When Fan Bi wanted to get the word out about his new company, Blank Label, he instantly thought of popular daily-deal sites like Groupon and LivingSocial. By offering a healthy discount for custom-designed dress shirts, “it wouldn’t cost us anything up-front, and we’d get all these new customers,” Bi remembers. “It sounded like a no-brainer.”
So he signed up with the deal site BuyWithMe, offering $100 gift certificates for $50. Only thing is, the discount worked a little too well. Almost 250 customers snapped them up, and after the deal site took its cut, “we were losing around six dollars a shirt,” he says. “If we’re losing money on every single order, it’s not even worth doing.”
It’s a common refrain from merchants who are testing out the increasingly popular daily-deal sites. For customers, as long as you actually cash in the coupon, it’s often a terrific bargain; for business owners, it can be a riskier gamble than they realize.
According to a new study by researchers at Houston’s Rice University, such promotions lost money for more than a quarter of businesses surveyed, and less than half said they would run such a deal again. “Consumers are getting a heavily subsidized product or service, so for them it’s a great deal,” says Utpal Dholakia, a Rice management professor and author of the report. “But businesses are hoping that those buyers will come back again and again, and by and large, they’re not achieving that goal.”
Indeed, for business owners, there are a number of potential mines that could blow up in your face. If the discount is too deep; if the deal site’s take is too large; if the duration is too long; or if those new customers never come back to pay usual retail prices, then you could be seriously endangering your bottom line.