INFORMATION FOR
LOCAL RESIDENTS

ADVERTISING
INFORMATION

At Smart Shopper naturally we wish to earn or keep your business but regardless, it is vital that you read this information so that you can make the right decision for your business.

Business Owners - Beware of "Daily Deal" or Groupon type web companies offering free ads.

These companies pitch online/email ad campaigns utilizing discount certificates, attempting to promote your business. A few "Daily Deal" companies are already operating in Central Oregon and others are likely to follow. We believe the "Daily Deal" type ad campaign doesn't add-up for most small businesses. Please read on to learn how they work.

THE LURE OF A FREE AD...Do you remember the old adage: "Nothing is free"? These ad campaigns can be very costly to businesses.

The "Daily Deal" web promoter entices a business owner with a free ad. The ad is sent via email to a list of consumers from their database. A typical promotion reads like this:

"50% OFF! $50 Gift Certificate for $25"

The "Daily Deal" promoter sends an email with a discount certificate offer from a participating local business, such as yours to the consumers on their list. The consumer then has the option to purchase the certificate to your business directly from the "Daily Deal" company. If they make the purchase, the consumer arrives at your store, certificate in hand, expecting $50 worth of goods or services for $25. For this, the "Daily Deal" promoter sends you a check for only $12.50, and keeps the other $12.50. This arrangement nets you, the business owner, only 25% of each sale from the promotion while the "Daily Deal" company collects an equal portion (also 25%) as their commission.*

Let's think about this...you work your tail off to provide goods and services to your customers while the "Daily Deal" promoter sits back and collects as much as you do from every sale generated by the promotion. In effect, they become your business partner. The goal of the "Daily Deal" company is of course, to get a very large response. If this should happen, they stand to make thousands or tens of thousands of dollars from your hard work and effort...this is completely crazy! Since when does it make good business sense to share a percentage of your sales with a media company?

Compare this lopsided arrangement to virtually any advertising campaign where you pay a flat fee for advertising, and you gain 100% of the benefits from each customer that responds.

At Smart Shopper, we also encourage aggressive offers to attract new customers and increase visits from regulars. "So what's the difference?" you might ask. The difference is dramatic...we charge a fixed, reasonable fee for your ad. You collect every dollar, from every customer that responds to the promotion! The example below illustrates the monumental difference:

A popular, upscale restaurant in Bend recently ran a Smart Shopper coupon, "$10 OFF Dinner for Two." On average, at this restaurant, two people typically spend $50 for dinner, netting them $40 per redemption. The restaurant redeemed 339 coupons and collected $13,560 in sales, after the discount. The restaurant paid $575 for the ad, netting them $12,985 from the promotion.

If the same restaurant ran a typical "Daily Deal" promotion, (assuming the same redemption) they would have collected only $4,238. Please see the chart below:

Daily Deal Co. vs. Smart Shopper Comparison
Based on Typical Promotions and Redemption Figures

	Daily Deal	Smart Shopper
Redemptions from Promotion (# Sold)	339	339
Value of Goods/Services Provided by Merchant per Redemption	$50	$50
Total Goods/Services Provided	$16,950	$16,950

Discount Offered in Promotion Per Redemption
Daily Deal = 50% OFF	$25
Smart Shopper = $10 OFF		$10
Total of Discounted Goods & Services	$8,475	$3,390
Total Amount Paid by Consumers	$8,475	$13,560

Smart Shopper Ad Cost		$575
Funds (commission) Collected by Daily Deal Co.	$4,238

Total Net Revenue Collected by Merchant from Promotion	$4,238	$12,985

Additional Revenue Collected by the Merchant Smart Shopper vs. Daily Deal Co.		$8,748

Would $8,748 make a difference to you? Does the ad still sound free??

Other Considerations:

The customer is learning to buy from the "Daily Deal" promoter, not your business. This reinforces the value of the "Daily Deal" promoter's service, not yours. Customers should learn to make a purchase directly with you and recognize the value of your business.

"Daily Deal" emails that are not purchased, typically get deleted immediately, rendering the ad ineffective. By comparison, ads in Smart Shopper that aren't redeemed are kept and seen repetitively by consumers for 8-10 weeks.

In the case of restaurants or any business that provides goods and services, be sure to factor in your cost of goods. When combined with the minimal revenue generated from a "Daily Deal" promotion, there is a great risk of actual losses!

