Is ‘Daily Deal’ Brokering An Unsustainable Business Model?

I’ve been pretty involved in hyperlocal news sites as of late, and I’ve had a really good taste of the daily deals market. And you know what? I don’t like it.

Analyzing different business models has become sort of a pastime for me, and the idea of ‘Daily Deals’ has had me thinking the last couple weeks. I honestly think consumers are getting sick of the term ‘Deals’, because of what it represents. It’s starting to sound snake-oily. And as a consumer, I’m tired of them coming to my inbox. I’m tired of them being for all-day wine or skiing trips, or for things that aren’t actually good deals at all. I just want deals for Moe’s sub and pizza shop. I think other consumers want that too.

Of source, that’s just speculation. I stumbled on an infographic that sort of encapsulates everything I was thinking: see it here. And it looks like it was backed by some credible sources.

There’s a serious disconnect between what the major stakeholders in this daily deal operation think they are getting in return, and it’s making the whole model crumble. For example:

The business owner wants new business. He takes a calculated risk by offering a ‘deal’ in order to get that business, hoping they’ll return and eventually pay full price. Business from existing customers kind of sucks, because those are already-loyal customers getting something on the cheap.

If the daily deals market grows in this scenerio, you reach a point where you begin to polarize commerce taking place. Businesses that offer deals are getting most of the customers. But those deals aren’t really making anyone money, and as soon as they revoke the deal in order to capitalize on the ‘repeat business’, deal seekers are off getting something cheap somewhere else.

The consumer wants a perfect world where they have a relevant deal in their inbox most days of the week. Not just zip line adventures and horseback riding — they want lunch and dinner deals — deals at the places they frequent most often. But they aren’t really getting that. And if they did, it’s completely incompatible with the fact that a business needs to make money to survive (polarization, again).

The daily deals market requires small businesses to hurt themselves by provoking unsustainable pricing amongst each other. I think a side effect of this is that you start to see deals which aren’t actually deals at all. SMBs are trying to capitalize on the popularity of the deals while making money at the same time. Ever see a deal that says something like “Dinner for 2 at Bob’s Pasta, only $50. Save 75%!!”?

That’s not a deal at all, but Bob’s pasta is using deals as a platform to gain visibility and possibly rope in some suckers. But consumers recognize a crap deal when they see one. At this point, the model has crumbled.

I also wonder if there’s a psychological issue with getting something discounted one day, and paying full price the next. If I pay $5 for a pizza, I might not be able to pay $15 for that same pizza a week later.

In sales, it’s common to hear that you should “never compete on price”, and that it’s better to give something away for free rather than give it at a discount. Why? Because the customer won’t always expect something for free, but it’ll be hard to take away the discounts. Another problem with the daily deals model?

This is all in retrospect, so it may have been hard to see how exactly things like this would play out when Groupon et. al. were still on the horizon. But at this point, I think SMBs and consumers are slowly becoming disenchanted with the ‘deals’ experience.

It goes back to my post on winning: The consumer is generally winning when he’s getting great deals everywhere. The business is winning when he gets repeat business at full price. But in actuality, he’s not getting repeat business from people who are already off capitalizing on the next deal. Much of the time he offers a deal, he’s losing.

When you think about this model, you might come to a realization: The SMBs were hurt in the long run, and the consumers didn’t gain much. Deals may still be useful, but only for local upstarts that need to get the word out.

Agree or disagree? I appreciate any thoughts, especially from small business owners and deal consumers.

PS: I’ve been thinking that a nice way to work around the issues above is to make an offer like “Free bottle of wine with two entrees.” This way the consumer feels like he’s getting something good, and the SMB has the opportunity to upsell on things like appetizers and desserts, making his money back right away. It also avoids the psychological issue mentioned.

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