Promotional Deals: Pros & Cons

by Pallas Hutchison

Building a client base is a huge challenge for any new business, whether it is a service- or product-based industry. When I opened my business, I had no official business management training or financial expertise. I still don’t balance my own checkbook; that's my accountant's job. To jump start my client base, I jumped on the shared revenue bandwagon with minimal research first.

What is a shared revenue company? 

(For ease of writing/reading this, I’ll abbreviate this to SRC.) The concept is relatively simple. A vendor offers a deal. The SRC sends your deal to their consumer database using a combination of email, print, social media, and radio advertising; the methods of distribution vary depending on the SRC in question. The SRC collects money when people buy the deal and sends the consumer a voucher. You receive a share of the revenue once the deal closes. The consumer brings you a voucher. You redeem it. Presto, you have a new client.

Groupon and Living Social are probably the most familiar names. Local companies have also entered this emerging market. For me, that means Limelight (an off-shoot of the Cape Cod Times marketing department) and Cape Cod Daily Deal (an independent company, I think). The SRCs make a big deal about their consumer base, claiming that they’re great tippers and just looking to discover new businesses.

The representatives from the SRCs I’ve dealt with have been fabulous, except for Living Social. They are very helpful and motivated to generate sales on my behalf. However, the fine print can cause some problems if you don’t pay attention. Keep in mind that this is a contracted agreement and the SRCs want to make money, not just help businesses reach a wider client pool. So, before you sign up make sure you understand the agreement….

Deciphering the Financial Mumbo Jumbo:

The deals offered need to be substantial, usually a discount of 50% or more. Of that 50%, the vendor splits the income generated with the SRC. This leaves the vendor with 40-60% of the net revenue, depending on the SRC.

• What does it cost? There is no out-of-pocket cost to the business. Sounds pretty good, right? Access to new markets without spending a dime… But it’s not exactly free. The actual cost gets discussed later.
  
  
• When do you get your portion of the money? Your share is generally broken up into chunks and sent to you over time via check or direct deposit. The actual time frame varies depending on the company but the contract spells it out clearly for you.
  
  
• How much do you actually get? That’s a bit confusing so I’ll plug some numbers in to give you an example. (To my knowledge, there is nothing in the contracts saying I can’t divulge this information.)
  

I ran a deal for 50% off a 60-minute massage. My rate at the time ($70) got cut in half so consumers purchased the deal for $35. That’s a great deal, for them. To make the math easy, I’ll say I sold 100 of these discounted massages…

Original cost for 60-min massage: $70
Promotional price at 50% off: $35
Number of deals sold: 100
Gross income generated from the promotion: $3500
My cut (50% of the gross): $1750
Income generated from each 60-min massage: $17.50

When you take the business overhead (massage table, sheets, oil/lotion, office space, electricity, etc) into account, you’ll find that you may actually be losing money by offering these deals. This is especially true if you run a multi-practitioner establishment and a staff member handles the session. You can generate more money per voucher by upselling to a more expensive service, selling products and/or when you turn that person into a repeat client. Repeat clients are great but there are some things to consider: timing, location and deal-seekers.

Why does timing matter?

Depending on your business goals for the deal, and you should clearly spell out what you want to accomplish, the time of year you run the deal has a big impact. Do you want an influx of people coming into your business during your already hectic summer season? Probably not. The deal runs for a few days and consumers have 6 months, depending on the terms of the deal, to redeem it for the promotional value. (After the deal expires, you are usually required to honor the cash value.)

Here is an example timeline… To boost my slow season, I ran a promotion in November. This gives clients until June, and the beginning of my busy season, to redeem the deal. Also, in November, people are beginning to think about gift giving for the winter holidays so people aren’t just shopping for themselves.

There is another reason that timing is important. If you sell 100 deals and 25 want to redeem within the first week, your current clients won't have any available appointments and you may suffer cash flow problems. One possible solution would be to restrict redemption to specific days of the week. This is done by including the days in the fine print of your deal. By setting aside only certain days for voucher redemption, you keep your schedule open for your current clients to make appointments.

Why does location matter?

Look carefully at the region your deal will be publicized in. How many people are in the SRCs database for that region? How many show an interest in your industry? The SRCs should be able to give you the answer both of those questions.

If you’re in a rural area, how far is the commute from the target region? Running a deal through a smaller, local SRC will generate more local exposure, increasing the potential for repeat business. A national SRC, like Groupon, operates in larger regions. A larger region means more exposure to a higher number of potential clients. Neither choice is wrong; you decide which is right for you and your business goals.

For example, I live on Cape Cod, which is a seasonal beach destination about 90-minutes from Boston (depending on traffic). If you live in a vacation destination, like I do, you’re going to find that a lot of people purchase deals to offset the costs of their vacation. Many clients that redeem vouchers don’t live in my state, let alone within a reasonable commute. Those clients, if they vacation in the same area every year, might come in annually. Boston, while still a commute, isn’t a completely useless region to market in for Cape Cod businesses because some people visit on weekends throughout the year. However, regularly marketing to people that far my actual location is not going to generate the sustaining year-round clientele that is needed to stay in business.

What is a “Deal-Seeker” and why are they bad for my business?

For a few people, it is a budget issue; they want the services/products but can’t afford them at full price. If you’re willing to work with people to make it affordable, you will turn “deal-seekers” into loyal clients. Unfortunately, the majority of “deal-seekers” that I've dealt with just don’t want to pay full price, for anything, ever. They purchase deals often with little-to-no brand loyalty. These people rarely rebook without a discount incentive and tip poorly, if at all. In short, not your ideal client.

Bottom line: SRCs are effective tools when used intelligently!

There are a lot of factors that can make a deal successful. I have had successful campaigns and unsuccessful campaigns. My first one, I charged in without really knowing what was going on and it almost bankrupted my business. However, I have gotten several clients from deals that have turned into loyal customers. Some come in regularly and I’ve counted them as clients for several years.

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If you’d like contact information for any of the SRCs I’ve mentioned, I would be happy to connect you with the right person. Best of luck with your deal!

If you’ve already run a deal, how did it go? Please share your experience in the comments!