I love Capitalism and entrepreneurship. As a serial entrepreneur and consultant, I have watched Groupon and Living Social, as well as other similar deal-of-the-day companies. Perhaps I have a perspective that differs from some because I have used these sites quite successfully. My company has sold over 5,000 of a product costing between $100 and $300 using a daily deal sites. We have done well, but not without working through some issues.

As a small business consultant, I’ve talked to many business owners who tried to do a Groupon or Living Social deal. In most cases, these owners failed because they didn’t think carefully enough about the offer or about the logistical issues that a flood of takers might create. However, that’s not the whole story.

To see why daily deal sites may not make it, let’s look at their value proposition:

• The daily deal site will make a profit by delivering a great product or service at a deeply discounted price to consumers who opted in for e-mail. To these consumers we offer exceptional savings on goods and services in their local area.
• Business owners need to find clients willing to spend money for their goods or services. To them, the daily deal site offers the possibility of thousands of new clients who may become repeat customers.

The formula seems like a winner, so why isn’t it delivering for all the stakeholders: shareholders, business owners, and the consumers getting the offers?

Shareholders have been stung by some daily-deal company stocks, partly because of questionable accounting for profits and losses. These issues have shaken investor confidence. Many business owners who have used daily deal sites did not achieve the new customer growth they expected. Consumers who get the deal emails are enjoying some deals, but efforts to promote more deals every day may be causing deal fatigue.  Even though they have a good value proposition for businesses and consumers, deal sites are having some real issues with executing.

Let me discuss why companies offering daily deals have, and will continue to, underperform.

• They promise a daily deal will grow your customer base. Even though it worked for us, most business owners who I have talked to were disappointed with their daily deals. The sales reps who called on us were only interested in getting an order for a daily deal. They did not help us create a profitable offer, nor did they follow up with us to improve our offers. We made money because we know our costs and we figured out how to put a workable system in place to handle a thousand orders in a day and the logistical problems that filling a rush of orders for a service can create.   Many of the small restaurants that offer a lunch deal are surprised that the deal site does not provide email addresses of the people who accept the offer. Even so, the business owner should have a system to harvest them when Groupons are redeemed.  In all the time we did offers, we never received a follow up on how the offer went or what could have been better.  We never had a rep talk to us about what we should be doing to ensure that the deal resulted in more long-term business. We figured it out, but many businesses need that kind of guidance. A little time invested in helping maximize the daily deal would help Groupon and Living Social keep their most important promise to the businesses that are doing deals with them.
• The very best list. Every deal company rep had a reason that their e-mail list would work the best. Their list had e-mails of especially affluent buyers. Their list had the right demographic. It was special. It was golden. In truth, all the deal sites sign up anyone with a pulse and an e-mail address.
• Where did my offer go? When our Groupon rep began to send our offer out only to “select markets,” we could not get an answer about how many people received the offer and where they were located.  At one of deal companies, the Dallas account managers do not talk to Fort Worth managers so we could not coordinate offers for adjacent metros.  As daily-deal companies have tried to get more revenue by having multiple offers and special offers that go with their main offer, they have not made it simple for business owners to know where their offers were being sent.
• Feeding the beast. The daily deal sites send out many more deals every day. The need to feed the beast has caused reps not to qualify the businesses very well. I know a salon owner who went out of business because of her Groupon. While I believe every business owner has to know what she is getting into, I also think her rep did her a disservice. She was a one-woman shop and did a Groupon for a $200 service for $75. She could provide the service for six customers per day if she working ten hours a day. The products to perform the service cost $65. She had no automated reservation system, so she spent time scheduling customers. The sales representative got a deal, but she is now closed and Groupon has had to issue refunds to hundreds of unhappy customers.  Had the rep qualified her, he could have started her with the right size deal.
• No flexibility in dealing with the deal site’s marketing department. We know that 40% of the sales we get for a particular service are gifts.  The deal site presented us with finished copy for our offer and we were unable to get their marketing department to make any changes, not even inserting “Makes a great gift!” Businesses that last are flexible enough to make adjustments on the fly.
• No follow up. If the daily-deal offer underperformed, we called and requested a meeting about improving it.  No meeting or discussion ever happened. Most of our offers did well, at least by their measurement, but we wanted to do even better. We were never able to get information about where our offers were distributed or how many people received them so that we could evaluate performance meaningfully.
• No training. Groupon offers a few online tutorials for businesses that address what to expect. None of the other companies offered any guidance about how to plan for the rush at the beginning or end of an offer. We have online reservations and we made it work. With a little training, many other companies could.  None of the deal companies offered any training about costs, or refunds. Even a small investment in training existing clients might avoid the negative stories that may ultimately be Groupon’s and Living Social’s Undoing. The deal companies also do not provide guidance about managing the reviews and other social media that a deal inevitably brings with it.  Their promise is growth and bad reviews can kill it. The deal sites should be providing some guidelines so that businesses are ready to handle reviews.

When I hear about a small business considering doing their first Groupon or Living Social deal, I wish them the best and hope that they will have an experience as good as mine. However, I know most will not.

As an entrepreneur, I find nothing sadder than a good business concept that fails because of preventable errors in execution.  Unless Groupon and Living Social and the other deal of the day sites are able to do a better job keeping their promise of growth to small business owners, they are going to find it is increasingly hard to feed the beast at all.

Written by Ron Sturgeon
Entrepreneur

I can be reached by mail at 5940 Eden, Ft Worth TX, 76117, or rons@RDSInvestments.com, or via phone at 817-925-4244