Retailers have learned the hard way that coupon sites like Groupon Inc. don’t always deliver such a sweet deal.
The small businesses that feed the “deal a day” websites are getting more sophisticated in how they structure their offers, and with whom. In the past, merchants regularly absorbed as much as 75% of a deal’s cost and often saw little in the way of repeat business.
Now, with a glut of Groupon clones competing for their attention, merchants are carefully negotiating better revenue splits and tweaking the fine print of their offerings to make deals work in their favor. That, in turn, could tighten margins in what has been a fast-growing business.
The lure for small businesses is the amount of potential customers they can reach with little effort. Groupon, for example, operates in more than 500 markets and has over 60 million users.
“We used to just do a deal with everyone that approached us,” said Dani Zoldan, principal of New York comedy club Stand Up NY, which has relationships with more than a dozen deal sites. “We’ve become more sophisticated on how to structure the deal.”
At two-and-a-half years old, Groupon is pulling in more than $1 million a day in revenue and had the confidence in December to turn down a $6 billion acquisition offer from Google Inc.
In typical deals, a retailer splits the revenue of a deal with a site like Groupon. For instance, a merchant might let buyers pay $25 for $50 worth of goods. Half of that $25 goes to the deal site, leaving the merchant with an expensive marketing campaign.
Groupon says the majority of its clients are satisfied enough to do more than one deal. Many companies are learning, however, that they have leverage to maneuver for better terms if their deals are strong sellers. Some are having better luck with smaller sites.
Stand Up NY, for instance, did its first deal last summer with Gilt City, an offshoot of fashion discounter Gilt Groupe that got into the business in September.
Gilt was the first deal site to approach the club, which agreed to a deal offering two drinks and a ticket to a weeknight show for $20. Gilt let the comedy club keep $14—70% of the proceeds. That was a better split than some other companies offer, which Gilt said it had done as a special pre-launch rate. And since the deal sold out in a few hours, Stand Up NY was able to get a couple of extra dollars in its next, more elaborate deal with Gilt, Mr. Zoldan said.
Avi Marko, head of business development for Brooklyn, N.Y., KidsSocks.com, a children’s sock retail website, did his first deal with mom-focused Mamapedia in January. The deal offered $16 worth of merchandise for $8. Though more than 600 people bought the deal, Mr. Marko says he didn’t make any money. Half of the revenue from each purchase—$4—went to Mamapedia.
But Mr. Marko also used that deal’s success to his advantage. He did another deal with the site this week, increasing the offer to $10 for $20 worth of product but holding Mamapedia’s cut to the same $4 it got in the original deal, upping his revenue split to 60-40. “You have to create angles on how to make money through it,” Mr. Marko said.
Small businesses are getting inundated with sales pitches. Mikki Alvarez, director of marketing and events for Tavern + Bowl, which has three locations in the San Diego area, set up a folder in her inbox to save the correspondence. She’s had at least 80 requests in the past eight months.
“I get bombarded,” Ms. Alvarez said. “They came out of everywhere.”
Mr. Marko said the deal offers come so quickly that once recently he failed to read the fine print on a contract from DealPulp.com, which promised free shipping. More than 700 people bought the deal. Mr. Marko estimates missing the shipping clause cost him at least $5,000.
He’s also learned to better sort out the sites that might be useful. The value for merchants is in the coupon site’s network, so he compares traffic statistics on sites like Alexa.com and Compete.com to see which sites are actually attracting eyeballs.
Lisa Gurvich, owner of Lasoderm, a laser hair removal practice in South Miami, has done deals with two sites and found the smaller one to be more effective at landing long-term customers.
MyCotorra.com, a small site based near Miami approached Ms. Gurvich for her first deal. Together, they devised the offer: $89 for six sessions of laser hair removal. Ms. Gurvich asked to limit the deal to specific body parts and to one deal per person. More than 100 people purchased the coupon. Ms. Gurvich offered another discount for a future treatment, which about 40% bought, she says.
Ms. Gurvich then did a broader offering with Couptessa.com, a much larger site with nearly 100,000 subscribers in South Florida. It delivered a crowd of what she called coupon addicts—customers who bought several deals from a variety of sites and would bounce from one practice to the next. Couptessa says that half of its affluent subscriber base has become long-term customers for many of its clients.
Ms. Gurvich has since signed an exclusivity agreement with MyCotorra.com. “The tiny site has worked wonders for me,” she said.
The sustainability of the coupon-site business model depends on the extent to which both sides benefit, says Jimmy Hendricks, co-founder of Deal Current, a technology company that provides daily deal software to publishers. Generating repeat traffic is among the biggest problems for daily deal sites, say small business owners, many of which only make money when customers return to pay full price.
After a couple of deals, children’s clothes-swapping site ThredUp decided to open some of its offers only to new customers. To redeem the deals, buyers had to enter an email address and voucher code on ThredUp’s website. That allowed the company to go back to those customers.
“We’re able to re-engage them at any point,” says Karen Fein, marketing director.
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