Why Daily Deal Sites Are a Mixed Bag for Small Businesses

Daily deal sites are in the news these days — and not in a good way. The share price of Groupon, the bellwether for the genre, has been sliding and sunk to a new low Aug. 20 before bouncing back. Consumers are getting weary trying to sort through the exponentially proliferating sites, and small businesses in particular are beginning to take a second look at what these sites truly bring to the party, one expert says.

As well they should. According to a recent survey by Utpal Dholakia, a professor of management at Rice University’s Jones Graduate School of Business, only 20 percent of deal users become repeat buyers, with higher success rates found among photographers, education services, health and fitness services, tourism-related services and doctors and dentists, while cleaning services, retailers, restaurants and bars performed less profitably.

"Daily deal sites are a double-edged sword, and unless they are structured properly, they’re likely to produce more harm than good," said marketing expert Charles Gaudet, CEO of PredictableProfits.com, a small business marketing site. "It’s important to realize that the daily deal customer purchased a coupon for your business based upon the price of the product, not because they have an intention to continue doing business with you. Once the daily deal customer redeems the coupon, it’s now the business owner’s job to convert them into a repeat purchaser and a lifetime buyer."

[5 Daily Deals Gone Unexpectedly Wrong]

Though the odds are against you, as the Rice study shows, there are steps you can take to up your conversion rate, he said. You can start by making sure that the daily deal sites you use reach the right customers. Many daily deal sites will provide demographic information; before doing a promotion, make sure the demographic matches your target customer base.

Small businesses also need to prepare for a surge of new customers, Gaudet said. Many businesses struggle with meeting the needs of a huge influx of new customers seeking to redeem their coupons, putting pressures on the existing business infrastructure, operations and often displeasing existing customers.

And you need to track the results and understand the impact the daily deal site is having on the business. This includes the cost of the promotion, the total customer expenditure, the net profits and any repeat purchases.

Finally, utilize follow-up marketing. In order to get the best response, offer each daily deal customer an incentive to come back and make a repeat purchase, such as an additional coupon or preferred customer pricing.

"As with all marketing measures, test small, measure its performance and look for ways to improve," Gaudet said.

Reach BusinessNewsDaily senior writer Ned Smith at nsmith@techmedianetwork.com. Follow him on Twitter @nedbsmith.We're also on Facebook & Google+.