisk said.

Owners should plan for the highest-volume scenarios over the life of the deal and consider including language such as “valid while supplies last,” or require an appointment by a certain date.

A better deal

Dixon decided to try another daily deal promotion in March after receiving sales calls from Groupon. With that deal, he chose new services and dates in which business needed a boost, used tiered expiration dates and straightforward language, and was able to get Groupon to cover credit card fees.

The deal made some money but met the ultimate goal of building repeat business, Dixon said.

“It worked out well,” he said.

Dixon eventually did two more Groupon deals, and also worked with Plum District, which offered a more favorable revenue split.

Dixon is now working on another deal with LivingSocial.

“Let’s try it again,” he said. “It all worked out in the end.”

Bridges: 919-829-8917

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