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!!!

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3 thoughts on “Daily Deals or Daily Nightmares?

  1. Ashish Rajadhyaksha says:

    Hi Reinier,

    Thanks and really appreciate your detailed comments/feedback on my post. Daily deals are a great concept for the consumers getting steep discounts as you correctly suggested, but not always for the merchants for the following reasons:

    1. It doesn’t create loyal customers in most instances from my experience in running these deals as customers hop from one deal to the next, especially if you’re in a big city and there are lots of choices available.
    2. Causes Brand Dilution. You get known for your discounts rather than product or services, and customers wait until you offer discounts rather than focusing on the product or service.
    3. It’s a classic marketing case of differentiation vs price/cost leadership. Daily deals focus on price which is nothing but a race to the bottom from the margin standpoint. To be a successful business, one needs to focus on margins and product differentiation, otherwise my competitor can offer a better price and if my cost structure isn’t flexible, my margins would suffer.
    4. Yes you can reach thousands, but if my fulfillment capability is limited, then I can get swamped by these orders and either offer poor customer experience or lose more money in the process.
    5. Content providers will adapt to changing times either by offering these deals directly to consumers within the sphere of influence or through alternative channels, that will squeeze the middlemen (Groupon and the like) over time. In my previous article, I addressed the issues behind Netflix. It’s the same concept, at the end of the day it’s about good content ownership and efficient, profitable delivery for all. If one party isn’t happy, it isn’t a good deal!

    There will always be a range of businesses for which daily deals make perfect sense for whom volume is critical. But for other businesses, it’s a balance of volume and margin. You can get 100% revenue growth rate if you give something away for close to free, but that isn’t a long-term solution for survival.

    Ashish

  2. Reinier Geel says:

    Hi all; Nice post, however; I love Groupon, and have had many pleasant dealing with them; So-, from a strategic perspective; it’s a mind switch that is required here; a new business perspective that is growing and expanding by all indications, and their reviews attest; and not a dying horse – In June 2011, Groupon was preparing to go public at a valuation as high as $30 billion, but the offering has repeatedly been put off., as eluded, they are making big bucks for the following reasons;

    Could it be – that – We all tend to want to still do business as “usual” today, when in fact everything is upside down,(case and point Groupon), and “unusually competitive”.

    So is it not better to go with the flow wand do business “unusual” then, like Groupon?

    In the positive; this strategy is very-very effective, those whom use it benefit directly, (and I myself as a consumer have a permanent prescription….why not?).

    As it has two prongs, it creates awareness and brand recognition, it connects dots, Oh so they do this, and make that…and they are right around the corner, perfect…

    Its market specific… concentrating on niche products – like entertainment, this is their key focus, with wine-and-dine, holiday and get away fun stuff sanctioned.

    Their strategy is simple; establish a collective buying power in this industry, market a deal-of-the-day, via a website that is focused on bringing discounted price deals in the lifestyle and leisure section, to community level, – where most of our disposable income goes.

    Perfect strategy!

    If anyone can save money and have a great time, why not, “Its survival of the fittest.” No stress there….

    In the negative; those who do not partake, and change in step with change itself will perish a slow death. It’s called friction. If people in the same markets do not move at the same speed, and direction, then they creates friction – stress.

    The expression, and principle where customers demand “more BANG for their Bucks”, is coming back.

    We don’t just want n great price, we want service, quality, and a dash of speed…on our doorstep…

    Electronic -Marketing is the key aspect here, where you reach thousands, and not the structuring of discounts, or the merchant’s deals per say; you have to sometimes give a little to get a lot, lose one battle to win the war…business is slow in general, and merchants will use any possible means to increase revenue streams.

    Therefore – and By all indications, and by just watching reoccurring deals – It works; “What you loose on the meal, you make up on the wine and drinks” – its just good promotion.

    VIVA Groupon…and their good Business savvy and strategy – big ideas without strategy to back it up – is just big egos talking…

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