The Math Behind Daily Deals - How To Run Successful Online Promotions

At Privy, we have concluded that running your own promotions online is an incredibly effective way to grow your business. If however, you do choose to run a daily deal promotion (e.g. Groupon) the following parameters must be met:

  • The value of the Groupon is slightly below your average ticket price - this encourages trial and spending beyond the value of the promotion
  • The redemption period is relatively short - with a longer window, more promotions will be purchased by consumers who are much less likely to become repeat customers because they live far away or buy it “for the thrill” (do you want a higher percentage of unredeemed promotions or of quality customers?)
  • Consumers who visit a store are asked to “Like” the business on Facebook, sign up for email subscription and follow the business on Twitter
  • Employees are made well aware of the promotion and asked to treat these new customers with special attention
Groupon logo

If all of these parameters are met, we are confident some new customers will come to your store.  We are not suggesting that a promotion will be profitable, but these parameters seem to be the factors that best predict whether or not a promotion will be deemed successful in terms of attractive new customers who have the highest potential of becoming repeat customers.

By doing a deeper dive into the calculations behind running a daily promotion, juxtaposed against re-engaging your online audience, we can make some interesting assumptions about best practices and delivering a high return on your marketing investment:

Daily Deal Best Practices Calculations

·Average Ticket = $50

·Offer = $40 for $20 

oKeep offer slightly under average ticket to encourage spending beyond Groupon

·Revenue for business per customer = $20 

o(50% of revenue from Groupon + $10 extra to reach ticket price)

·Profit for business in terms of % of fulfillment = 50% of value of coupon

·Price paid to acquire customer from Groupon = $30 

o($50 value - $10 profit - $10 revenue share = $30 cost) or 75% of coupon value

·We can assume, against this model, that the business described here will cover its cost of acquisition by using Groupon when a customer visits at least 2 times

o(visit 1 = $20, visit 2 = $50; Visit 1+ visit 2 = $70; $70/$30 = 2.3x). 

oIf the customer does not visit a second time, then the business loses $10 

§($30 cost of acquisition - $20 revenue).

·If 1,000 Groupons are sold and 300 people return (30% return rate![1]) and spend the average ticket price of $50, then the business will lose $5,000.  That’s a lot of money to lose on an effort to acquire more customers.

·ROI = -133%

oBreak even point = 60% return rate

oNote, this does not include the cost of goods sold, it is purely from a revenue analysis.

·*We recognize that by using different price points, certain businesses may be more or less profitable than the above calculations – it is just an example

Re-Engagement Best Practices Calculations

Let’s take those 1,000 customers that were “acquired” through a Groupon and see what it would cost to turn those customers into regulars.  For conservatism’s sake, let’s assume that we have a 0% return rate.

·Cost of running a Groupon with 0% return rate = $20,000 

o(- $40,000 vouchers + $10,000 profit share + $10,000 extra spend)

·Assumed % of redeemers who connect with business online (e.g. visit website, fan on Facebook, opt-in for email, follow on Twitter) = 20%

·Re-engagement offer through Privy = $40 for $50

·Revenue from promotion = $8,000 ($40*200)

·Cost of promotion =  $2,000 ($10*200)

·Profit from promotion = $6,000

·ROI = 300%

Now let’s look at the cost of re-engaging your existing audience without running a Groupon.

·Assumed size of online network = 2,450

·Assumed redemption rate of targeted promotion = 5%

·Number of redeemers = 123

·Offer = $40 for $50

·Revenue from promotion = $6,150 (123*$40)

·Cost of promotion = $1,230 (123*$10)

·Profit from promotion = $4,920

·ROI = 300%

·Plus, you get the added benefit of having face to face contact with that consumer again, deepening the connection with your customer.

It’s clear that running a daily deal can offer huge potential, but the costs are so large that your chances of making a profit over time are not particularly high.  Whereas, the ROI delivered by re-engaging your audience can be substantial and meaningful towards growing the bottom line of your business.

[1]Noted as the highest return rate on average - Dholakia, “What Makes Groupon Promotions Profitable for Businesses?”, March 12, 2011.

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