Local deal of the day websites are all the rage inside the social media bubble at the moment. Groupon, LivingSocial and BuyWithMe are the biggest players in the space, and having raised over $80 million in venture capital (between these three players alone) they are beginning to dominate the online marketing landscape. From endless Facebook ads, to SEM and online PR these deal of the day sites are turning (almost exclusively) to social media to seed their client base. In fact, this may be the first example of an multi-million dollar industry built exclusively on the backbone of social media.
Local Deal of the Day websites generally list one deal per city, per day. The deal is generally for a restaurant, spa, event or service. The offer is always somewhere between 40% to 90% off the retail price. So what’s in it for the players?
The consumer gets a great deal cause. The Deal of the Day site makes an incredible CPA. They take 50% of all revenues generated, on some deals this is as much as $75 a sale. The biggest sites like Groupon are averaging thousands of deals a day in each of their two dozen cities. So it’s pretty easy to deduce their is big money in running a popular Deal of the Day site. But what about the merchants who are doing these deals?
TOP 15 Local Deal of the Day Websites
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It turns out that Deal of the Day sites offer local merchants only one advantage – great social media coverage. For one day people are tweeting, blogging, and posting your deal to Facebook. This creates the word-of-mouth buzz everyone local business yearns for. In exchange merchants sacrifice, not only margin, but massive amounts of revenue. Each item sold on a Deal of the Day site is sold at a significant loss to the merchant, as they take 50% of the revenue. In practice this means if a merchant is offering a gift certificate 50% off they are actually offering a 75% discount = 50% off for the consumer + 25% of the revenue to the Deal of the Day site , leaving the merchant with just 25% of the retail price.
Is it worth it for merchants to loose money for a day of social media coverage? It really depends on the merchant. Garment Valet, a Boston based dry cleaning delivery service, had a nightmare experience. They sold $45 worth of their Laundry Service for $20, pocketing just $10 of each transaction. After selling 381 of the deals Garment Valet was left to fend for itself against a slew of customers with high expectations. Many of these customers lived in buildings without door men, which the service doesn’t traditionally serve because it is a logistical nightmare. Then there was the process of redeeming the deals over the phone and finally the people who purchased the deal outside Garment Valet’s normal coverage area. In the end the laundry service lost money and was left with scathing Yelp reviews – a lose, lose damaging their reputation and bottom line.
Restaurant’s seem to be the big exception to this nightmare scenario. Yamashiro, a Los Angeles based upscale restaurant, was facing more and more nights with empty tables as the economy headed south. In response the company launched a deal, offering $80 worth of food for $40. Yamashiro was even able to talk Groupon into doing a better dollar allocation, giving Yamashiro $25 and keeping only $15. In just one day Yamashiro sold 4,381 of the deals. This gave Yamashiro over $100,000 in revenue and has filled their tables up every night of the week through the end of the summer. Restaurants have the luxury of having limited seating capacity and can always say that they are completely booked, forcing people with group discounts to choose less popular times. More importantly people will almost always go over the amount of their gift certificate at a restaurant. Appetizers, wine, dessert and suddenly that $80 looks more like a discount than a free meal. Yamashiro is (probably) making a profit off of 80% of the customers who bought their deal and the case seems to be the same for other sit down restaurants. But the real question is weather the buzz created by their one time deal will bring customers back for good.
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