The Indian market is full of deal sites & group buying sites like Snapdeal, Mydala, Dealsandyou and many others. The Indian customer is excited about the concept of getting nearly 50% off on products and services.
But the question is will this really last? Are the companies offering such deals able to cover up costs? Are they able to convert these first time user to repeat consumers? Or is this really damaging their bottom-line?.
I once bought a coupon for a massage and a haircut. Something which I wouldn’t spend on, but since the offer was so good, I decided to try it out. Upon entering the shop I presented my coupons, The sales person groaned” you too have one of those”. This salon was inundated with customers which meant more work for the employees, more work hours and deeper discounts. Was it really worth it?
This concept works well on the premise that the new customers would come back and turn to repeat customer thus expanding the customer base of the store. But what really happens, is the audience purchasing the coupon are doing so because of the price, the next time they want to buy a product they will go back to the deal site and buy another deal this time of a different store. A Rice University study found that only about 1 in 5 daily deal users become repeat customers
Annoys existing customer?
Existing regular customers get annoyed at a fact that customers from the deal site can avail of the product at half the price, when they are actually paying the full amount. Besides if the store can’t keep up with demand with the influx of new customers the business could suffer a serious hit on its reputation.
Additionally, with sudden influx of hordes of customers, more often than not the quality of product or services dips (also because person offering is paying only half the amount..).
Are these companies advertising on deal sites really making a profit at the end of it? Lets take a closer look at the numbers. A restaurant for example, offers a meal worth Rs 500 at 250. ( Rs 50 going to deal site as commission) The restaurant is paid Rs 200. Assume profit margin in this case in 10%. ( assuming volumes). Compare this to a situation wherein person pays 500 for the same meal.( profit margin 40%) . In the first case the profit per customer is Rs 20 and second it is Rs 200.
Taking this example further. Assuming that Deal site would bring in 100 new customers 100 x 20 = 2,000 in profit and traditional advertising would perform 40% effectively in getting new customers. Taking 20% out since traditional advertising is more expensive. So 20 new customer. 20 x 200= 4,000 Profit.
Deal based sites have been working on the premise that customer will return back, but there is no way to measure repeat customer transactions. When consumer spending is low, it makes sense that fewer people are spending on things like expensive dinners out. A discount coupon is an attractive incentive to get them out to the restaurant, and it is more effective at driving new business.
Going ahead I feel its important for deal sites to alter its existing business model to survive in the long term. They need to find ways to add value for merchants to keep offering deals.
This is the future. Customers will always buy deep discount deals, but fewer merchants will need them. What they’ll need, are ways to turn existing business into repeat business!
What do you feel? Will these companies be forced to change their business models? Or can we see the emergence of a new type of deal sites? Comments are open!