Conclusion:

It can be very difficult for business owners to sift through the countless advertising options available. When a "Daily Deal" company shows up offering free ads, business owners often sign-up quickly without carefully considering the costs, results or potential losses. Business owners typically regret this hasty decision.

Feel free to contact us if you have any questions.

*Commissions vary

It is not the intent of this letter to impugn the reputation or business practices of any "Daily Deal" advertising company. All advertising offers are different and need to be evaluated on their own merits, and you should do your own research before making any decision as to what form of advertising is best for you. However, it is the opinion of Smart Shopper that when the true costs and benefits of "Daily Deal" advertising is considered, this form of advertising simply doesn't make economic sense for a lot of small businesses. We hope the information contained in this letter helps you make the right decision for your business.

Recently Published Articles

These articles explain the pitfalls of "Daily Deal" / Groupon-Type advertising and the many flaws with the business model.

Click on the article title below to read the complete text

Coupon sites are fading as businesses question cost of daily deals

By David Streitfeld / New York Times News Service
Published: October 02. 2011 4:00AM PST

NEW YORK — Like businesses across the land, the Madison Avenue spa Wellpath tried to drum up customers by running heavily discounted coupons on deal-of-the-day websites. But the Internet coupon fad is shrinking faster than fat from a weight-loss laser.

Coupons for the spa drew women from around the metropolitan area eager to see their bulges melt and their wrinkles removed. Once.

“Then they would get another coupon and go do it with someone else,” Wellpath’s director, Jennifer Bengel, said. “There was no loyalty.”

Just a few months ago, daily deal coupons were the new big thing. The biggest dealmaker, Groupon, was preparing to go public at a valuation as high as $30 billion, which would have been a record amount for a start-up less than three years old. Hundreds of copycat coupon sites sprung up in Groupon’s wake. Deal sites were widely praised as a replacement for local advertising.

Now coupon fatigue is setting in.

Groupon’s public offering has repeatedly been put off amid stock market turmoil and internal missteps; the company says it ist back on track, but some analysts say it may never happen. Dozens of copycats are closing, reformulating or merging, including Local Twist in San Diego, RelishNYC and Crowd Cut in Atlanta. Facebook and Yelp, two powerhouse Internet firms that had big plans for deals, quickly backed off.

Even the biggest Web retailer, Amazon.com, has had trouble gaining traction in oversaturated New York, where it started offering deals with great fanfare a month ago. There are at least 40 active coupon sites for the city, according to LocalDealSites.com.

Deals won’t die

Shopping coupons have a long history, and they will undoubtedly continue to play a significant role in local merchants’ efforts to attract customers. But what has become apparent is a basic contradiction at the heart of the daily deals industry on the Internet.

The consumers were being told: You will never pay full price again. The merchants were hearing: You are going to get new customers who will stick around and pay full price. Disappointment was inevitable.

Some entrepreneurs are questioning the entire premise of the industry. Jasper Malcolmson, co-founder of the deal site Bloomspot, compares the basic deal offer with lenders’ marketing subprime loans during the housing boom.

“They were giving these mortgages to every consumer regardless of whether he could handle it,” Malcolmson said. “But sooner or later you find that you can’t make great offers to people if they’re not making you money.” He recently revamped Bloomspot to focus on merchant profitability.

During the first dot-com boom, entrepreneurs tried to develop group-buying sites. They never really worked. Then a group of outsiders far from Silicon Valley stumbled upon the idea and, to their amazement, it caught fire. Groupon was begun in Chicago in late 2008 by a group of musically and theatrically inclined young men and women who never seemed to have contemplated the Internet riches that quickly came their way.

“We were used to small audiences, like blogs that we were the creators and the only readers of,” said Daniel Kibblesmith, a Groupon copywriter. “Now it seems like an audience we can’t wrap our heads around.”

Last December, Google offered $6 billion for Groupon. That was astonishing enough, but then Groupon snubbed the search giant, a declaration that it was really worth much more. Its valuation began to rise by about a billion dollars a week. Deal mania commenced, a boom within the larger Internet boom. If a bunch of part-time artists could do it, so could everyone. All you needed was a desk and a deal to present to the world.
“A lot of people saw an opportunity to get rich quickly,” said the Forrester analyst Sucharita Mulpuru. “It was a very 1999 mentality.”

