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Debating Daily Deals for Your Small Business?

With preparation and knowledge, how discount sites can make your business boom.

K. Shelby Skrhak

Two years ago, the word Groupon didn’t exist. Now, Groupon has become what linguists call a proprietary eponym. It’s like Kleenex or Q-Tips—nobody calls them facial tissue or cotton swabs anymore.

Nearly 83 million people subscribe to the daily deal site Groupon.com, which blends “group” buying power with a discount or “coupon.” Act now, says the pitch; the offer expires soon.

And so, you buy a “Groupon” that affords you a massage for half the price, two for one festival admission or a gift card half-off. A minimum number of people must purchase the deal to “tip it”—the business stipulates how many sales they must get in order to honor the deal.

Groupon, and sites like it, offer discounted deals on products and services with limited-time buying windows. Members subscribe to emails for daily deals, which are limited to three or four purchases per customer but can be bought as gifts or sold through an affiliate link to friends, often garnering members a $5 to $25 credit toward their next purchase—or even a free deal.

Groupon was the first, and quickly others followed. There’s LivingSocial, Google Offers, Woot—take your pick. There are hundreds of daily deal sites that offer deeply discounted goods or services to email subscribers, not to mention flash-sale sites—limited-time brand-name sales (similar to sample sales) that offer small collections of merchandise at discounted prices. Those have earned their own eponym, The Gilt Groupe of... men’s streetwear, watches, wine or whatever.

In today’s fickle marketplace, where news headlines proclaim the daily deal bubble is about to burst because of oversaturation and consumer fatigue, experts say there’s still enormous potential for small-business owners to win using daily deal and flash sale sites. It just takes a little know-how.

 

What Groupon Means for You

One thing’s for certain: Daily deal and flash sale sites are forces to be reckoned with. While Groupon shrugged off Google’s $6 billion bid, competitor LivingSocial counts deep-pocketed investors such as AOL’s Steve Case and Amazon.com in its corner. Media analysis firm BIA/Kelsey estimates daily deal sites will collectively reach $3.9 billion in revenue by 2015.

It seems everyone has become a deal seeker. Whereas a 30-year-old guy probably wouldn’t be caught dead holding a buy-one-get-one-free coupon, snagging a Groupon for his favorite restaurant, wine shop or online retailer doesn’t carry such a “stigma.” Deal and flash sale sites transcend demographics.

Another benefit for the small-business owner is a new form of advertising; sites like Groupon and LivingSocial bypass newspaper and radio ads and put your family restaurant in the Holy Grail of direct marketing—opt-in email lists.

Most significantly for entrepreneurs, deal sites give local mom-and-pops an even foothold with big, national retailers. Smaller companies might have been wary of traditional advertising, which costs money up front without guaranteeing incoming business. But with deal sites, they don’t put any money up front and only get paid if their product or service sells.

 

Do’s and Don’ts for Flash Deals

Don’t make “Let’s do a Groupon!” your famous last words. Here are six ways to make daily deal and flash sale sites work for—not against—your business.

1. Do be ready for the rush of traffic.

The sudden onslaught of walk-in traffic, ringing phones, email inquiries and spike in web traffic can send a small business running for the hills. In fact, there are as many success stories as there are horror stories of small businesses that couldn’t keep up with the swarm of customers.

“Small businesses recognize that the hardest part of business is generating leads. Daily deals sites carry out this hard work for you, but you need to be prepared for the new business that comes knocking,” says Colin Fabig, CEO of LivingSocial Australia and New Zealand.

When you partner with a daily deals site, you’ll be assigned an account representative to walk you through the process. Because daily deal sites can reserve the right to post your deal at any time, keep close tabs with your rep so you know when your deal is close to launch.

When your deal does go live, keep the phones manned with informed staff members who understand the deal’s terms and conditions and know how to book services or take orders efficiently. Dedicated manpower can help mitigate any customer service issues that might arise from the sheer volume of new prospects trying to do business with you (which of course, is a great problem to have).

2. Do be realistic about your profit margin.

Daily deals aren’t guaranteed moneymakers. In fact, Fabig advises not to treat these websites as guaranteed revenue streams. “Promotions are designed to bring in new customers and generate brand awareness,” he says.

