The Daily Deal Movement Insights and Best Practices

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1 The Daily Deal Movement Insights and Best Practices When roughly 30% of mobile phones owned in the United States are indeed smart phones and, by some estimates, 1 in 3 smart phone owners are thumbing through their mobile applications before getting out of bed, the ritualized behavior surrounding today s mobile phone use seems to proclaim it s a good time to be operating business in the mobile space. On July 2nd, 2011 the world learned it s been VERY good for one particular company that expects 50% of their total revenue over the next 24 months to come from their mobile focused business division (read APPLICATIONS). That otherwise uneventful summer Thursday was the date Groupon filed their S-1 form with the Securities and Exchange Commission, the first act in a production that could raise up to $3 billion dollars for their Chicago, Illinois based organization. That $3 billion dollar figure sets the value of the online-coupon company at as much as $30 billion. What is Groupon and how did they reach such dizzying levels of success? Let s take a brief walk down the Cliffs Notes review of what has been pegged as the fastest growing company in history: Groupon ( is made up of daily deals for the best stuff to do, see, eat, and buy in 43 different countries around the world; Groupon works with popular local businesses to offer deep discounts usually 50-90% off of their products and services. By promising businesses a minimum number of customers, Groupon generally negotiates the cheapest deals possible for the Groupon community of users; Deals are disbursed and announced to thousands of subscribers via , social networks, and their mobile applications; Launched in November 2008, the company grew exponentially and was

2 Today the company may be sitting on the largest Initial Public Offering in recent history. Groupon s strength has been its ability to bring the two main players in a market, buyers and sellers, together in a quirky and fun way that offers the Groupon community an unbeatable deal while businesses garner a large number of new customers. That, quite simply, is the goal of the Daily Deal Movement: Discounts bartered for mass marketing and the business of new, potentially recurring, customers that are generated as a result. Woot.com may have gained first entry and the title of trailblazer within the market but Groupon has most effectively brought make money, and live. Not all is Bright and Rosy When an organization, individual, or even a cultural movement for that matter (daily deals are indeed affecting the culture of business), finds itself in the midst of a meteoric rise in success, attention, and overall adulation there are bound to be skeptics and contrarians champing at the bit to identify deficiencies and vulnerabilities. The Daily Deal Movement, and more specifically Groupon, has had just such an experience, with increased attention being directed to its flaws following news of its envious valuation potential. One particular study released by Utpal Dholakia, a professor at Texas Rice University, found that about 80% of coupon users are first time users of which only 20% of them become repeat customers of businesses that have offered deals through services such as Groupon. Theoretically, part of the tangential opportunity these deals are meant to offer is the fact that many customers will either spend beyond the daily deal and/or return for future purchases of products and services. The Rice University study found that just 36% of customers buy goods or services beyond the original daily deal. In addition, less than 20% of daily deal redeeming customers ultimately returned to the business for future, full-price purchases. In addition, every single time Groupon sells a voucher to its users, it collects cash up front (i.e. Groupon community pays for the daily deal coupon). The daily dealoffering business s share of the coupon/voucher sale, which averages about 60%, globally, is paid out at a later date: In North America, merchants get paid in installments over 60 days while internationally, it typically takes 70 days! While Groupon, through its stranglehold on the market, finances its own business growth on the backs of merchants through 60 and 70 day terms, its rivals such as

