Since many of my new customers come to me through Living Social, Groupon, or Amazon Local, there is a fairly good chance that if you are reading this, you are familiar with how those sites (called daily deals or voucher deals) work - from the client side. I am often asked by clients (especially those who are themselves entrepreneurs) about how successful the daily deal campaigns are, and how they work from the merchant side.
How Does It Work?
You are probably familiar with daily deal sites, but if you aren't, here's how it works: merchants (that's me) offer their product or service at a reduced rate, to be marketed and sold by the intermediary (that's Living Social/Groupon/etc), to you. What you actually receive is a voucher or coupon which the merchant is obliged by their contract with the intermediary to accept in exchange for the goods or services described on the voucher. The terms of the voucher - such as the price point, any restrictions on use, and how many will be available - are worked out beforehand between the merchant and the intermediary. The intermediary pays all the costs associated with marketing the deal and getting you to purchase it, and in exchange keeps a portion of the proceeds.
How Much Does the Merchant Make?
Not a whole lot. In order to have a deal listed on one of the daily deal sites, a merchant must typically agree to cut their price at least 50% from their normal rate - this is what entices most people to purchase the deals. Then the intermediary takes a percentage of that, which is negotiated on a case-by-case basis. A large, well-known brand with high pre-existing demand will be able to negotiate a larger cut than a small merchant with an unknown brand. When I first did a daily deal I was paid 47.5% (50% minus credit card fees for each transaction); with higher-than-average reviews from daily deal clients, and making the intermediaries compete for my patronage, I have since negotiated up to 60%. Some math:
My regular rate is $60.
Offering at %50 means daily deal customers pay $30.
The intermediary takes 40% of the $30, which means I get $18.
This is about what a brand new therapist just out of school gets paid at the sweatshop known as Massage Envy (after tips are added). That therapist doesn't have to pay any expenses like rent, or spend any time answering phones, scheduling, marketing, doing laundry, etc, because they are an employee of a business which already covers all those things.
On the plus side, the merchant gets paid whether or not the vouchers are redeemed (as long as they are not refunded). In my experience, approximately 30% of vouchers are never used (that's a lot!). This amounts to about another $6 for each voucher redeemed for a 1-hour massage, or $24 total ($18 for the unredeemed voucher, divided by 3 because there is about 1 unredeemed voucher for every 3 redeemed vouchers). The mean pay for a massage therapist who works as an employee somewhere OTHER than Massage Envy is $30-$35.
Why Would You Offer That?
I hope you don't take the above paragraphs as complaining. It is just an objective picture. The reason we (the merchants) do it is because it brings new clients in the door. As I said in the beginning, the majority of my regular clients started as daily deal customers, or as referrals from those who did. That being said, it is an awful lot of work. The "conversion rate" (how many daily deal customers actually return and pay full price at least once) has been somewhere between 10% and 25% for my business. I consider the time I put into these low-paying massages to be a marketing expense. 10% or even 25% seems like a very low number, but I have poured lots of money into more traditional forms of advertising (including conventional internet ads and SEO), and was never able to attribute a single new customer to those marketing methods. I can't compare the conversion rates because you can't divide 0. So it seems like a pretty solid marketing plan in comparison.
It is also worth noting that, despite being a merchant, I also know what it is like being a customer - I still am one, regularly, of merchants other than myself. I know how it is to be wary of spending a lot of money trying out a new service, or a new provider, that you are not familiar with. I respect the risk you are taking by trying me out. Offering the reduced rate for new customers reduces that risk (because, if you don't like it, at least you spent only $30 and not $60, right?), which I hope encourages more people to give it a try than otherwise would.
How Do You Get Paid?
The exact terms are determined by each merchant-intermediary agreement, but typically the merchant receives a check by mail or direct deposit 2-4 weeks after the end of the sale period, for 60-80% of their share of all vouchers sold. The merchant receives another check for the remainder of their share (minus deductions for any vouchers that were refunded) 2-4 weeks after the vouchers have expired. In the case of ongoing deals or more lengthy sale periods, checks are received twice a month for the same respective shares of any vouchers which were purchased or expired during the previous two weeks.
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