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

Inside the Crowdsourcing Boom

By Carol Tice

Ever since the Internet began, entrepreneurs have been trying to figure out how to tap its power to connect people, and use it to create a thriving business. At first, that mostly consisted of opening a store and driving many buyers to it, using that big audience of shoppers to drive prices down -- think Amazon.com.

But a more innovative model also emerged that involved the assembled crowd more in creating what would be sold. An early success in this niche is the decade-old t-shirt company Threadless, where customers design the shirts and the most popular get made up and sold. By 2006, Wired reporter Jeff Howe dubbed this model crowdsourcing.

Crowdsourcing is currently red hot. New companies seem to be springing up everywhere that are using it, and venture capitalists are funding them. Probably the best-known is the online group-discount pioneer Groupon, which got a VC infusion that gave the deal-a-day company a $1 billion valuation.

That gives you an idea of the buying power the crowd can unleash, under the right circumstances. Groupon's model is ideal, in my view -- customers band together to create a big enough pool that a product or service provider is willing to offer them all a great discount. The customers get the deal, Groupon gets a fee per-customer, and the business offering the discount gets a huge, guaranteed uptick in sales volume that helps make the lower price work. (In a chat with Groupon's founder Andrew Mason recently, I learned the biggest successes have been for companies with excess capacity to sell -- seats on a tour boat and tickets to an art museum were both big wins.)

Crowdsourcing is being used a lot now in product creation. You can collaborate online with other designers to create housewares for purchase at Quirky, you can find a writer or designer at Crowdspring from their big talent pool, or post your videogame and earn royalties from the large audience of gamers at Kongregate (just snapped up by gaming retail chain GameStop).

But I've been covering Internet business long enough to know that pulling off a successful crowdsourced business isn't as easy as it looks. There's lots of ways to use the crowd, and not all of them work.

Back at the dawn of ecommerce, I followed the story of Mercata, an online marketplace. Their crowdsourcing theory -- bring together a large number of service providers. Then, when customers come, have the vendors bid against each other to provide the customers with the lowest-priced services! Mercata raised $90 million in venture capital before going bust in 2001.

This model worked for some customers, who got deals on everything from housecleaning to automotive repair. But no vendors wanted to participate in a race to the lowest price. Many customers also sat on the sidelines waiting for prices to go down more.

It was sort of the inverse of eBay -- more customers made prices go down and down, instead of up and up.

Moral of the story? Getting a crowd together is great, and can drive business. But there's got to be something in it for all the players, and a profit at the end of the day for the company.

Are you using crowdsourcing in your business model? Leave a comment and tell us how you make it work.

Photo via Flickr user sandy ferenczi