By the time Groupon issued its financial documents in June, the first step to going public, the phenomenon seemed a little less promising. Contrary to what the company had maintained, it was not profitable in the traditional sense. Eighty percent of subscribers to Groupon’s daily e-mails never bought a deal.

Thirty billion dollars suddenly seemed a stretch. “They’re in over their heads,” Mulpuru said.

Groupon’s legally mandated quiet period prevents it from responding to criticism of the business model, beyond a joking explanation on its official blog that it is “prohibited from saying anything to the press that may make the company look ‘good,’ ‘successful,’ or ‘not currently on fire.’”

Benefits — and costs

Merchants do derive benefits from doing a daily deal. Deals increase brand awareness, and of course there are some consumers who do indeed come back again at full price. But the cost is high: Most coupon sites offer deals at 50 percent off and then take half the money the customer pays, sending the other half to the merchant.

Da Pietro Hair Studio on East 78th Street did a promotion with a second-string deal company and ended up begging it to stop running the ad. “I said, ‘No more. We don’t want your clients.’” said the salon’s manager, Rosanna Kabashi.

Even worse from the merchants’ point of view, the popularity of the coupon sites fed a relentless bargain-hunting mentality among customers that did not use them. “Every day, we get an e-mail or phone call saying, Can we match someone else’s price?” said Bengel of Wellpath. “We’re not Wal-Mart.”

Don't sell your soul to the discount devil

Posted by Bill Bice / SpaBloom

February 25th, 2010

Or, why Groupon sucks…

We all love to get great deals. But it's one thing to take advantage of them personally, and another entirely to take your spa down the slippery slope of discount oblivion. It can be tempting, especially when you see your competitors doing it, to start throwing some ridiculous discounts out into the marketplace.

The current craze in discounting devils are new websites like Groupon and BuyWithMe. They sign up a small spa, restaurant, etc. to sell coupons at a steep discount:

Balani Custom Clothiers Inc., a Chicago men's suit and shirt tailor, offered a promotion through Groupon where, for one day in October, consumers could spend $95 on a gift certificate from the tailor shop valued at $225 that's redeemable for up to one year. But at least 50 cards needed to be purchased for any to become valid … "We were all over Twitter and Facebook that day," says owner Sonny Balani … Still, Balani paid a hefty price for the exposure—50% of the earnings generated from the promotion went to Groupon—which means the tailor received just $47.50 per gift certificate sold. —Wall Street Journal

It's great for exposure if the deal is really good, but it also stays out there forever. Every future client entertaining coming to your spa will know that you're willing to sell your services for dirt cheap. Why should they pay the full price that your services are worth? Discounts only work in one direction and only from some established value. Once you are exposed as a discount seller, you have lowered the value of your brand and begun your slide. Sites like Groupon feed on nice local brands like the devil. You get exposure, they get your soul.

Instead, use intelligent discounting that rewards loyal clients or is likely to generate repeat clientele. BOGOs are one of my favorite techniques: you sell your services at full price, with the added bonus of an additional, small gift certificate which generates an additional visit to your spa (and an almost guaranteed upsell).

Groupon Is a Straight-Up Ponzi Scheme

By Jose Ferreira / Knewton blog

Posted: June 3rd, 2011

I would love to be wrong about this. Especially given the fallout in the tech economy if Groupon blows up. But isn't it really pretty obvious that Groupon is a massive Ponzi scheme?

Let me first say that Groupon filing to go public is not proof of a tech bubble. There is no tech bubble, just a micro bubble here or there. Nor is the Groupon story even particularly interesting or important compared to what's happening in Europe right now. But since it has filed for IPO and since all of us in the tech economy now must spend the next years hearing the breathless gossip, IPO hysteria, and requisite recriminations over the inevitable implosion — let us briefly examine the tulip mania that is Groupon.

Why is Groupon not merely a tech-bubble datum but a Ponzi scheme? Simple: Groupon has found that you can get local merchants to try anything once if it brings them new customers. A few local merchants in Chicago get them started, and Groupon shows good revenues. In fact, Groupon immediately remits half of those "revenues" back to the local merchant — they were never Groupon revenues in any meaningful sense of the word. But, optically, Groupon revenues look high — which they use to raise a financing round at a high valuation. Then they use the proceeds to hire vast armies of salespeople to dig deeper into Chicago's local merchant community and repeat the trick in other cities.

