With the hype around Groupon, little media attention has been paid to the true collective buying customers: local businesses.
The collective buying model can successfully drive thousands of one-time customers to a location, yet little research or analysis has been done to determine if daily deal sites are driving the right type of customer – one that comes back at full price.
Businesses almost always lose money on the deal itself and justify the expense with the hope they’ll connect with loyal customers. Unfortunately, a recent Rice University study showed that only around 20% of Groupon customers actually return to local businesses. Most local businesses only break even when 60% or more of their customers come back.
The loyalty problem stems from a conflict between local business and the companies that market their deals. Marketers optimize their platforms to profit from the first visit – the only visit they’re paid for.
There are three factors that benefit collective buying companies at the expense of their clients:
- Geographic targeting. Many buyers are willing to travel for a deal, but only those near a business are likely to return. Daily deal sites don’t target geographically because they earn a commission for every buyer, even the ones that are unlikely to make the trip again.
- Consumer marketing. A small percentage of deal email subscribers generate 90% of daily deal profits. Marketers spend millions to find these deal hungry consumers. These consumers will go a long way for a bargain, but won’t budge at full price.
- Repeat campaigns. Recurring campaigns and loyalty offers help businesses generate steady traffic and convert repeat visitors to regular customers. Since the typical daily deal users won’t buy the same deal twice, marketers, to maximize profits, only allow a single campaign for any given business.
As merchants begin to understand the economics of running a daily deal, they’ll continue to demand platforms that work on their terms. Deal sites will need to innovate to meet these demands if they want to differentiate in a crowded marketplace. Particularly when businesses are receiving four or five calls a day from salespeople with the same aggressive pitch.
The Signpost team has been involved in the local deal market for over two years. There is no doubt that over this time period Groupon has carved out a substantial market segment. Their model was so profitable that clones earned profits by offering a similar service on a smaller scale. As margins continue to fall, local deal companies will have to innovate in order to serve the true customer and new local marketing models may evolve that could one day rival Groupon.
Stuart Wall is the CEO of Signpost, the community-powered deal site that recently unveiled the Signpost Merchant Center, a self-service tool that addresses the needs of local businesses to maximize capacity and create loyal customers.