3 LivingSocial (payout of full share in 15 days) and Google Offers (80% of full share in four days) provide merchants with a bit more breathing room. Horror stories have sprouted up surrounding the pitfalls of the Daily Deal movement and, in particular, how some Groupon merchants have had trouble supporting all the deals, even resulting in a total closures of business. With such doom and gloom apparently prevailing through the Daily Deal space, what type of conclusion should be made? Daily Deals are a Business Proposition. Business Propositions require PLANNING Groupon and the Groupon style daily deal site is a business. The merchant offering a deal is a business. In order to establish a working relationship through the Daily Deal Movement, each side needs to make decisions that determine whether this engagement will propel a positive, short term return and ongoing benefits at a cost that makes sense for everyone involved. For example if the terms that are being offered by a site such as Groupon cannot be financially viable for Joe s Pizza Shack, Mr. Joe and every other business facing that dilemma needs to hold on moving forward with their Daily Deal. Due diligence on the part of the merchant is necessary because although Daily Deal offers can elicit operational challenges that otherwise may not have been expected, small businesses cannot afford to categorically ignore a marketing opportunity that can deliver hundreds and possibly thousands of new customers in one fell swoop. As a company very familiar with the local business and local advertising space (checkout we understand the challenges of advertising a small businesses and the weak effectiveness of the standard marketing channels such as yellow pages and print publications, have created opportunities in the daily deal, mobile marketing, and online directory space. Some of the most basic elements that are necessary to generate success through a daily deal coupon are also the easiest. 1. Identify the Cost of the Deal Makes sense right? Offering a Daily Deal is a different form of advertising but its Advertising, none the less. When a business makes the decision that advertising and marketing are necessary, the costs need to be evaluated. Some of the basics to consider are: a. How much does the product or service being offered cost the merchant and how much does the merchant retain in profits off of a non- discounted sale? This should include overhead costs such as employee wages necessary for product/service preparation, raw material price (wholesale purchase price), etc. b. How much of a discount can the merchant offer while retaining a profit he/she comfortable with on a per sale basis?

4 c. How much of that profit is the merchant comfortable sharing in commission with the Daily Deal site? There are plenty of other identifiers, qualifications, and assumptions that can be made but those three are the basics. I recommend visiting this blog post provided by one of the founders of Yipit.com, a daily deal aggregator that is providing tremendously useful data to companies such as Groupon and Livingsocial about the users of Daily Deal Sites. 2. Intelligently price the Deal What do people generally do when they come to the place of business? What are the tendencies of the average customer? If the merchant is a restaurant and a meal is regularly priced at $20, the deal can be priced at $10. This will provide a deep enough discount that the Daily Deal site user will probably bring someone else along for their experience, turning the meal into a larger sale. 3. Engage and Sell! That deal being offered by the merchant probably isn t the only product or service the business offers. If the customer walks in the door with deal coupon in hand, the merchant should show them extra tender, love and care. For example, go over board and let the user know how special they are for using making the business s new marketing initiative worthwhile; share information about new products and services that will be available in the coming weeks/months; offer future incentives for coming back (i.e. free drink with a purchase that is only available to previous Daily Deal customers); and of course up sell on other products and services that may be complimentary that is also available while they are in the store. 4. Collect their Contact Information - Pretty self explanatory: merchant will want that information to market to these new customers in the future (i.e. future promotions and discounts). Recap Groupon has sprinted to the top of a powerful marketing and commerce movement that will prove lucrative for the firm as it prepares to become a publicly traded company. As a result, the Daily Deals Movement has been growing just as successfully, sprouting an estimated 200 individual sites/businesses of this type already. But Daily Deals aren t right for every merchant. That s a fact. There s a reason why the vast majority of deals are for spas, salons, restaurants, events, and activities. However, if a deal is conducted intelligently and properly, it s a tremendously scalable marketing opportunity and produces a nearly instant sum of revenue larger than what a business could otherwise expect. The Daily Deal business is growing and maturing with opportunities available across a broad spectrum of industries and verticals. Coupled with the considerable research that points to commerce transitioning to mobile platforms such as smart

5 phones and tablet devices, more and more iterations of this business model will soon appear. Arca Mobile provides application solutions for a broad spectrum of business needs. Our Arca Mobile Deals application provides individuals the opportunity to launch their very own Daily Deal business that targets the mobile application customer and user base. If you have any questions, or would like to further discuss your plans to enter the daily deal space, please feel free to contact us: John Yoo Business Development Manager Arca Mobile