Meanwhile, many early-adopting merchants find that the burst in customers immediately disappears, and since they can't perpetually discount 75%, those merchants stop using Groupon. But Groupon's sales force adds many more new merchants than it loses (for now). And Groupon goes out and raises another round at an even higher valuation; they hire even more salespeople and expand into even more virgin territory. Lather, rinse, repeat.

The model is only sustainable if it pays off for local merchants — and to justify Groupon's current size, it now must pay off for local merchants ubiquitously and flamboyantly. If not, Groupon is mostly a Ponzi scheme.

Groupon argues that it helps merchants attract new customers who become loyal patrons, and that pays for the expense of winning them via Groupon. This is the fundamental argument Groupon's sales force uses to close local merchants. Let's get past the sales speak to what this really means. The typical Groupon "deal" is 50 percent off retail, with half of the proceeds going to Groupon. So the merchant gets 25 percent of the revenue s/he would have received if the same number of customers had arrived via walk-in traffic. Except that all that Groupon revenue is unprofitable — so more and more Groupon revenue is actually bad.

The vast majority of local merchants can't discount more than 10 percent. Some can go maybe 25 percent in special situations. But 75 percent is a wholly unsustainable number. If all local merchants begin using Groupon then it can't send loyal customers to anyone; Groupon can only send discount chasers to merchants. Which means that as Groupon grows, both local merchants and their competitors will find that Groupon's main argument no longer works (if it ever did) — Groupon simply can't send them loyal new business. So they all stop using Groupon in its current form.

Perhaps Groupon management thinks it is creating a sustainable Prisoner's Dilemma, one that ultimately destroys value for the local merchant ecosystem but benefits Groupon. In other words, Groupon could grow so big that local merchants have to use it, even though it ultimately hurts them. In game theory terms, Groupon creates an equilibrium point at "All Local Merchants Defect," and then, having forced merchants into this value-destroying equilibrium, takes a cut for having rigged the game. Obviously, Groupon couldn't share this thinking publicly. They would just continue to use the attract-loyal-new-customers argument even though it no longer makes any sense for a ginormous Groupon.

This may sound cynical. But if this is Groupon's game plan, it isn't cynical. It's naïve. Most local merchants simply don't have enough value in their collective ecosystem to share anything remotely like this much value with Groupon. This isn't a stable equilibrium, it's a suicidal one. The local merchants will have to stop using Groupon en masse not long after they first start experimenting with it.

Due to its size, Wal-Mart can squeeze its suppliers on price and its suppliers will comply. Lower prices create value for Wal-Mart's customers. But it's sustainable only because it also creates value for Wal-Mart's suppliers who are large enough that they can find efficiencies in their manufacturing processes (generally by outsourcing manufacturing to low-wage economies like China). That's bad for American workers. But it's value-creating for Wal-Mart suppliers because they get to sell stuff through Wal-Mart (which means they can sell more of it) at margins that are acceptable due to reduced manufacturing costs.

But most Groupon local merchants are nothing whatsoever like Wal-Mart's suppliers. They generally have no margin to spare or wiggle room in their operating costs. Therefore, they cannot continue using Groupon.

Let's consider the exceptions because there are some. A local merchant with huge gross margins — 70 to 90 percent — can use Groupon sustainably (though it still isn't clear that they should). Or, a large local merchant who does a lot of expensive customer acquisition (i.e., local television) can use Groupon sustainably but only if Groupon is better than its traditional customer acquisition methods (doing both and doubling customer acquisition costs will not double the local market size).

This is why Groupon must ultimately implode — there just aren't that many business that fit either of these descriptions.

Groupon's management publically avers that "local merchants come back" — well, sure, some of them do. For a while. But what do the audited numbers look like? Just what percentage of local merchants come back? How many times? Do local merchants show a strong tendency to decline in participation over time?

Groupon management won't release these numbers, and certainly won't release thoroughly audited and vetted versions of these numbers. Instead, what Groupon management is doing is withdrawing an astonishing amount of cash out of the company. It's also creating a new class of B shares so that it can keep control of the company in the hands of management — all the better to keep the Ponzi scheme going for as long as possible.

Again, there isn't a bubble in tech. High valuations for many of the big tech companies like LinkedIn, Facebook, and Twitter make sense due to those companies' incredible network effects and the fact that, fundamentally, these companies are creating value and will get better over time at monetizing that value. Net-net, Groupon is unsustainably destroying value and will implode sometime in the next five years. When that happens, it will almost certainly, and totally unfairly, wreak havoc throughout the tech ecosystem.