Guest Column: What the Daily Deal Empire Decline Means for Startups and Small Businesses

By Editor October 24, 2011

David_Galvan-SchedulicityBy David Galvan, president of Schedulicity

Daily deal services have become a multi-billion dollar industry and have reestablished focus on the local marketplace since late 2008. With Groupon and LivingSocial leading the pack, there were, as recently as a year ago, more than 350 players in the space providing deals, platforms, data, analytics and aggregation.

But that was then. The current state of the daily deal industry has quickly shifted, creating challenges as well as brand new opportunities for small businesses.

The daily deal site pool is shrinking at a remarkable rate. According to The Wall Street Journal, nearly one-third of all daily-deal sites in the United States have shut down. This consolidation of the industry cannot be ignored, and when the daily deal dust settles, those who’ve discovered how to deliver benefits to both the merchant and the consumer will ultimately be the last men standing.

What Happened?

Touted as the consumer’s crusader, daily deals exploded because they saved the masses tons of cash, although many times at the expense of small and startup businesses. The sites then took as much as 50 percent of the revenue off that already discounted product or service, leaving merchants with as little as $25 (or less) to deliver a $100 service. Furthermore, many daily deal horror stories have centered on the logistical nightmares of accommodating the front end (and back end) loaded nature of appointment-based offer redemption. It was not uncommon to see an attractive offer of $50 for $150 of spa services, sell upwards of 300 or 400 units. Fulfilling 400 massages starts with taking 100 phone calls the first few days and trying to accommodate everyone who’s after the Saturday 11a.m. slot.

The cost of acquiring customers has skyrocketed, from around $7 per new customer at the outset to as much as $25 per new customer today. Groupon spent more than $241 million in 2010 and $466.5 million on marketing during the first nine months of this year alone. While some companies are big enough to absorb these costs, smaller operations certainly cannot. More importantly it seems like the venture-backed cash pipe for daily deal companies is starting to run dry, as painfully noticed by BuyWithMe’s rumored liquidity problems.

What Now?

This consolidation has serious implications for small business and startups looking to cash in on the daily deal craze.

Whereas merchants once saw daily deals as an opportunity to get in front of a lot of people in a short time, the market consolidation means many merchants have learned from past mistakes. Random, “go-for-broke” deals will evolve into well thought-out, planned and managed offers. This gives merchants the opportunity to establish loyalty by offering targeted, hyper-local deals. The more geographically concentrated the consumer base, the better the chance of turning deal-seekers into repeat customers.

With fewer daily deal options to vet, merchants and service providers now need to employ productivity management tools to maximize a deal’s potential. For example, scheduling applications like Schedulicity provide easy and inexpensive daily deal management by allowing a service provider to meter the fulfillment of an offer over a specific set of time blocks for the entire duration of the offer. Basically, the merchant could set aside 20 appointments for daily deal redemption per week, the availability of which could be easily accessed by the consumer. Once the slots were filled for the week, the consumer would be forced to move into the following weeks for availability. In addition to alleviating the onslaught of phone calls, scheduling services allow the merchant to set aside ample appointment slots for current, walk-in and other full-paying customers.

What About the Future?

While it’s hard to envision what this dynamic industry will look like a year from now, we can make a few predictions.

Going forward, we will continue to see massive consolidation and an evolutionary fine tuning of the remaining players. I see the space ultimately being run by a couple of the large, national “big guys”, a bunch of vertical niche players and a long tail of smaller local guys who are able to form strong hyper local market penetration. For small businesses, it means owners can now pick the right deal partner for the right deal offering. The biggest isn’t always the best, especially if you are a provider of specialty goods and services. With vertical deal providers, from luxury goods to babies to pets to children (and everything in between), merchants can find the perfect match beyond simple location. A little homework and small and startup businesses will be amazed at the type of deal partner they can find!

Daily deal fatigue has become a common term, as the slew of daily deal emails to consumers’ inboxes has become more of an annoyance than an enjoyment. This fatigue will ease in the coming months and years, as consumers begin to dictate what types of deals they want to receive and from whom (check out personalization products like dealadar.com). Discount directories will allow consumers to search for deals that interest them, transforming passive discount recipients into active couponers. Digital “coupon books” will offer small businesses an engaged, active audience and another way to leverage their existing consumer relationships with hyper-local offers.

Some sites have dabbled in hyper-local deals, but they will come into their own in the near future. Today, a consumer sees a deal across town, but will make the journey to take advantage of the deal. Unfortunately, that customer is not likely to make the trek again to pay full price for the same service. The merchant is the one affected, as they offered a discount service to a one-and-done consumer. However, a consumer who lives five blocks away and received the same deal is more likely to return to that business. Opportunities for startups and small businesses to use hyper-local deals will become more and more prolific, allowing them to connect with customers and turn them into repeat business. We can’t forget about the role of mobile, which will provide a quick and efficient medium for hyper-local deals, allowing merchants to push offers to customers in the vicinity and quickly move time-sensitive inventory.

David Galvan is President at Schedulicity. He is an internet industry veteran who previously served as Vice-President of Sales and Business Development at Topix LLC, an online news and community site, where he was responsible for managing all revenue programs for the company and advertising development of new revenue products and local strategy. Prior to joining Topix, Galvan was the Senior Vice President of Business Development and New Media for business and consumer database provider Infogroup Inc., previously InfoUSA. From 2001 to 2005, he served as the Senior Director of Business Development for the Search and Marketplace Group at Yahoo!, working across the Yellow Pages, Local, Search, Real Estate, Classifieds, Pets, Maps, City Guides, Autos, Tickets and Employment verticals. While there, he negotiated and closed complex revenue deals and strategic partnerships, resulting in 20 to 40 percent revenue growth each year. In addition, Galvan has held senior roles at leading technology organizations throughout his career at: AOL/Netscape, Motorola and Unisys. He is a frequent speaker on the Search and Local marketplace scene. A native Californian, Galvan is a graduate of Stanford University.