Why All The Daily Deal Hate?

Editor’s note:Guest author Rocky Agrawal is causing quite a stir with his in-depth TechCrunch series looking at the daily deal industry (read his latest, Why Groupon Is Poised for Collapse, as well as Part I, Part II, and Part III).   Agrawal is an entrepreneur who has worked on local products since 1995. He blogs at reDesign and Tweets @rakeshlobster.

Some people have been asking me why I’ve spent the last 10 days writing about Groupon. What’s my hidden agenda?

I’m tired of seeing small businesses get screwed.

I’ve been working on local products in some form since 1995. And I’ve seen a lot of small businesses get screwed by horrible online products.

First, it was microsites, where businesses were sold 5-page templated sites for crazy amounts of money.

Then flash designers came along with horrible, unusable Web sites that did nothing but look pretty in the designer’s portfolio. (On paper, where you couldn’t grasp what an awful experience it was.) They were terrible for SEO, terrible for driving traffic and hard to update.

The latest trend is getting small businesses to fork over all of their profit and then some in the hopes of driving additional traffic. They’re driving traffic alright, but it’s mostly the wrong kind of traffic. One tweet in response to this series called daily deals “strip mining the small business ecosystem.”

Many businesses I talk to aren’t fully aware of what they’re signing up for. The power relationship is incredibly lopsided. Some of the “advice” that deal sales people are offering works against the interest of the local merchant. Businesses are being sold a bunch of useless statistics when the reality is that the most meaningful metrics to assess the performance of these assets don’t exist.

I’m hoping that the information from this series helps balance the playing field a little bit. If the business model can’t survive this level of transparency, it doesn’t deserve to exist.  Daily deal companies should be able to point to some variant of my list of best practices for running a daily deal.

I’m not saying that Andrew Mason and the Groupon team are evil people or that they set out to design products that can be toxic for small businesses. But sometimes you end up with a set of incentives where everyone acting in their best interests (or what they think are their best interests) creates a system where bad things happen.

In the mortgage bubble, pretty much every player had an incentive to keep the thing going. Even the appraiser. If you were dilligent and appraised for what a property was actually worth, it would take you more time and banks wouldn’t recommend you any more because they wanted to approve the bad loans. It was much better for you (and faster) to do a cursory appraisal and rubber stamp what the bank wanted.

There are fundamental laws of economics that refuse to be ignored, no matter how much people want to say “this time it’s different.”

Small businesses have it tough. Many of them fail. A success is a comfortable lifestyle, nowhere near the definition of success in Silicon Valley.

A deal has to work for everyone involved. That’s how you build a great business.

After my on-camera conversation with Jessie Burke, the owner of Posies Cafe, she noticed that I had a Square reader on my iPad. We talked about her credit card processor, how she didn’t have a POS system and how much her loyalty program cost. I quickly did the math… Well, really there’s no math involved. With a $5 average ticket, it’s obvious. Square would save her more than 50% on credit card fees.

I used the camera on the iPad and snapped a picture of the pomegranate soda I was drinking and showed her how easy it would be to use Square as a POS for her business. She had been considering a $3,000 system but couldn’t afford it. Square does what she needs for just the cost of the iPad. It could also solve her loyalty program needs.

That’s a win-win. She gets a set of services that is perfect for her needs at a reasonable cost. Square gets a new customer. I felt really good about that part of the conversation and left my Square reader with her.

That’s what the tech community should be about. Using innovative technology to create great products that help people.

There is an opportunity in the deals space for someone who does it right. You just have to pay really close attention to incentives and details to find the opportunities. Yield management and location-based targeting are just some of the open spaces. And this can be done without fleecing small businesses.

That’s a bunch of sanctimonious B.S. Clearly you’re getting something out of this.

I truly believe everything I’ve written here.

But, yes, I’m getting something out of this, too. As a recovering former journalist, I’ve enjoyed researching and writing these posts. My follower counts on Twitter and elsewhere have gone up. My email box is fuller than ever. I’ve strengthened relationships with some people and created new ones.

But being outspoken can close certain doors. I’m fairly confident I won’t be working for Groupon anytime soon.