So know the terms of your deal. Daily deal sites negotiate commissions as high as 50 percent of the sale, so the $20 gift certificate you offer for $10 only earns you $5 per sale. Of course, you hope that customers buy more than $20 worth at the point of sale and that they come back for repeat business. (Perhaps more cynically, you hope that customers forget to redeem the coupon, which happens approximately 30-40 percent of the time, so you make pure profit.)

But deals don’t have to be bargain-basement-priced to succeed, experts say. A recent Rice University study says deal-buyers aren’t solely bargain-seekers. “There is a theory that consumers must be offered ‘deep’ discounts (50 percent or more) to be interested in daily deals,” says management professor Utpal M. Dholakia of Rice University. “Our research shows that a significant number of consumers will continue to buy the deals even if the discounts are slightly smaller.”

Instead, consumers want to try new products so they have something to talk about and can influence others. That’s one element of the social shopping experience.

Knowing that, the more buzz-worthy an offer, the better. Consumers might not run to tell their friends about the great lip waxing deal they snagged, but they will share the half-off Groupon they bought for the hot new restaurant in town.

3. Do specialize.

Ask JackThreads founder and CEO Jason Ross how the name came about for his discount men’s skate, surf and streetwear e-tailer, and he’ll tell you, “Jack.”

“Jack is a guy that knows about all the latest products for cool guys,” Ross explains. “He’s up on the latest gadgets, music and fashion. But he’s smart because he doesn’t have to have it right away. He’s willing to wait to see if it’s the real deal, not a fad, and find a good price.”

Ross knows all about the composite consumer named Jack because he knows his audience well and creates sales specially tailored for those customers. As the first men’s clothing flash sale site, JackThreads began with a handful of clothing brands that Ross and his friends liked. He has grown JackThreads’ offerings to approximately 450 brands, including WeSc, Creative Recreation and Vestal.

The cool-factor of these skate and surf brands wouldn’t ordinarily submit to an online or brick-and-mortar outlet. “These brands don’t want to be sold in TJ Maxx where they’ll be sitting next to so many other brands that they’ve worked so hard not to sit next to,” Ross says.

Budding retailers, in turn, should know their key demographic and partner with a flash sale site that specializes in their audience. Ross could have sold thousands of various menswear lines, ranging in all different styles and for a variety of audiences. But he carefully narrowed it down to this niche of customers.

“When creating the JackThreads model, we decided something important: We’d handpick the brands,” Ross says. “Only selections that we know fit our audience.”

So, explore the industry. Some daily deal sites cater to moms and families, while others gear toward urban dwellers. There are flash sale sites specifically for watches, wine, handmade crafts, green products and modern design. (See SUCCESS.com for links.)

4. Don’t think you’re too small for Gilt.

Whether you’re a large fashion house or a small budding designer, a flash sale gives you two important advantages: a captive audience and brand exclusivity. By partnering with Gilt Groupe and other limited-time sale sites such as Rue La La, DealPulp and Ideeli, new brands can reach hundreds of thousands of customers, many of whom are discovering your wares for the first time.

“You’re never too small for Gilt,” founder and CEO Kevin P. Ryan tells SUCCESS from his New York office.

Now 3 million members strong, Gilt.com wasn’t the original invitation-only shopping site in the United States to offer members special access to high-end merchandise at special prices—Ideeli.com was the first. But Gilt is now the largest curator of luxury clothing for women, men and children, as well as home goods, travel and gourmet food from brands such as EMU Australia, BCBGMaxazria, Dolce & Gabbana, Melissa & Doug and Lenox.

To keep it exclusive, Ryan’s team of curators is very selective about what it features and how the merchandise is presented. Using fashion photography and models instead of simple snapshots and mannequins, Gilt’s site offers customers a luxury experience—one that small designers and business owners can use to build their brand.

“Some of the designers we feature on Gilt don’t even have stores,” Ryan explains. “They could be a women’s clothing designer like Zac Posen, who until recently didn’t have a store, or a small operation of 10 employees whose only distribution outlet had been through Saks Fifth Avenue.”

