Economics of a Daily Deal

We have all heard of a win-win situation but more often then not, somebody wins and somebody loses in business. That’s just the way the world works right? The Daily Deal originated online by Groupon in 2008 claims it’s a great deal for all parties included. Let’s take a look at this win-win-win situation and see if this is indeed the case.

There are only three cast members of the daily deal: the Buyer (you and me), the Seller (Groupon and other types of deal sites) and the Vendor (the great restaurant, salon or spa we go to). we all know that getting 50% to 90% off a deal is a win for us and the higher the discount, the more we buy. Even if we have never heard of a microdermabrasion, at 90% off, we’d consider buying one just to check it out.

On the Seller’s side, Groupon is the biggest dog on the block and had an offer of well over $5 billion from GOOGLE in 2010 for the business. Turning it down, the owners thought their company was worth more and have been speaking about an IPO for some time now. Groupon even reported to have made $17.5 million on a sales commission from selling over 400,000 GAP vouchers on a single day in 2011. so we all know, Daily Deals are good for the seller.

With such huge win-wins on the Buyer and Seller side, how can the Vendor win as well? The answer is- only if the Vendor has huge profit margins and/or they generate a ton of repeat business by basically giving away the store for a short time. You see, with a 50% discount to us, the Vendor only gets to keep half of the half. For example, when we buy a $40 voucher for $20 at a restaurant, the restaurant only gets to keep $10 of our money and the Seller keeps the other $10. In fact, the Vendor is even hit with the full cost of the credit card charge we use to buy the deal so they are making even less than 25% of full retail. The hope of the restaurant is that you stay and order at least $40 more so they can make back the margin that they lost on the killer 50%+ off deal. In actuality, almost restaurants are losing money on these deals and are just beginning to figure it out as they cling to the idea that most of the people who bought the deal will be back. Deal statistics are now showing that most of the people buying the deals are already customers and the new people will only come back in small numbers.

So as a Buyer, embrace these deals- spend more when you get there- thank the owner and SHARE the deal with your pals because volume with repeat customers is where it’s at for the restaurants. If your favorite restaurant owner doesn’t see new faces, the gravy train is going to end. In the meantime, stay thirsty and pick these great deals up while you still can

Economics of a Daily Deal

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