Groupon’s share price is at a record low.
Groupon’s share price is at a record low.

DISCOUNT deals and bargains are as old as business itself, but there has been an increase in daily deal startups such as Groupon, Living Social and Zetu (in Kenya).

These sites offer discount vouchers as high as 90% on various products at specific locations. Customers subscribe to the site and the deal of the day is delivered to their inbox. The site and the business offering the deal then split the revenue from the deal equally.

The theory is that the discount entices the customers to buy the product for the first time and they will then return for repeat purchases in future. But whether this works in practice has been hotly debated.

Groupon’s share price is at a record low and Amazon has written off about $137m from the value of its stake in Living Social. And many businesses are up in arms. In 2011, a UK bakery claimed it lost a year’s worth of profits on a Groupon deal after offering a 75% discount off a dozen cupcakes.

With 8,500 people rushing to buy the cupcakes, the owner was forced to hire and train extra staff and work through the night to push out more than 102,000 cupcakes — at a loss. A US-based food market claims to have lost $10,000 on a deal.

On local site, reviewers rebuke restaurants offering Groupon deals, accusing them of treating customers with discount vouchers "like second-class citizens" and letting the quality of their food slip because they are unable to handle the influx of business.

To be fair, the social discounters are not at fault; often business owners fail to understand the consequences of using the medium. Small businesses or startups are usually the first to jump on the daily-deal bandwagon without a plan in place to deal with the new customers. It is all well and good to bring in new customers through a loss-leader strategy, but if those customers aren’t coming back or if you aren’t selling additional goods or services to raise your profit margin, you aren’t a loss leader — you are just making a loss.

You are also dealing with price-sensitive consumers, who are loyal to the company that offers the lowest price at any given moment, not the company itself. (Some waiters have even complained to me that discount diners are awful tippers, and spend very little above the value of the deal they made.)

If your margins are low, a daily deal and a price-savvy customer can hurt your business in the long run. Similarly, if you are unable to keep the quality of your service consistent should 3,000 daily discount shoppers flood your shop, you could injure your reputation. And if your restaurant is already floundering because of poor quality or competition, a one-week spike in business won’t be enough to keep the doors from closing.

Success depends largely on the nature of the business. An independent study of discount deals showed vacation spots and fitness centres do well using the model. Their marginal cost is low, they have high fixed costs and can schedule daily-deal customers so service does not suffer. In restaurants, the opposite is true.

No one should demonise social discount sites. They are complex marketing tools that should not be used without understanding your business model, your target audience or your operating environment. As for floundering discount dealers, they may benefit from taking a more consultative, responsible approach with new customers if they hope to continue.