Daily Deal margins are coming down….

We predict, as most industry watchers, that the cut that Daily Deal sites keeps from a Daily Deal will continue to erode.

It started at 50%, it is now between 35-40% on average.

As more and more “me too” sites try and compete, they will go down the unfortunate road of competing on price. We already see instances of 20-25%, mostly from smaller sites trying to compete and from larger sites for strategic purposes.

What concerns us, however, is what Google Offers, Facebook or other large Daily Deal sites will do over the next 18 months. When Google offers launches in Canada (probably not till 2012) and if they decide to only take 20% of the deal or less, and the market follows, well, say goodbye to the majority of smaller Daily Deal sites.

Smaller sites cannot compete at 20%. They will merge with others to gain scale or simply close down and move on to other ventures.  Large services such as Groupon, Living Social, Dealfind, etc can compete at 20% due to their size while making more commissions from special categories such as escapes, packages, travel, etc. Niche sites will also be able to protect themselves from margin erosion given that they do not have as much competition.

Our recommendation to all those smaller Daily Deal sites:

1. Protect yourself somewhat and niche your site. Focus on one category, set up partnerships, distribution channels and be an expert in that category.

2. If you have a generic site, then see#1.

3. If you have a generic site and choose to ignore our well thought out advice in point #2, then we recommend you build your business model around a 20-25%  cut, if not lower, because this is where it is heading. (don’t drop your take to 20-25%…just build your model so you can still profit at those levels)

4. Develop other lines of revenues from your members and /or merchants beyond the typical Daily Deal commission. Remember that this industry is about local commerce and not just daily deals.

5. As always, this business is all about YOUR LIST and how you can best grow and monetize it. Invest the majority of your time on list development. (quality, size, segmentation, etc). Come up with various new features that will have your list keep coming back to you.

6. Don’t kid yourself….margins/commissions will come down..in Canada probably later than in the US. Nevertheless, they will come down over time. Build your business strategy accordingly.

Good luck!

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