What About the Merchants?
As banks increasingly with banish their debit rewards programs or turn to merchant funded discounts (MFDs) to load share costs, there is a key lesson they can learn from Daily Deal schemes: What about the merchants? Daily Deal providers (Groupon, LivingSocial, Google Offers and Amazon Local) have been challenged to address this central issue and flaw in their strategy.
Below, we will outline both the problem and the efforts Groupon and LivingSocial are marking to address merchant ill will and attrition.
The idea behind Daily Deals was so simple it was brilliant (which is why there are so many large companies entering the fray). Consumers get a 50% discount on a great deal which could be for a service or a meal at a restaurant or a vacation but only if a specific minimum of other consumers signed up for the same deal. Each deal was limited to specific dollar values or specific dates.
Luring New Customers, but are they ones Merchants Want?
Merchants got new customers walking through their doors and the opportunity to sell them additional products/services. While merchants gave customers 50% off a retail price, and then gave the deal providers 50% of the balance (plus a 2.5% credit card processing pass-through fee), leaving the merchant with only 25% revenue, the lure of new customers proved enticing enough to make selling merchants into the Daily Deal stable remarkably easy.
But merchants have noticed that while Daily Deals bring in large numbers of new customers, those deal hunters seldom buy additional products/services and they don’t make return visits to the merchant. This means that merchants:
- Lose money on their offers
- May have hired additional staff to handle a burst of business volume, increasing the actual cost of their offers
- Reinforce consumer’s interest in buying only when a huge discount is offered
- May experience a surge in negative Yelp comments if there are any issues in order fulfillment
At the end of 2011, Susquehanna Financial Group and Yipit surveyed almost 400 merchants who had recently offered deals thought Daily Deal providers. While merchant satisfaction with the Deal providers was high (an 80% satisfaction rate), more than half (52%) of those same merchants said they had no plans to feature deals with the firms in the next six months and another 24% of merchants anticipated offering only a single deal in the coming six months.
Merchants Say: We Love You and Goodbye!
This creates an interesting landscape where almost the same percentage of merchants are satisfied with their Deal providers as have no plan (or only a single plan) to repeat their experience of offering a deal through the providers.
How are the Largest Daily Deal Vendors Responding to Merchant Pushback?
To address Merchant-Slam, Groupon is introducing a program to spread out the customer surge. It has launched a VIP program for the customers who are the largest consumers of its deals. For $29.99/year, customers get early bird access to deals along with access to refunds for the deals they paid for but didn’t use and the bonus for merchants is that they can manage their traffic. Groupon has also introduced a merchant loyalty program that allows its business customers to make follow-up offers to Daily Deal customers to encourage repeat business.
Creating Value for the Merchant
LivingSocial is trying harder (as the number 2 daily deal provider). In addition to launching its own version of a VIP program, it has announced that a new credit card is in the works. The new VISA card will be issued by Chase and while it will be publicly marketed to customers, its real intent is to sweeten relationships with merchants.
Early Buzz on LivingSocial’s New Credit Card
For customers: No annual fee and for frequent buyers (10 purchases per month), refunds of 10 “Deal Bucks) which will apply $10 to the future purchase of Daily Deals. While not finalized, the card may well include inducements for repeat merchant visits.
For Merchants: Build more enduring relationships with LivingSocial customers. No passed-through credit card processing fees, short-term funding, rewards and loyalty programs.
What Can Bankers Take Away?
As deals are worked out with merchants that will defray the FI’s cost of debit program, it is essential that the institution be proactive in crafting and offering merchant-focused features. Particularly if an FI is targeting local businesses, those small business owners may be game for trying a new strategy but may not be able to foresee some of the potential challenges looming down the road. How can a business track new and repeat customers? How can participation in a debit MFD program lift sales? How will funds be reconciled? What tools will the merchant be provided? How can a revenue split not harm the business by cannibalizing revenue it would have received anyway from existing customers?
These are not idle issues or idle questions and as new programs roll out, bankers must address them upfront. Otherwise, after dissatisfaction and frustration foment, bankers may have to make far more generous concenssion to frustrated partners.