Daily deal sites are about discounts and the best offers, which in turn imply that they exist to bring to consumers the lowest prices and the biggest savings. Ergo, it may be intuitive that, to be the market leader in a niche, a daily deal business may need to undercut its competition with margin-suppressing price cuts. The problem with this mentality is not only that it almost always results in less revenue (one might find that economics principles do not always apply in real life; the buyers do not necessarily make it up in numbers) but also that the retail pricing of deals is never the sole decision of the daily deal business itself – the merchant has a substantial say (sometimes whole say) in the pricing details.

The fact is that the customer of any daily deal business is the merchant, not the end-consumer. The end-consumer is the customer of the merchant. The end-consumer basically acts as a supplier to the daily deal business, because they aid in the acquisition of merchants as customers. Revenue is collected first by the daily deal site, yes, but that revenue is in effect passed on in whole to the merchant, who then passes a cut to the daily deal business in the form of a commission.

Pricing in the business model of daily deal businesses thus refers to the commission percentage that the daily deal business is willing to work on. Dropping your commission percentage to unhealthy levels may seem like a good idea to undercut the competition, but consider the fact that daily deal sites may be Veblen goods: their perceived value drops with their pricing. When you drop your pricing, you not only give up revenue unnecessarily but also create a negative perception impact on your offering.

The obvious solution is to start at a higher pricing; aim to be a premium daily deal site servicing local merchants with a higher-than-average commission percentage. The only thing better than cheap is good. When no merchant buys at your ideal price point, do not make your offering cheaper; make it better. Provide a range of value-added services, such as faster payment timelines, customer retention strategies, super-strict lead qualification, generous collection and sharing of buyer data, etc. Merchants do not actually want to work with the cheapest daily deal site, which probably does not even bring in enough revenue to provide meaningful value – merchants simply want to work with daily deal sites that can do their job, and do their job well.

It is not a stretch to say that the existing daily deal sales model is broken. Consumers are expected to spend money upfront for a printable piece of voucher that is to be redeemed in some distant time in the future and that has no guarantee of validity or authenticity. This model places the onus on the buyer to remember to use the voucher according to all of its many terms, failing which it would create pure profit for either the merchant or the daily deal website in question (if the latter manages to negotiate with the former to transfer payments only on redemption). This situation seems advantageous at first glance for merchants and even daily deal websites (who act as a gatekeeper for all funds coming in) but less so for consumers who bear the risk of not using the vouchers according to their terms and thus having their payment forfeited.

Some consumers have arguably come to recognize that this situation is sub-optimal for their interests. The mother issue is actually that for most goods and services, consumers are used to paying on the spot and getting their goods or services at the same time – the window of risk is indeed much smaller. The daily deal sales model – pay now, get goods or services much later – is a stark departure from mainstream practice. Over time, it has become clear that many consumers are simply plagued by the following problems:

Problem 1: redemption in the future creates the risk that the voucher will be unused.
Solution: let consumers pay only a small initial payment online to minimize risk exposure. This initial payment should preferably be equal to the daily deal website’s share of revenue to minimize administrative work. This increases the probability of a sale happening because: 1) should the buyer fail to redeem the voucher by the due date, he loses only a small(er) amount of money, and 2) the smaller initial payment makes it much easier to stomach at first glance. Consumers are irrational, after all.

Problem 2: consumers are apprehensive of the prospect that the deal is bogus.
Solution: offer free vouchers. With rampant fraud in the daily deal industry perpetrated by irresponsible sellers (need we say more), consumers are finding it harder to trust daily deal websites. The solution is to simply provide free vouchers (meaning consumer pay nothing upfront and only pay the discounted price during redemption), and then either charge a flat monthly fee to merchants for promoting their goods and services or depend on the merchant for your share, much like authors depend on publishers for royalties. Free vouchers are increasingly popular, because they require no upfront investment on the part of the consumer; yet it still drives people through the doors of merchants. This model is also well-suited for markets where online payments are just not common.

Problem 3: consumers dislike having to print vouchers or expend additional effort to get the discount for which they have paid.
Solution: focus on SMS/mobile redemption. While mobile redemption is already a common practice in the industry, what needs to be done is phasing out the very idea of printable vouchers. Consumers should be able to redeem their deal just with a unique voucher code in hand (which can be delivered via mobile phones or email), much like how prepaid cards for cellular phones work. The whole printable voucher system seems to be a relic of imitating traditional coupon clippings that is truly an anomaly in the age of email and smart phones.

The truth is that pleasing the customer is the best long-term strategy to generate sustainable business (in our case, it would be pleasing our customers’ customers). When everybody’s interests are aligned, everybody wins. The current model is still disadvantageous to consumers, thus new sales models will eventually and inevitably emerge to rectify the imbalance, since, after all, consumers are the ultimate source of revenue in the daily deal industry.