As the market anticipates the time period leading up to Groupon’s IPO, the conversations around the various daily-deal providers have reached fever pitch: “It’s fabulous!” “It’s awful.” “It’s a great deal for merchants.” "It’s a terrible deal for merchants.” Who is right? When is it right? This article addresses the circumstances under which the daily-deal model is good for merchants, and how it can be improved by narrowcasting to the right audience.
While the daily-deal model is relatively new, the determination of whether it’s good for merchants involves decisions that are as old as the discipline of marketing itself. As a first step, let’s explore the deal and dollar flow for a scenario involving three parties: a daily-deal provider, a merchant, and a consumer.
A merchant offers a $30 deal to consumers for $15 via a daily-deal provider. The value chain runs like this:
- The consumer pays $15 to the daily-deal provider and receives $30 in product or service.
- The daily-deal provider pays $7.50 of the $15 received from the consumer to the merchant (possibly more or less as structure varies) and keeps $7.50 for itself.
- The merchant receives the $7.50 from the daily-deal provider and “gives” $30 in product/service to the consumer.
Is this a good deal for merchants? The answer, of course, is it depends. Can the model be improved to increase value for all parties? Absolutely.
Daily deals can definitely bring in traffic (stories abound of merchants being overrun), and they result in cash flow for the merchant. The deal’s value might possibly be further enhanced for the merchant...
- if the daily deal brings in first-time customers. Then it has brought in new revenue for the merchant.
- if a daily-deal customer spends more than the minimum associated with the deal. In the example above, for anything the consumer spends up to $30, the merchant receives only $7.50 from the daily-deal provider. For every dollar above $30, the merchant presumably receives every penny.
- if daily-deal customers return and become profitable, repeat customers.
In the example mentioned above, a merchant spends $22.50 ($30 in retail goods provided for which the merchant receives $7.50) to acquire a customer. A merchant can understand whether the model works for her business by asking these questions first:
- Is sacrificing 75% of the retail price for my product or service one time worth getting a customer in the door?
- Would I normally spend 75% of a first-time purchase to acquire a customer?
These questions would be easier to answer if the merchant knew the potential value of the customers she is acquiring through this channel. The daily-deal model will eventually get much better by enabling narrowcasting. Narrowcasting is the opposite of broadcasting, where a marketing message is broadly distributed, reaching whoever happens to be paying attention. With narrowcasting, messages are specifically targeted at audiences who are most likely to be receptive and profitable for the merchant putting out the message.
How might this work in a daily-deal model? Recall, the question for the merchant is, “Would she spend 75% of a retail price to get a customer in the door?” That answer gets much clearer if the merchant has the ability to target specifically who sees her daily-deal offer. The daily-deal structure becomes a better value proposition for merchants when narrowcasting options make it possible to:
- make sure daily deals aren’t offered to current customers (unless merchants specifically want it to be).
- identify and recognize the target audience so that offers reach only the demographic, psychographic, geographic, and lifestyle segments of the population that fit their “best customer” profiles. Those offers are made available to only the target audience.
The narrowcasting evolution in the marketing and advertising business models is not far off, and all parties in the transaction will benefit. Why is it not far off? Given the number of entrants into the daily-deal space and the mixed results among merchants, the various daily-deal providers will increasingly compete for merchant attention as well as consumer attention. That means daily-deal providers will need to deliver results for merchants–enabling profitable, new customer acquisitions who will spend more than the deal minimum and return regularly. Put simply, that means merchants will need to enable good, old fashioned data-driven targeting to create a “right” cost of acquisition. Consumers will benefit from narrowcasting because they’ll see offers that are more relevant to their interests. Furthermore, if merchants have greater confidence that they’re reaching the right audiences, then they’ll be able to extend even more appealing offers because of the efficiency of the channel.
So the daily-deal providers that enable narrowcasting will cut through the clutter for consumers and deliver better results for merchants. The ones that do not will cease to exist.
The daily-deal model is an exciting and interesting marketing innovation. As a channel for new-customer acquisition, it holds enormous promise. Comscore projects that the daily-deal market will expand to $3 billion this year. As with all acquisition channels that have come before, the daily-deal market will be forced to evolve to enable targeting. Merchants desperately want to acquire customers; by giving merchants the power to narrowcast, daily-deal providers will create a channel that lets them do so profitably across a customer life cycle.