Read This Before Getting Your Business Involved With 'Daily Deal' Websites

Although my company (Goldstar) isn’t in the daily deal business, we live in an adjacent neighborhood. It’s a less crowded place, and the neighbors aren’t as likely to be in foreclosure on their houses or  dodging collection phone calls. And because we only sell tickets to live entertainment, the block parties are a lot more fun. They’re less about oil changes, laser hair removal, 2 hot dogs for $4, and botox. More likely someone’s singing show tunes, playing basketball, or balancing on top of a wheel of death. It’s a good group.

Anyway, that and a decade of e-commerce experiences means I can be helpful to merchants who are evaluating whether or not to work with one of the many daily deal providers.  Done right, it can be a very strong marketing tool, and done wrong, it can break a small business.  You’ve probably heard the stories.

Think of it this way.  Daily deal sites are like a band composed of one instrument: a great big bass drum. It plays one note: loud.  Big email, big discount, potentially big volume sales, for a single day. Impressive. Powerful.  Strong.

But most bands aren’t limited to a single instrument.  And if you’re marketing a business, you probably want different instruments for different moments. Perhaps it’s a “bass drum” moment for you, but maybe it’s not. Here are some thoughts on both how to figure it out and what to do about it.

First, figure out if the program is going to make you money now, later or never. The idea of daily deals, in the words of Groupon CEO Andrew Mason, is that they don’t make you money right away.  In fact, you might lose money in the short term, but you make it up by increased awareness.  Ok, possibly true, but here’s some simple math to do: if every daily deal you sold were redeemed, how much money would you lose?  To make up for it, how many new customers would you need to get?

For example, suppose you plan to sell 1000 vouchers for buy 1, get one free Giant Cupcakes that normally cost $5 apiece.  

The offer is $5 for two cupcakes, normally worth $10.

The $5 from the voucher gets split down the middle between you and the daily deal site, so you collect $2.50.

Making and selling them costs you $6 but that’s normally fine because you charge $10. There’s plenty of profit margin.

But in this case, you still have $6 in costs and the $2.50 in revenue means your net loss per voucher is $3.50.

That’s still ok as long as the new business that comes AFTER your deal is done exceeds the $3500 (1000 vouchers x $3.50 loss each).  Will it?

Keep it simple and estimate what a customer is worth to you in a single year.  In this case, let’s say it’s $15, since you figure most customers buy from you 3 times a year or so and pick up a Giant Cupcake each time.

$3500 divided by $15 is about 230 new customers you’d need to get from this campaign to break even.

Does that seem realistic?  Only you can judge that, but if your analysis told you that you needed 10,000 new customers to break even, I can tell you from here that that’s not going to happen.  In other cases, the deals might make you money now, if you don’t lose any money on the sale.

Either way, you should know if the daily deal is going to make you money now, later or never.

Now and later are both ok.  Never is not.

Second, control the number and timing of the sales. Selling an unlimited number is not usually a good idea because the promotional value of doing one of these doesn’t change all that much whether you sell 300 or 600, but your costs sure do.  The daily deal site may decline your deal altogether if you don’t give them the opportunity to make enough money, and fair enough, but if the value is in the promotion and not the sales, push back on the number you’re offering to the lowest number possible, especially if you’re losing money marginally on each sale.

Another way is to create  rules about when the sales can happen. If you have slow or “shoulder” times for sales, try to create limits on redemption or use of the vouchers.  This helps because most likely, you’ve got fixed costs in staff, rent, etc. that you’re going to be spending anyway, and you might as well put them to use to serve these customers with the vouchers then.

Suppose lunch is a slow part of the day in the cupcake shop.  Maybe your voucher is $5 for a $10 cupcake lunch combo.  You’re slow then anyway because people don’t go to a cupcake shop for lunch, for reasons that I cannot imagine.  Building your lunch business might be great for your bottom line, so it’s easier to justify the short term loss.

Control both the total volume and the timing of your sales and create a compelling offer and a daily deal could be great for you.

Third, negotiate the revenue share.  Hard. The daily deal business has been in a honeymoon period as merchants learn what it is.  During this honeymoon, these sites have collected 50% or sometimes even more of a merchant’s revenue.

For example, if our cupcake baker sold $10 worth of cupcakes for $5, she’d only end up with $2.50, giving the other $2.50 back to the daily deal publisher.

It’s only fair that the daily deal publisher should get paid, but 50% is not written in stone.  Traditionally, sales commissions are much closer to 5 to 15% on sales of retail items.

1-5, not 5-0.

The difference is massive.  Google, recognizing this, asks far, far less of merchants, close to the traditional commission rate for stuff like this.  There are even agents who now work on behalf of merchants to make this part easier.  They’re used to negotiating with these sites, so use them if you can find one to work with you.

In our example, each voucher was losing the baker $3.50, but that’s at 50% rev share.

Taking it down to a more traditional 15% means that the baker is keeping $4.25 instead of $2.50.

The loss  per voucher is just $1.75, and the baker only needs 115 customers or so to break even.  Big difference.

In conclusion, do those three things and you should be fine.  Ignore this stuff, and it’s a  chancier affair. Don’t expect the daily deal companies to figure this out for you because, although they are flexible and are happy to negotiate, they’re not going to negotiate against themselves.  They assume you’ve done your homework by the time you’re talking to them. 

So put that bass drum to work as a highlight of the beautiful symphony your marketing is performing. That’s so much better than having it shatter your windows and deafen your employees.

This post originally appeared on Live 2.0, the official blog of Jim McCarthy, CEO of half-price live entertainment ticketing website Goldstar.com.