Daily Deal Sites Were an Unlikely Success Story to Begin With.

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As you may have heard, the CEO of troubled daily deals site, Andrew Mason, was fired recently. This is a good time for me to put forward my belated thoughts about the difficulties of the daily deal business. If you're bored of such analyses rehashing the same obvious points, don't worry. This one is a bit different and it's from the point of view of someone who spent a lot of time on the ground between 2003 and 2009 building his own business by providing services for small businesses.

Just about every analysis of the demise of the daily deal websites brings up two key factors.

  1. Too many copycats led to rapid oversaturation of the market for daily deals.
  2. There were disgruntled businesses who had bad experiences with doing daily deals.

By the way, did you know the sun is hot? Most of the stuff written about the fall of daily deal sites is too obvious to be interesting. I'm much more interested in how they managed to take off in the first place. It's a miracle they managed to find success at all on the backs of technology leery mom and pop businesses. If you could pick the worst champion to take you to the promised land of flash discount Valhalla, you would choose small neighborhood businesses. 

How often do you see mom-and-pop businesses do sales on targeted items that are designed to bring in foot traffic and inflate their overall sales in exchange for taking a loss on the sacrificial door buster? You don't and the reason why you don't is because to make such a tactic work you have to have data and be able to understand that data well enough to have the confidence to lose money on a popular item so you can earn money on less popular items. To get to that point, you're going to have to have your business running at a very high level and you might also need to have a marketing manager. This doesn't describe most of the mom-and-pop shops that I know.

Also, I can say from personal experience as someone who's been involved in several initiatives both as a consultant and as the creator of coupon sites, that small local businesses really don't like doing coupons. I've even had one restaurant owner scoff at me when I suggested putting forth some token coupons just so he could get extra exposure because he considered his restaurant a form of art and you don't cheapen good art by slapping a discount on it. 

Everyone out there, raise your hands if you love running complex calculations on profit margins so much that he would quit your job and put forward your life savings so that you can start a new job that will pay you crap and won't give you a day off possibly for years. Most of these people are not MBAs and did not decide to start a business because they wanted to enter a life of hawking commodities at shifting price points to maximize their material gains. No, they'll usually confess that they started their business because it was something in their blood or they wanted to have a chance to do what they love.

Around the time that the US economy went into total collapse in 2007, it was still rather difficult to get many small businesses to direct their attention to promoting their businesses online even though their favorite advertising partner, the local newspaper, was already in a death spiral and it seemed crazy to continue advertising in a doomed medium that cost up to thousands of dollars a pop for one day of exposure when you could build a website and run AdWords or put up free Craigslist ads.

This paints a no chance in hell kind of scenario for the way that outfits like Groupon rose to prominence, but yet they did. I think the demise of the newspaper industry had something to do with the unlikely ascent of the daily deal business.

When I started my indie career as a freelance Web developer in 2003, I chose to focus my energy on working with small locally owned businesses because I felt like they were really being left behind. While I had a strong desire to work with them, they initially did not have a strong desire to work with me. I can chalk up some of my difficulties to having to pay my dues and learn how to conduct business in a new way, but I think there was more to it then just those typical factors. After I had broken through and began getting business through word-of-mouth, I discovered that the easiest clients to build websites for were the ones who were advertising in local papers. They were easier clients because they had marketing pieces that they could show me examples of things that they would want on their websites. All the other ones could barely come up with a logo and three sentences to say, which led to me putting in a lot of time making marketing and branding decisions on the fly because trying to get them to do it themselves with either result in poor results or would sidetrack the project fatally. Unfortunately for me, this was also time I could not bill for. Doing so would kill the project too. 

I realized what was happening was that a lot of these small businesses were using the graphic designers and the sales content writers in the advertising departments of the local papers as their informal marketing department. When I would ask for collateral to use as starters for people's websites, it was not uncommon for them to request the local paper to forward files over to me. The businesses would often refer to the sales managers that they dealt with at local publications by their first names. I soon learned that when someone told me to check with "Ray", it didn't meant that they all had some guy named Ray on staff. They were all customers of the same salesman who was helping them produce their print ads. In time, I joined these loose inner circles too and others would in turn be curious who this ubiquitous Sheldon person was.

The thing that the local paper, small indie designers like me, and Groupon have in common is that we all provide marketing services and handle a lot of decisions that small businesses are ill-equipped to make themselves. Groupon didn't just tell you about Joe's diner, they wrote about it in such a way that made Joe's diner sounds exciting and like a once-in-a-lifetime meal experience. Traditionally, small businesses entrusted that job to the newspaper's advertising department. Groupon came around at a time in which there was an immense vacuum left behind by the collapse of the local newspapers and risk adverse small businesses did not have their usual safety blankets to clutch at if they needed a boost in sales. 

In order to have a successful online campaign you need to marry services (marketing and branding) with a product (the advertising itself). In the case of small businesses it's very difficult to get them to pay for the service part of the equation separate from the product part and if you let them handle the service end of the equation on their own, most will get overwhelmed and drop out. 

For a while, the Groupons of the world resembled the service and product sales model embodied by the newspaper advertising department. That opened doors, but the very factors that allowed them to break into what was once an impenatrable market would also work against them in turn.

The service part of the relationship is arguably what cements a long term relationship and it's also where the real costs are, but nobody wants to pay for it. They want the product, but once that product is no longer protected by the high barriers of entry that newspapers enjoyed, it becomes no longer possible to subsidize service by pricing it into the product. 

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