How Daily Deals are Hurting Local Merchants

Daily deals like Groupon and Livingsocial promise local businesses hundreds, even thousands of new customers, exposure, and ROI overnight. Offering deals that typically range from 50% off and up for restaurants, spas, skydiving and everything else you can think of, it seems like a win for everyone involved. A closer look into the logistics of how daily deals operate show a high-risk, low payout investment that leaves less than half of participating businesses going for round two. Meanwhile, companies like Groupon are raking in the revenue, leaving advertisers and businesses wondering, where is all this cash coming from?



Groupon tells local businesses in their informational videos, "…you’ll never send Groupon a dime," and "…We make sure our featured businesses always come out ahead," but doesn’t explain how they have created this win-win, "highly profitable," business model, or the details of how it works.



According to an article by business analyst Douglas J Utberg, the revenue figures that Groupon reports include the percentage that is paid to the participating businesses. Groupon claimed a $420 million loss in 2010, which is not factored into their figure of $760 million revenue for the year.



Groupon claims that 97% of businesses that run with them want to be featured again. However, in a recent study conducted at Rice University, Uptal M. Dholakia found that less than half (48.1%) of businesses who participated in their study said they would be willing to run another daily deal. These statistics suggest that the "risk-free" promises of new customers, tons of exposure, and ROI overnight aren’t exactly panning out.



While it is true, businesses that run a daily deal with Groupon never actually send Groupon any money, it doesn’t mean they aren’t making a high-risk investment in an expensive marketing campaign. If a daily deal company runs a deal for John Doe’s Restaurant, he pays no money up front. Let’s say the deal costs $20 for $40 worth of food at John Doe’s. The deal runs for a day, and two hundred are sold. The daily deal company takes 50% of the profit made from the sale of the coupon. This means that John Doe ends up with a $10 income, for what originally would be $40 worth of product. A thirty dollar loss might not sound so bad, but multiply that by the 200 coupons that were sold, and that is $6,000 down the drain. Suddenly, great exposure and hundreds of new customers doesn’t sound like such a great ROI anymore.