Daily Deals or Daily Nightmares?

Article by Ashish Rajadhyaksha at  Entreprenuership Central

When I read the article on NY Times recently about the Deep Discount Daily Deal Sites phenomenon started by Groupon and then copied and recopied many times now in the U.S. and abroad, I realized I wasn’t alone in having bad experiences with these sites.

Being in business long enough to know that relationships and proper order fulfillments matter, I’ve always been wary of these new sites calling me every day wanting to promote my business through a new customer discount deal of at least 50% off the regular price.

While as a consumer, I don’t have any gripes against any of these deal sites, my issue with them is strictly as a merchant trying to survive in this tough economic environment.  How does one survive this deep-discount environment where you’ve to offer at least 50% off the retail price, do a revenue share of 50/50 or 60/40, plus not get paid for at least 30 days or longer from some sites, and also offer fulfillment of 6 months or longer for the vouchers purchased?  All of this with an illusory concept of up-selling, cross-selling, or any other kind of “selling” in the hope of converting the deep discounted vouchers to full-paying, happy customers!  Don’t get me wrong, there’ll be some businesses where this would succeed during their slow times, with some likely survivor deal sites that execute well, are focused on uniqueness or luxury items rather than just daily deals, and who work well with merchants.  But for others, I can’t wait for them to go public with sky high valuations, so I can short a little bit of their stock and recoup some of the money I’ve lost on these deals!

Recently, we offered a discount sale of pillows and throws on a high-end daily deal site to help provide us a new outlet to sell some quality merchandise to offset reduced orders from other customers.  Obviously no one expects perfect order conversion, but we got less than 10% sell through!!  What kind of projections are these buyers making and how do they expect to keep working with quality vendors with established, well-received product assortment?  The NY Times article above discusses this problem with many examples, and I can certainly add my example to this issue as a warning sign for new vendors thinking of signing up for discount deals.  It’s a basic issue of fairness, competence, supply chain management, payments, and relationships.  Luckily for us, we had relationships with a big discount store who happily agreed to take this good quality merchandise, even though at a steep loss to us.  But who will pay for the capital locked for almost 3 months, stress from your creditors knocking on your door, time spent on researching and meeting different fulfillment requirements, labor expense to pack and repack merchandise as per changed retailer needs?

All these experiences bring us to the age-old lessons taught in our business management textbooks on 4 P’s of marketing, and how they need to be updated by 2 more hard lessons learnt by all of us along the way (although they don’t relate to marketing per se):

1.       Product:  In this 24/7 and price sensitive market, product & service are still very much relevant.  We all need to focus on fine-tuning and continuously improving that.

2.       Price:  Management books discuss target price points for positioning purposes, but what’s really relevant are the cost points.  Either Retail or Wholesale Prices are those non-static points where demand equals supply at each relevant interval, but if the cost structure changes, prices will need to be adjusted to prevent someone from going out of business.

3.       Place: There’s a constant debate whether traditional meaning of “place” is still relevant when everything is online.  Yes it is if your business is local brick & mortar.  Your online presence is informational, but not a marketplace unless you sell online.  Handing out flyers and talking to residents at a local park maybe more effective for your local business than an online campaign.

4.       Promotion & Positioning: Since you need to define and segment what your “place” is, you need to promote and position your business accordingly.

5.       Partnerships/Relationships:  If we didn’t have relationships with buyers at large stores, we would be sitting with hundreds of pillows and throws as mentioned above.  Need I say more?

6.       Production and Logistics:  The product & marketing strategy could be wonderful resulting in lots of orders, but the real issues for many small businesses are managing efficient production, logistics, and fulfillment.

Conclusion:  From my personal experiences and those of my entrepreneurial circle with the daily deal sites so far, I honestly believe that this is a passing phenomenon, and the market has already started to rationalize towards providing more uniqueness, creativity, attentive customer service at affordable prices through innovative delivery mechanisms.  Nothing radical about that; good products and services and the brands that stand behind it will sustain over a long-term.  But there’s a great business opportunity for someone who wants to get into logistics and fulfillment.  Fedex and UPS need competition!!!