MEDIA PERSPECTIVES - December 30, 2015

Editor's Note:

I just wanted to let my readers know that I've created a blog where I will be posting essays and articles I've written on digital and online marketing. It's an extension of Media Perspectives. I hope you continue to read and enjoy!

Here's the link: Jaffer Ali's Blog - Perspectives from a Media Contrarian

Thanks for Reading!

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Daily Deal Dilemmas
By: Jaffer Ali
(Originally Published: April 28, 2012)

"Everyone wants to go to heaven, but nobody wants to die." -Peter Tosh, musician (Popularized by Blues man, Albert King)

Most people think that Groupon created the daily deal business. Not so. Back in 2001, a French entrepreneur, Jacques-Antoine Granjon pioneered a private online shopping "club" offering daily deals. In the US, the daily deal business did not really come to our shores until Woot.com entered the marketplace in 2004.

Woot sold products and grew wildly with an irreverent sales style. Most of their items were dropped shipped from vendors until Woot developed their own line of products, mostly t-shirts. In 2010, Woot was sold to Amazon. BTW after being inspired by Woot in 2007, my sister created a little division as an offshoot of our media company. We began to offer an impulse, inexpensive item per day to consumers. We did and continue to do our own fulfillment.

Then in 2008, Groupon changed the world of the daily deal business.

Seemingly overnight, Groupon brought restaurant BOGO (Buy One-Get One free) deals to mass audiences and spawned hundreds of "me-too" daily deal sites. The cost of fielding a nationwide local sales force was subsidized by a frenzy of VCs. Apparently the VCs never delved into how expansive the graveyard was of failed attempts creating nationwide local sales forces.

This overwhelming cost of putting boots on the ground in hundreds of markets has led to an industry with an accumulated deficit of over $2.5 billion since 2008. That is if you just take the top 10 daily deal companies. Groupon's cumulative losses exceed $1 billion by themselves. Living Social lost $548 million on $245 million in sales last year alone.

So it was inevitable that these daily deal companies would discover the benefits of offering a single product to its entire nationwide audience. How many boots on the ground does it take to cut a deal with an eager product vendor wanting to sell more of its inventory? The answer is about the same as it takes to screw in a light bulb.

Or does it?

As we said, many daily deal sites jumped at emulating Groupon's model. They saw only the benefits of growth and ignored the dilemma and costs of "boots on the ground". With the same devotion to emulation, many are now jumping to follow Groupon's entry into offering products. The benefits are obvious...or it was to my sister when we started in 2007. But the pitfalls are buried. Below is a short list which is not exhaustive by any means:

1) Sales Tax Issues: The manner in which deals are presently handled, daily deal sites are literally selling the product to the consumer with vouchers redeemed on the vendor site. Attempts to push sales tax responsibility to the vendor (like with local restaurants) will not survive a state sales tax audit. This puts the daily deal companies like Groupon and those with a lot of markets at risk for sales tax due to nexus in each jurisdiction.

2) Product returns: Having owned one of the largest fulfillment companies in the country for 7 years, shipping for Target Stores, MGM, Garth Brooks, Nintendo and many others, I can guarantee returns are going to happen. And how they are handled will determine the success of holding on to the 4%-10% customers that return merchandise. The higher the price of the deal, the higher the return percentage by the way.

3) Customer Service: Related to #2, there are a multitude of issues surfacing that must go to the vendor. We work with several daily deal companies and receive calls directly from consumers. How many? 11% of all products sold results in a customer service call or issue. 9 out of 10 vendors do not know how to handle this and the daily deal company is extremely at risk. When things go wrong, the daily deal site cannot blame a restaurant and actually assumes 100% of the consumer anger.

4) Inventory Issues: Coupon daily dealers are clueless about inventory management. So what they do is tell the vendor that they have sold 5000 of X and the vendor must stock up on this. Then after only 1000 are sold, they say, "sorry". After missing the projection once, it is hard to believe the daily deal folks who really have no idea how many they can really sell. So they then run the offer and order the product after. Disaster customer service ensues because consumers expect to be shipped within 3 days of ordering.

5) Forget Breakage: People who purchase products are much more likely to want the product immediately. While breakage accrues to the vendor, if a daily deal site becomes the vendor, they cannot count on the same percentage as "unredeemed" spa vouchers.

The daily deal space is nothing if not iterative. Groupon is already doing its own fulfillment. KGB Deals, as reported by DailyDealsMedia.com is reducing its boots on the ground to focus on more national deals. In the past 90 days, we have been contacted by 27 daily deal companies to offer some of our hottest products to their audience. We thought this would be a huge business and even sent a press release out.

But we quickly discovered that many of these sites had one foot in the grave and the other on a proverbial banana peel. Few of the sites that contacted us cared about the pitfalls and only saw the benefits. They did not want to sell products the right way. With a few notable exceptions, we kept hearing Albert King singing, "Everybody wants to go to heaven, but nobody wants to die."

Original Article: Daily Deal Dilemmas

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