Groupon’s success has attracted a slew of competitors in the local-daily-deal space, most notably LivingSocial, with backing by Amazon.com. Deals from Groupon, LivingSocial, and Urban Dealight show up in my inbox daily, offering me deep discounts on everything from auto detailing to pilates to laser body sculpting.
I might not be tempted by offers of discounted plastic surgery, but I’ve bought bootcamp classes, spa services, and – of course – that Amazon gift card. There’s no doubt that customers love deals, or that local businesses are able to attract droves of customers with this new channel.
However, small businesses risk being Grouponed to death – that is, enjoy huge volume increases at the expense of profits (á la Vlasik’s gallon of pickles at Wal-Mart). My parents own and run a true mom & pop shop, Math ‘n’ Stuff, in Seattle and were contacted by a LivingSocial sales rep. I did the math and they were unlikely to come out ahead by offering a daily deal.
They’d have to offer a minimum of 50% off of their retail prices. Then, the daily-deals company takes its 50% cut of the ticket price to the customer. That would leave my parents with 25¢ for every $1 of retail price. Some of those customers would shop again or buy more than the deal amount, but, if they are like me, many of them wouldn’t. (I do not plan repeat purchases from any of the local businesses I bought deals for.)
Here is an interesting article on the psychology of these daily deals from new & existing customers’ perspective. The author says,
The thought process goes like this: I get a new customer by giving them a discount: 50% off. They will appreciate the discount, see how great we are, and become a new customer. But that’s not how the customer thinks. They get their coupon, buy your stuff, and they like it. Then you ask them to buy again, but now you’ve doubled the price!
Meanwhile, your existing customers are thinking:
WTH? You mean I’m paying double what someone else is paying? What a rip! I want in on that deal.
Welcome, he says, to the Discount Death Spiral. Funny, the LivingSocial sales rep didn’t call it that!