Some couturiers even make their debut on Gilt, seeing it as their big break. They can skip traditional department stores and go straight to Gilt. In the flash sale business model, e-tailers have more space for merchandise. “Name a children’s department store.... There isn’t one. There’s only a children’s department in a large store that only has space for x-number of items in a four-month season cycle,” Ryan says.

Gilt’s divisions, such as Gilt Kids, Gilt Man, Gilt Home, Gilt Taste and Gilt City, offer niche retailers more opportunities to be selected for a flash sale. When the site’s buyers select goods, Ryan says, they evaluate many factors, including a product’s quality, uniqueness and viability to sell to their upscale audience. Bottom line? “We need to know it’s a good fit for us and believe that it’ll sell 500 units,” Ryan says.

5. Don’t count yourself out of the market because your product is hard to sell.

When Zappos.com hit the web, people asked, “Who in their right mind would buy shoes online?” The same could be said for large home furnishings such as sofas, coffee tables and art offered on the first home decor flash sale site, One Kings Lane. The site, which recently surpassed $100 million in revenue, specializes in curated selections of designer furniture, samples, antiques and personal collections from interior decorators.

“Consumers often have anxiety around making home décor decisions, but we strive to make shopping for the home easy,” One Kings Lane CEO Doug Mack says.

Good, editorial information, not just empty marketing copy, is the key to selling items that are traditionally harder to market online. “We feature lifestyle photography, videos and editorial on our site, spanning everything from rich slideshows to how-to videos. This provides added context to the shopping experience, which we find is highly engaging with our members,” Mack says.

6. Don’t become a ‘one and done.’

Founded in May 2009 and acquired by Gilt Groupe in October 2011, BuyWithMe offers the same salon visits, manicures, pedicures and massages that are popular with competitors such as Groupon, but gives customers the longest lead time in the daily deal industry.

“We’re a daily deal site in the sense that we offer one new deal every day, but our deals run for one week,” founder and Chief Strategy Officer Andrew Moss explains. “It allows customers to have a more measured experience, so they’re not just impulse buying but thoughtfully purchasing a deal they’ll like.”

That makes BuyWithMe more of a shopping site than a deal site. As such, merchants have a higher retention rate of customers who are likely to become repeat clients—the ultimate purpose of partnering with a flash or daily deal site.

To nurture that relationship, BuyWithMe is launching a new marketing platform called MerchantConnect by fall 2012 (at press time). “Actually, just this morning, we made the announcement about this, which helps ensure there’s a win-win-win so that the merchant gets a positive return, as well as giving a good offer to the consumer and working well for BuyWithMe,” Moss tells SUCCESS.

The platform gives business owners the ability to track the success of their promotions, spot sales trends, have more insight into customers’ buying patterns and help predict future spending opportunities for existing clients—all are robust chunks of information that small businesses don’t typically have time or resources to track.

“The daily deal is a very big lead aggregator and an opportunity for the business to get exposure to people otherwise unfamiliar with their product or service,” Moss says. “But MerchantConnect will help small-business owners create an ongoing relationship with consumers.”

That’s important, because as any small-business owner knows, it costs exponentially more to acquire new customers than to sell to existing ones. When taking advantage of the massive impact daily deal and flash sale sites have had on small business, knowing what to expect and how best to utilize the benefits will set you apart from the rest.

Sites like Groupon and Gilt have dramatically changed buying habits and small-business owners’ strategies. Forbes calls them a monumental new phenomenon and Groupon “the signature company for a new era, in which technology companies are, quite remarkably, becoming ordinary.”

Groupon founder and CEO Andrew Mason puts it this way on the company’s website: “We’re extremely proud of the fact that our customers discover and try new things simply because they’re featured on Groupon. Every business we feature goes through a vetting process, when our team of 30 writers, researchers, fact checkers and editors scour online and offline media [to ensure quality businesses are featured].

“Now, that last paragraph is usually the type of empty marketing BS that I loathe about companies,” Mason says. “In other words, Groupon is a city guide and a deal site, not a site that alleviates your core human responsibilities. We’re not legally responsible if you are injured or killed or break up with your girlfriend while using a Groupon.”

Not exactly business-as-usual speak. Not yet, anyway.

Trying to make heads or tails out of all the flash sale and daily deal sites? Visit the SUCCESS Guide to Flash Deals.

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