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July 5, 2011

Why the Daily Deals Business isn’t as Simple as it Appears: an SEO Perspective

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Coupons have returned, though prudence never goes out of style. With the market for collective buying power becoming more and more competitive, companies that make it possible for bargain hunters to shop and eat to their heart’s delight for bottom dollar, may need to redevelop their revenue stream. Daily deals can benefit businesses by providing a new outlet to reach new customers they otherwise wouldn’t be able to, but can daily deals be a source for continued business?

coupon clipping

The model is a simple one: a business wants to offer a discount online and one of the daily deals websites wants to host it – for the sake of argument, let’s say it’s Groupon. Groupon will design an ad, host it, and promise a no risk guarantee that you’ll get new customers (not revenue). Groupon only stipulates that a certain number of people must purchase said deal ahead of time, otherwise the deal is cancelled.

I think rational people can all agree that word-of-mouth advertising is essential to the success of any business, especially the local ones. Daily deals are partially, if not wholly, based on this principle. Groupon puts a lot of faith in people sharing deals on Facebook, Twitter, et al. so the business reaches the customers it hopes to and Groupon gets its cut of each deal sold, which ends up being about a 70-30 split in the end. Ah, the beauty of lopsided mutual and self-interest.

To the economist, it may seem too good to be true, and I would tend to agree. I share a healthy skepticism in the sustainability of daily deals for businesses and providers, and fully subscribe to the idea that if you say anything fast enough the first time around, it always sounds like a good idea.

Groupon, at this point, is the preferred platform by which local businesses provide discounts and reach new customers, but it may not be a great financial decision for businesses. Yes, Groupon promises a heavy flow of traffic, but the business ends up holding the bag because of long-term deep discounting.

In addition, there seems to be trouble turning one-time customers into repeat business. According to Rice University, only 20 percent of Groupon patrons are returning to the businesses, which is a bad omen for merchants and an even worse one for Groupon.

It just goes to show that the business that can control all the variables wins. Everything is dependent on how heavy the offered discount, how many deals are sold, and if people decide to return.

Groupon’s Future Cashflow Problem

When Groupon sends a featured deal to thousands of email addresses every morning, they hope as many people as possible purchase that deal and share it, as previously discussed, because in five business days, Groupon has to send 33 percent of those proceeds to the business. After 30 days, another 33 percent, and after 60 days, the remaining share.

Collective buying power aside, this becomes increasingly difficult to implement when you have thousands of businesses wanting to offer deals. So how does Groupon get the cash flow it needs to afford theses deals?

Easy as pie. Groupon robs Peter to pay Paul. The cash (Groupon’s cut) from new deals for local businesses is used to pay for older ones, or “working capital needs” as they call it. I’m no financial genius, but I did work for a major bank once and this is commonly referred to as check kiting,

It would seem that Groupon cannot be sustained, especially if Groupon’s competitors offer more favorable terms when it comes to paying businesses a larger portion of their fair share a lot faster. By comparison, Google Offers terms stipulate an 80 percent payout within four days.

If Groupon’s hand is forced and they become inclined to pay their businesses faster and with more money, then things could get interesting considering their apparent need for an exponential increase in cash flow and this business of an IPO, but I’ll save that for another bedtime story.

Two Birds, One Stone: How Google Will Finish What Foursquare Started

Recently, the social check-in service Foursquare announced they would offer geo-targeted discounts for locations specific to a subscriber’s area. Think GPS meets online discounts. What Foursquare offers is a different and intuitive way to share and access daily deals.

With digital services hinging on integration these days, this is a perfect match, at least in theory, staying true to that age-old adage, innovate or die, but is it enough for Foursquare?

After integration comes concision, and casual users of the Internet want to go to as few sites as possible to find things. They want a platform, and despite its 10 million users, Foursquare is self-defeating because of its lack thereof.

Compared to the behemoths of Facebook and Google, and the thickening field of daily deal competition, Foursquare becomes a website serving only two functions ─ check-ins and online discounts.

If we define success as a reinvention of old ideas, then Google Offers may be able to take the concepts of integration, digital concision, and daily deals and implement them in a natural and unimposing way that is beneficial to the consumer and the merchant.

With a business model that accounts for the mistake of daily deals predecessors, Google Offers could entice merchants from their competitors, and as a possible extension of Maps, Places, and Latitude, it offers a much larger platform for daily deals.

What remains to be seen is if Google will adjust its algorithm to account for Google Offers based on localized queries, like they already do with Maps and Places. If they do, it might provide a few more rounds for their relevancy canon, and another reason for businesses to optimize vertically

It doesn’t get anymore Web 2.0 than that, folks.

The only remaining question is when? As a relative newcomer to the world of SEO, I’m learning that when Google says, “Jump,” I say “How high?,” which pretty much makes me the luckiest SEO in the world because I’ve got a 55 percent off Groupon for a trampoline I’ve been dying to use.

What are your thoughts? Start a conversation with me in the comments or connect with me on Twitter: @MatthewAYoung

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4 responses to “Why the Daily Deals Business isn’t as Simple as it Appears: an SEO Perspective”

  1. Dries writes:

    From a personal viewpoint, i think this is where it is going wrong. People focus on price but forget quality. I’d rather advise (bigger) brands to invest in a longterm approach instead of offering all kinds of little cheaper prices. You don’t build an audience that way, as a brand i mean.

  2. Kent writes:

    Hi Matthew, I have done a thorough research on Group Buy business. I can say that it won’t long very long. Discounts is really not a long term strategy for business. If the whole world offer discount, no one willing to pay full price to get the same items.

    I do get a news that Google will give advantage in search engine rankings for those merchants who signed up Google offer but Google already denied it. But not sure what will happen in future.

  3. Matthew Young writes:

    You are absolutely right, Dries. You definitely speak to the ‘you-get-what-you-pay-for’ argument, which historically pertains to us consumers. Now, it seems, businesses are not immune.

    It seems like daily deals offer an easy way out of SEM, SEO, and Social for companies that don’t want to do sweat over proven marketing techniques. An awfully loft grenade, I know, but I can’t help but be wary of an industry that promises customers only, as opposed to customers and revenue.

  4. Matthew Young writes:

    Kent,

    I could see collective buying becoming the flavor of the week. However, if a business can make it work in the books and daily deals companies can integrate with other platforms, then it may be the formula for success.

    Houdini is famous for many things. Among them is misdirection, which is what Google is really good at. They say they won’t integrate something in the algorithm, then they do without anyone really noticing until after the fact.

    Then we SEOs try to figure out what Google did and how Google did it.

    Thanks for reading.



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