Daily deal sites offer the appeal of customers paying cash up front for discount coupons, but it can cost you a lot more than you realise
It’s not every year you can see a whole brand-new industry spring from nowhere to have a major economic impact. Sure, social media innovations seem to flare up and sometimes disappear as quickly without anyone quite figuring out how to make a buck from them (anyone still on MySpace out there?), but the daily deal phenomenon—basically, web-powered group-buying—is the opposite of that. It’s an old bargaining strategy that has become social media; a business that has been changed into something brand new by the web.
Two years ago no-one had heard of daily deals sites. In September last year, PBL Media launched a daily deals website called Cudo, which it has heavily promoted on the Nine network. However, Cudo was the thirteenth such site in Australia—all of them are modelled on the US group buying site Groupon.com, which offers discounts of up to 60 per cent on anything from massages and meat trays to movie tickets and hotel rooms. Deals are activated once a minimum number of customers commit to the offer. So the revenue from the discount coupon is split between the retailer and the deal site.
At the time of writing, fresh from raising US$130 million ($142 million), Groupon was expected to arrive in Australia and the world’s No. 2 player, Living Social, had announced plans to set up in Sydney “in the future”.
Ben Johnson, vice president, Associates, for R&C NSW, has been watching daily deals sites closely since they first appeared. “This whole phenomenon came about because the recession-wracked USA,” he explains. “And in the US, restaurants are doing it really tough—some of those that used to be full are now doing 50 per cent capacity or less, and all the businesses have really been hit hard. So the daily deals sites were a natural outgrowth of the recession. In Australia, the recession has been much milder and, in general, restaurants are still performing relatively well.”
Luke Stringer of Mezzo Bar & Grill in Melbourne was an early adopter, and admits the way it was sold to him was very convincing.
“There was a guy whose mother is a regular customer, and he worked for one of these sites,” he explains. “He pitched this idea, which was $100 value for a $40 voucher. I liked the idea that it would be only on sale for one day, and I liked the idea of getting cash up-front. The company was brand-new at the time, so for us there was no fee or payments required. And given that lunch has been pretty bad this year, we said we wanted the coupon to be for lunch only.”
At the eleventh hour, however, Luke and his partners were talked into extended the coupon to dinners as well, on the logic that it would be a stronger, more popular offer. And it was. “It went gangbusters,” he says. “We sold 641 in a 24 hour period. So it was great in that it was cash up-front. In that sense it was a success.”
But there were problems. There was confusion about fees after the fact—with Stringer believing none had been negotiated, and the daily deal company trying to charge him after the deal was done. But more importantly, the greatest problem was the clientele the deal attracted.
“For every thirty coupons presented, there might be one positive experience,” Stringer explains. “An example of a positive experience was, we had five people come in and spent $600, and then presented two vouchers (for $200 value, and pay the balance), which was great. But a lot of people tailor their meal to get as close to the coupon price as possible. And with many of them, you know they won’t come back. We’ve seen some people come in who wouldn’t normally—for example, there was a group of boozy louts who drank their way through their coupons. From what I’ve seen, I wouldn’t do it again. There was 640 out there, and we had the majority of them present on a Friday or Saturday night. When we asked the daily deal site how we handle this, they suggested to us that when people ring for a booking we ask do you have a coupon. And control it that way. But I don’t want to do that with everyone who rings, and in any case, that gives a bad impression of my restaurant.”
“For every thirty coupons presented, there might be one positive experience—from what I’ve seen I wouldn’t do it again.” Luke Stringer, Mezzo Bar & Grill, Melbourne
At the time of writing, Stringer estimated that there were still about 320 coupons out there that hadn’t been presented yet. But he wasn’t holding out hopes that they’d appear with a better class of customer. “The problem is that people aren’t buying the business when they use these deals, they’re typically buying the deal,” Ben Johnson explains. “There is limited brand loyalty from the customers, and restaurateurs need to be aware of that.”
The other challenge for restaurateurs is controlling their cashflow if they have a particularly successful campaign. One Sydney restaurant that Johnson had heard about sold over 2000 60 per cent-off vouchers through one of the daily deal sites. “They’ll get some cash up front for that, but its hard for any restaurateur to then think about apportioning that over the next several months. They’re going to have nights with very limited additional cashflow as those vouchers are presented. To be honest, running a restaurant is such a low-margin business, it can be quite difficult to make these profitable—especially when the restaurant has to pay a sizable commission on top of the discount.”
Luke Stringer can see ways you can make daily deals work for you—even if, after his experience, he’s not planning on doing another.
“To be honest, if the offer was food-only it would be appealing,” he says, “or if it was lunch-only. But again, the daily deal company talked me out of that idea. If you’re 60 per cent full all the time and you want to fill the other seats, I think it’s probably fine—and I think that post-GFC, the whole world is on sale. Everyone wants a discount if they can get it. I think these deals are appealing to the customer, but I cannot tell you the number of salespeople from other daily deal sites who have approached me since doing the original deal, and they’re all calling constantly.”
The aspect of daily deals that gives them their strength is the rapid growth of social media; only in the world of Facebook, Twitter and the like, can you communicate so rapidly with potential customers with a strong propensity to buy. However, Ben Johnson suggests that there are other ways to create awareness on social media, and encourages restaurateurs to develop their own through Facebook, Twitter and other sites. “Not only can this be less costly, but it gives the restaurant owner much more control,” he says. “In today’s world, having your own social media pages should be part of every restaurant’s marketing plan.” (see box below for more).
Despite an unpleasant experience, Luke Stringer says he can still see where the daily deal works: “From our point of view, we were relying on a lot more customers like the table of six to turn up. If they’re coming in at lunch, fine. But the deal with the new coupon companies is even worse than the one I got—they want 11, 12, or 13 per cent of what you’re getting, so you’ve already offered the 60 per cent discount, plus they get a percentage of what’s left over.” It’s a big price to pay for custom. ⎮