Looking at the daily deals addiction

The deals addiction isn’t going to keep the industry afloat, it’s only going to ruin it – but the problem doesn’t just lie with consumers.

Daily deals should be most concerned about what some might consider their greatest asset: daily deal addicts.

But I’m not just talking about the frequent bargain hunters that consistently pump up the numbers and fill seats in hair salons and restaurants across the country – addicted or, rather, dependent, merchants should be just as much a concern.

The Loan for a Loan Effect

Rocky Agrawal, among his tirade of arguments against daily deals, included a fair point from Forkfly CEO Paul Wagner who likened merchant deals addicts to families in debt: they rack up a credit card debt and so get another card or loan to cover their debt and buy some time.

I recently spoke with a local restaurant owner that was running a deal as a kind of ‘loan’. He was more fixated that the deals operator was going to transfer the majority of the revenue within 48hrs than how he was going to service the customers.

Merchants like this don’t often equate the full cost of running a deal and make the hard discovery that they are not gaining new customers and making money, but rather losing money for the chance to win customers from the voucher crowd. They then run another deal so that they can afford to service the initial deals customers.

Another scenario is the merchant that has priced themselves out of the market and becomes reliant on deals for business – until they can’t even access returning customers unless through a deal.

There is a Sydney merchant that runs a deal with one of the major operators every month, almost to the day. The discounted price is not terribly low – it’s just fair – while their full price is far too high for what they offer.

I’ve purchased several vouchers there myself, as have many of my colleagues. Their standard price is so high that we would not ever consider returning as a full price customer. The merchant is locked into the idea of winning new customers through daily deals and runs them so often that they eventually bastardise the opportunity to create returning customers: loyal customers would rather just wait for the next deal than pay 60% more.

Word of mouth does its thing and the deals sites are no longer creating demand for the business, but are fulfilling it: consumers are requesting the deal from the operator, and existing deals customers are sharing/recommending the deals, rather than the business itself, to their friends on Facebook.

Soon the business is entirely reliant on deals. If they can run deals at a profit, it doesn’t seem that bad: but what about when the deals site requests the discount be increased, or that the revenue share become greater for the operator?

While the merchants that regularly run and sell deals must seem an easy sell for daily deals operators, they have plenty to lose themselves when running deals with these merchants. If the business goes broke, or simply refuses to honour deals, the operator has to organise refunds plus deal with the social backlash (there are endless threads about such experiences on OzBargain). Today Tonight even ran a spot recently on daily deals with a fairly harsh presentation of some merchants and the sites that ran their deals.

Dealing with it

Unlike many commentators I’m not predicting an end to the daily deals model – not, at least, because of the low return rates from addicted customers, or poor service from deal-dependent merchants. Daily deals are certainly here to stay, though must mature from its current position before enthusiasm from merchants and consumers deflates any further.

Spreets is now offering categorised deals and subscriptions rather than the generic daily email – which is a significant step in the right direction if more genuine customers are to be retained and businesses are to see greater conversions. Livingsocial is launching a family-only channel, and others are likely to follow.

With such high levels of interaction and volume there are also huge opportunities for user modelling and recommendation engines, beyond just offer categorisation, which would further act in the favour of customer redemption – as those who are willing to wade through dozens of irrelevant emails are more likely to be the bargain addicts.

As these functions develop we may see the industry consolidation that has been discussed for some time as larger operators seek more loyal and specific user-bases to shift towards more genuine consumers who are actually likely to return to businesses.

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