UPDATE: August 2010—Since publishing this story in June, Jeremy Iggers reports the daily deals in this program were not generating enough revenue to justify the amount of effort. Instead, they have begun partnering with another local company, DealStork.com, that offers discount deals to TCDP readers.
When Twin Cities Daily Planet founder Jeremy Iggers approached a local sushi chef about helping support his site with a half-price gift certificate deal, the chef at first didn’t bite.
A large social deal-making site, Groupon, had already approached Koyi Sushi Too, but its chef feared that too many customers might present certificates and overwhelm his restaurant. A few weeks earlier another local restaurant was involved in a similar deal: It sold 5,000 gift certificates – and then had to deliver on $200,000 worth of food.
Koyi’s chef wanted to attract attention to the store’s new location, but wasn’t sure he could handle a customer onslaught.
“We’re local and we’re a nonprofit and those things appealed to him,” Iggers said of his site, which was launched with J-Lab funding in 2005.
How Social Deal-Making Sites Work
The social deal-making business model promises deals better than half-off for consumers, more customers for local businesses and, of course, considerable returns for the industry and their backers.
Here’s an example of how it works: For one day, customers can buy a $40 gift certificate to a restaurant for only $20. Of that $20, the local partner gets $10 (typically half the revenue) – and the deal company keeps the rest. So the business is giving away $30 of food per certificate and is banking on a combination of customers (a) eating more than $40 worth of food when they come in, (b) enjoying the food so much they come back and (c) forgetting to use the gift certificate entirely, in which case the business just pocketed $10.
After some thinking, the chef gave Iggers’ idea a shot, and in June 2010 the restaurant became the first Daily Planet Deal of the Day. Customers could buy $35 gift certificates to his restaurant for just $15. He and the site then shared in the coupon revenue: 60 percent for him, 40 for the Daily Planet.
Over the first two weeks, the Twin City Daily Planet sold fewer than 100 deals to the restaurant, a more reasonable number for the chef to accommodate.
But of even greater importance for the Twin Cities Daily Planet and news sites like it is that, in the first two weeks of the program, the revenue from local business deals surpassed traditional advertising sales, Iggers said.
Iggers did not want to disclose exact revenue numbers, but his deals hold promise for opening up at least a small revenue stream for community news sites. Consider that if a community site were to sell seven different $15 coupon deals a month to 100 people each, it might bring in $4,200. After paying an ad salesperson a 20 percent commission, the site could net $3,360.
“I think a lot of advertisers prefer this kind of deal to display ads because with those ads you never know how effective they are.” – Iggers
The Daily Planet Back Story
Iggers and his sales manager Yvonne Hundshamer had been looking for another way to bring in revenue, aside from banner and tile ads – an issue community news sites often struggle with daily. So they put into practice the deals idea floated by Michael Skolar as a fellow at the Reynolds Journalism Institute. He spent a year studying the future of news and hypothesized that local sites could, through coupon deals, leverage their audiences and provide meaningful connections for advertisers.
TCDP’s two-week experience with a handful of deals seems promising but it’s too early to confirm Skolar’s hypothesis.
“I think a lot of advertisers prefer this kind of deal to display ads because with those ads you never know how effective they are,” Iggers noted. In this case, “you get some money upfront and it only costs you money when a customer comes in the door.”
How These Deals Differ
The major difference between national deal companies operating in markets across the country and sites like the Daily Planet is a major local asset: Their mailing lists.
[Groupon] does not position its service as a moneymaking opportunity but a chance to get customers in the door.
The people who sign up for alerts from such deal sites as Living Social, Groupon, and Woot are actively looking for a deal. (For example, Groupon said it had 6 million subscribers as of mid-June 2010; 160,000 of those in the Twin Cities.)
Meanwhile, the roughly 2,500 people who sign up for alerts from the Daily Planet are looking for news relating to their communities, not necessarily half-off at the local diner.
Another difference: the Daily Planet offers the deals over a longer time frame than the 1- or 2-day offers of the larger sites.
Appealing to an advertiser’s position in the community is also important, Iggers explained. “I think you risk damaging [a business’s] brand when you do this kind of deal. Your product or service may be perceived as a commodity. And I think when it’s done with a nonprofit it doesn’t quite look that way.”
“We’re local and we’re a nonprofit and those things appealed to him.” – Iggers
The Daily Planet also offers an alternative take on its coupon program, creating opportunities for local outfits to donate coupons as a way of supporting TCDP and with luck, increasing their customer base.
Similar to donating gift certificates to a local PTA or community group for a fundraising raffle, restaurants or stores can donate $500 worth of certificates that are then sold online for half-off.
The businesses get recognition online, the Daily Planet sells those certificates at a discount, and the consumer can get a $25 gift certificate to a wine and cheese shop for $12.50. In fact, that particular deal sold out in a few hours.
Iggers advises business owners to consult financial advisers as the donation may be considered tax-deductable.
Of course, not every Daily Planet Deal has taken off. Just like the larger deal sites, Iggers has seen restaurants do particularly well, but a haircut and eyebrow shaping deal has not sold well at all.
After the initial weeks, Iggers said he remains optimistic, but it is too early to get meaningful data. “I think the jury is still out on whether this is going to be profitable for long enough that our sales team is going to be motivated to keep at it.”
On its site, Groupon, for instance, indicates that as of mid-June 2010 it had sold more than 6 million coupons to customers, with “total dollars saved” at $246 million.
Groupon, reported to be the industry’s largest company, in April 2010 took home $135 million in a recent round of venture funding. The company was valued at more than $1 billion and through June 2010 has secured a total of $173 million in funding, according to TechCrunch.
A competitor, Living Social, attracted $25 million in second round funding in March and $14 million a month later. In all, it has raised $49 million in venture funding through June 2010, according to TechCrunch.
The effect on a business can be massive. In a recent interview with the Wall Street Journal, Andrew Mason, Groupon’s CEO and founder, highlighted the story of helicopter lessons in Boston, where the company sold 2,600 deals in four hours:
“To put that in perspective, this fellow has been in business since 1985 and in the quarter century leading up to his Groupon he had acquired a total of 5,000 customers. So in one day we managed to increase his entire customer base by 58%,” Mason was quoted as saying.
Some critics see the company’s strategy as preying on businesses in tough economic times. A chef in St. Paul called the practice “preying on people’s fears” in the Star Tribune.
Groupon disagrees: “We see ourselves as marketing partners for small business – and part of that is being a good partner on our end,” explained Julie Mossler, the company’s public relations manager.
She says the company does not position its service as a moneymaking opportunity but rather, a chance to get customers in the door. (“Of course we’re making money, we’re not a nonprofit,” she said.) It doesn’t “take” money from business, it shares in the success, she says. And the company strives to make sure the deals are realistic – including occasionally limiting the number of deals sold. The result, Mossler says, is that 97 percent of merchants want to be featured again.
In some cases, the company is arranging partnerships with established local publishers. For instance, the Chicago Tribune will run a Groupon advertisement in exchange for a portion of any coupons sold through its site.
Groupon operates in 140 cities (and 18 countries) and the company is expanding into smaller communities now, as well as running separate deals for individual communities within a metropolitan area.