Editor’s note: We’ve run a lot of guest posts lately poking holes into the daily deals industry. With this one, we hear another side. Arash Pirzad-Allaei is a co-founder of KASA Capital, where heads the internet technology development of KASA’s network of websites, including daily deals site Crowd Cut.
Sure, Groupon has become the whale in this industry, but that doesn’t mean Groupon constitutes the entire industry. Sure, while Groupon may sometimes structure lousy deals for merchants, it doesn’t mean the entire daily deal business model isn’t sustainable or beneficial for small businesses. When done right, the daily deal can actually be very lucrative for everyone involved: Merchants, customers and the daily deal sites themselves.
So why should you take my word for it? It’s true, I’ve got my biases. But so many people have quickly elevated themselves to “experts” on this space that it’s hard to filter truth from the noise. My company, KASA Capital, started Crowd Cut in May 2010. We are now a top player in our markets, generating eight figures of profitable revenues. So, when I talk about the daily deal space, I do so with direct experience. I talk to merchants and customers every day. I have numbers to back my claims. I’m a player in this game, not a self-proclaimed expert who sits on the sidelines.
Let’s start by clearing up some common misconceptions:
Most merchants participating in daily deals do not have much deal experience. This leaves them at a disadvantage to the daily deal sites when it comes to negotiating the terms of running a daily deal, and can lead to stories like “Groupon Was ‘The Single Worst Decision I Have Ever Made As A Business Owner” (also on TechCrunch). Interestingly, I find that most of the daily deal horror stories come from merchants that a) negotiate terrible deal structure/terms b) do not accurately track redemption or customer spend and c) do not clearly understand the true economics of running a daily deal. This particular post references a story about a coffee shop that signed a 50/50 deal to sell $13 value vouchers (an atrocious 2.5-times their average ticket) for $6 and claimed to have lost $10,000 after selling 890 vouchers.
But, let’s take a look at the real economics:
Total Voucher Value = (890 vouchers) X $13 = $11,570.00
Total Food Cost = $11,570 X (85% redemption rate) X (30% food cost) = $2,950.35
Income From Groupon = (890 vouchers) X ($6 voucher price) X (50% split) = $2,670.00
Cost of Deal After Food Cost = ($2,950.35 food cost) – ($2,670.00 income) = $280.35
Even if we factor in additional variable costs (such as labor, etc.) and amortize fixed costs, a $10,000 seems unrealistically high. Unfortunately, it appears that the poor deal terms and lack of preparation crippled the merchant’s ability to convert new customers into regulars, leaving a bad taste towards the quality of the daily deal model—and daily deal users. Sadly, at times this manifests into merchants and their staff treating daily deal customers like 2nd class citizens. Then they wonder why they don’t come back.
Let’s take a moment to analyze a properly-structured restaurant deal:
A restaurant sells 1,000 vouchers that are $20 for $40 worth of food with a 70/30 revenue split.
If reservations are required (per deal terms) and proper sales limits are set, the restaurant merchant can fulfill the vouchers with minimal increases in variable costs. The economics further improve for other merchants in different market segments (rock climbing, golf, laser hair removal, and so on—i.e. merchants with lower costs of goods). In the example above, even if the restaurant merchant simply breaks even on the economic side, a minimum of 600 new customers will be walking through their doors at no cost. What other advertising options could possibly beat that?
Groupon may be the figurehead of the daily deal, but they are not a true reflection of the market as a whole. It is critical for daily deal sites to understand that a positive merchant experience is extremely important, and that more sites should work towards avoiding deals that will result in a negative experience for merchants. It’s not so difficult to reset priorities with this goal in mind and, if we do, we are likely to find that the majority of merchants will continue to reward our industry with repeat business. It’s worked for Crowd Cut.
Now, you may still be asking yourself, is it really possible to make money averaging 30% revenue splits, paying merchants within 5 days, covering credit card processing fees, and providing higher levels of customer service? Yes! For all you haters out there, remember: Hate the player, not the game. The daily deal is here to stay.
LivingSocial is the social commerce leader behind LivingSocial Deals, a group buying program that invites people and their friends to save up to 90 percent each day at their favorite restaurants, spas, sporting events, hotels and other local attractions in major cities. LivingSocial has an extensive user base of more than 85 million, and is headquartered in Washington, D.C.
Crowd Cut aims to bring users the hottest deals in the top cities to people as easily as possible. At Crowd Cut, there are no “tipping points” that need to be reached; they don’t have a minimum number of buyers that have to purchase deals to make them valid. Crowd Cut works toward getting deals at the most exciting local restaurants, theaters, and entertainment establishments as easy and fast as possible.