How to Avoid Losing Money in a Daily-Deal Promotion

By Carol Tice

The daily-deal company Groupon is one of the most talked-about Internet startups in recent years. This red-hot flier recently got a venture-capital investment at a valuation of $2 billion or more. As I write this, rumors are flying that Google will buy the company for $2.5 billion.

That's a lot of discount-deal commissions. Another company, Woot, was bought by Amazon.com for over $100 million. So it's a great time to be the owner of a daily-deal company.

The bad news is, not all the businesses that participate in Groupon ads are doing well with their promotion. A study done at Rice University's Jesse H. Jones Graduate School of Business asked 150 businesses that put out Groupon deals in the past year how it worked out.

For about one-third of the participating businesses, the Groupon deals were unprofitable. Participants reported deal shoppers bought what was in their deal, nothing else, and didn't return. Over 40 percent of the entrepreneurs reported they wouldn't do another daily deal in future.

There's an art to designing a daily deal, it turns out. Key findings from the study for creating a successful daily deal:

• You don't want your existing customers finding and using the deal -- it should bring in new customers. When you set up parameters for who you're targeting online, be sure to exclude people who are already connected to your brand.

• Know that certain businesses benefit most from these types of promotions. Generally, they are businesses with excess inventory or capacity to sell. The deal should cost you nothing, really. A good example would be selling goods you were going to trash, selling excess stadium seating for a game, or selling memberships to a museum. You're essentially selling excess capacity and whatever customers pay is found money.

• Make sure your deal builds a relationship, rather than encouraging a one-off deal purchase. For instance, make your deal good for $15 off each of your next three visits, rather than $45 a customer could spend in one trip.

• Don't offer a discount off all purchases. In this scenario, you've lost control of how much money you are giving up. The customer can keep shopping, and you're obligated to discount everything they buy.

Has your business done a daily deal online? If so, let us know how it worked out, and whether you'd do it again.

Photo via Flickr user Taekwonweirdo