Is Offering Pre-paid Deals Good for Merchants? – By John Vehlewald

by Colleen on December 24, 2010

One of the most popular promotional methods for businesses lately has been pre-paid deals. We’ve all seen them from places like Groupon, LivingSocial, or DealEx, but are they a good thing for merchants?

They are known by many names, such as “flash deals”, “Groupons”, “group buying”, or simply “pre-paid vouchers”. Names aside, they allow a merchant to offer deals to consumers that are so good that the consumer will pay for them. Generally, they offer consumers a hefty discount (40-60% off in many cases) in an effort to acquire a new repeat customer.

There have been some horror stories from businesses that trying these sorts of deals had a negative effect on their business. A recent study from Rice University found that 32% of surveyed businesses that offered a deal with Groupon found them to be unprofitable, and 40% said they would never do another one.

Statistics like this can make it a scary proposition for many businesses. Fortunately, with a little planning it doesn’t have to be.

Many merchants wonder how they can take advantage of this new revenue source, without the risk to their business. There are some key questions merchants should ask themselves when considering this avenue to drive additional revenue:

1) Is your goal short-term revenue, or long-term growth? This may seem obvious, but it’s important. Offering a deal like this to consumers generally will mean the merchant may take a loss initially to acquire the customer. If a merchant’s margins support the initial discount, it’s a great way to drive short-term revenue. If a merchant doesn’t have the margins to support the initial discount, they need to look at this loss as a customer acquisition cost, and work to make these new customer repeat customers.

2) Does your business lend itself to this sort of promotion? Just about any business can find a way to structure this sort of deal to be good for them. Services, high margin items, or anything with a subscription attached tend to be great fits due to the high lifetime value of bringing in a customer. If you’re not sure how a deal could work for your business, the providers of these sorts of services can talk you through ideas based on their experiences.

3) Do you have a real understanding of how customers interact with your business? Knowing things like average purchase price, lifetime value of a typical customer, and time based buying trends can really help. This sort of data can help you to calculate the return you can expect to see by offering a deal, and ensure that it is going to be profitable for you.

There can be a delicate balance between creating a deal that works for the merchant, but is still compelling enough for the customer to actually buy. There are no absolutes, but if a merchant asks themselves these questions, creating a pre-paid deal can be a great way to drive additional revenue.

John Vehlewald is the VP of Affiliate Products at Inuvo, Inc.

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