What’s the Deal with the Daily Deal?

You would have to be living under a rock not to notice how many of these daily deal sites are popping up.  The question isn’t: Is this a fad or is it here to stay? The question is: How will it evolve?

Groupon certainly thinks it can continue to lead the way, considering it denied Google’s offer to buy it for $6 million a year ago.  Although they are the leader in Daily Deal activity right now, I believe change is on the horizon.  There are so many competing websites popping up with almost identical offers that it is making me dizzy.  A lot of my clients have used sites like Groupon, The Daily Save, Local Twist, Living Social and KGB Deals to gain new clients, but there is more than meets the eye as to how the contracts work, how businesses make money and how it all benefits the consumer.

THE WAY THESE DEAL SITES WORK:

You may have bought tons of daily deals from these sites and never stopped to think how they work.  First, the providing website and the business agree on a deal to offer their customers.  The site takes anywhere from 40-50% of the revenue and the business gets the other half.  This works great for service-based industries, which is why you see so many service based offers.  It is tougher for restaurants and product-based industries to do because their profit margin is already so tight.  Think of it this way: If you pay $12 for $25 worth of food, the restaurant is only making $6.  That means they take a big loss on every customer that walks through the door.

Restaurants and product-based industries have been forced to think of these daily deal sites strictly as a different form of advertising.  Instead of spending $10,000 on ads, they offer a daily deal which guarantees new customers walk through their doors.  The other little interesting side note is that after 6-12 months, these deals expire unlike normal gift cards under California law, so the businesses bank on a certain percentage of people never using their purchase.  I know I am guilty of letting a few expire myself.  The final thing to mention is that some of the larger sites like Groupon have exclusivity clauses in the contracts so that the participating businesses can’t use one of the other sites for an entire year.

HERE IS WHAT I SEE AS THE FUTURE OF THE DAILY DEAL:

Someone will launch a site that gives businesses a much greater share of the revenue, so instead of splitting 50-50, they will split 20-80 or even 10-90.  This will allow businesses to offer much more aggressive deals and still make more money. It will also allow smaller, local businesses to participate who can’t take as much of a loss as some of the bigger chains. To do this, the platform will need to be supported by a lot of capital starting out, have connections to business owners and be willing to take a loss for 6-8 months **Google, cough, cough**.

The reason why Yahoo, Google or Facebook would be an ideal candidate is that they already have the visibility of the consumer without people having to sign up for an email list, making it much easier to reach them.  They also have very well tuned targeted ads, which means someone like me wouldn’t have to sift through the endless Yoga, facial and nail painting deals to get to the ones that pertain to me. I’m not Mark Zuckerberg, but I think a daily deal could help Facebook monetize itself beyond ads in the sidebar.  By checking a box, people could see the daily deal pop up every morning when they sign onto their Facebook.

The final shift will we see is the expiration dates.  Consumers are not going to be happy about the expiration dates for too long and eventually the daily deal providers will give in.   You all saw what happened in Egypt… and I feel like making that joke isn’t too out of line considering Groupon’s terrible Tibet commercial in the Superbowl.