The success of LivingSocial and GroupOn has garnered a lot of interest in their business model. Almost every content site is evaluating whether they should add a daily deals component to their business. This is a guide to decide whether or not you should start a daily deals business, and if so how to go about doing it. I take a very metrics driven approach. If you are evaluating this from a marketing and strategy perspective, I would refer to Yipit’s guide here.
As a metrics consultant, I have helped a number of companies in the daily deals space through this process. As a word of warning, this is EXTREMELY hard. The simplicity of the user-facing software makes this business look deceptively easy. All of the complexity is hidden behind the scenes. That said, here we go.
Part 1: Should I Start a Daily Deals Business?
Lesson 1: This business is about user acquisition, not deals
In the early game, this business is about user acquisition, not deals. I’m going to say that again because this seems to be the least understood piece of this business model. This business is about user acquisition, not deals. Relatively speaking getting deals is a cakewalk compared to getting users onto your email list. At this point you can completely forget about the deals.
There are two questions you need to answer:
Can I consistently sign-up 4,000 users to my email list every week?
Are there enough people in you intended market, with a crystal clear channel to reach them, to support 4,000 new emails every week? If you can’t see how this is possible, then it doesn’t make sense to start a daily deals business. I will get into the logic behind this in a bit.
Can I afford to acquire 4,000 users every week?
If the channel you identified is paid, can you afford to acquire 4,000 users per week?
The answer is going to change depending on the business you’re in and how much money is in the bank. I will go into further detail on this as well.
Lesson 2: After user acquisition, all your resources should be focused on data
Why you need at least 4000 new users per week
This is a metrics driven game. You can run an entire daily deals business on a spreadsheet, and there is a calculable answer to almost every decision you will come across. That makes setting up your metrics of paramount importance, second only to acquiring users.
A good way to illustrate the challenge you will face is to use the example of a plumbing system. If there is only a trickle of water passing through a new plumbing system, you can’t tell if it’s working and where the leaks are. You need full water pressure to figure that out, so your goal is to get to full pressure as quickly as possible so you can determine what works and what doesn’t.
This is a simplification of statistics, but you need about 40 data points to start to draw conclusions from data. Lets assume your emails convert at .2% into a sale. 4000 x .2%= 8. You need 4000 new emails to get 8 sales per deal. 5 deals x 8 sales per deal = 40 sales per week, a number that you would be able to draw significant assumptions from.
At this point you’re probably asking why at week 2 I am not calculating 8000 X .2%. As you learn more about your audience and how to merchandise deals to them, this will become the correct calculation. In the early stages your churn is going to be incredibly high. Here are some assumptions you can make.
Your user list is really as large as the number of people you acquired in the last week. This should get better as you optimize, merchandise, and acquirer users more efficiently, but this is typical of an early stage daily deals site.
There are a few caveats to this. Sometimes the first batch of users specifically sought out the site and is therefore highly engaged. As you expand the channels you are using to acquire users, you will find the quality of those users will decrease. I’ve also seen sites nail the product market fit out of the gate, which will result in a low churn rate. This is more typical of niche deal sites. The final caveat is if you have existing traffic that you are converting into daily deal users. The metrics around this are a bit different.
How to Acquire users
You probably fall into one of two camps. If you already have a content site with users, you are evaluating whether you can convert those existing users into daily deals customers. If you are starting from scratch you are evaluating how much it will cost to acquire users.
I have existing traffic:
If you fall into this camp you will need to decide what % of your users will convert into daily deals subscribers. One option is to send them deals without asking for them to opt-in, but I would advise against this. When people start receiving daily emails that they didn’t sign up for, they generally click the Spam button. This will hurt your email deliverability in the long run.
These are the three calculations tha
t you need to consider:
The correct conversion rate is a function of how aggressive you’re willing to be in encouraging victors to sign up. If you check out Groupon.com there is nothing on the page expect the box to enter an email (clear you cookies). That’s the most aggressive you can be, and will also be the highest converting. Assume a 23% conversion rate on that page into an email address, and 10% or lower if you use anything softer.
I have no traffic.
If you don’t have traffic then I would think long and hard about getting into this business. If you decide to go ahead anyway, make sure that it’s in a niche where the population is extremely easy to reach in a consolidated way. If the population is a tight knit community with a few powerful channels that reaches them, then you have a sustainable method of acquiring users. If the population of that niche is a bit scattered, undefined, and there is no specific channel that you can reach them through, then you might want to reconsider this business.
Assume you will spend $10 per email address. You can lower this cost as you optimize, but it will hover around that level in the beginning. $10 X 4000 emails per week x 4 weeks = $160,000 per month, and that’s barely spending. The big guys spend 20+ million per month. Make sure you have some serious capital to get going.
Lesson 3: ‘Great Deals’ is not a user acquisition strategy
Every new deal site is convinced that great quality deals will attract organic users. This is false. You are probably thinking to yourself that your industry and your deals are different, but I promise you this will not work. Deals just aren’t that viral, and even great ones don’t bring in a lot of extra traffic. They do bring in some, but it’s not enough to rely on this as an acquisition strategy.
But what about the Living Social/Amazon deal?
If you get a deal of that magnitude with full press coverage, then yes, it will drive new users. That’s not a sustainable model, and the users that you acquire will likely be of the lowest quality. They are coming for just that deal and have no interest in whatever else you’re selling.
Having great deals is a user retention strategy. It keeps your existing users engaged so they don’t churn. Having a mega deal every so often is a very effective way to re-engage users that have stopped paying attention. It makes them think, wow, I don’t want to miss another deal like this, better keep reading.
Deals per month
You should be sending about a deal every workday. 5 deals per week X 8 weeks = 40 deals. In two months you will have a complete data set, although you will be optimizing along the way.
It will seem strange to send out deals as you ramp up your list since you know that you don’t have enough users to really make money. That’s okay for now. Your goal at this stage is to obtain data to make decisions, not to make money.
Local vs Global Market
If you are going to get into the local daily deals business then you need 4000 users per month, per market. You will also need 20 deals per month, per market. As you can imagine this gets expensive. Conversely, if you pick a market segment that can be served by deals anywhere in the country, you will make things a lot easier and cheaper for yourself.
Generic vs Custom deals
There has been a shift away from deal sites that offer generic deals like a spa package, to deal sites that offer highly curated custom experiences. Curated deal sites offer packages like a hotel, event tickets, after party, and dinner that you couldn’t buy otherwise. The upside of this model is that you are offering a differentiated product and an experience that can be “on brand” with your site. The downside is that these take a lot more time and effort to set up, and figuring out what sells is even trickier. Despite the downsides, there is very little room for generic “spa/restaurant” deals as LivingSocial and Groupon have gathered up the majority of that space.