Reality Bites

This week I was asked by 3 startups in the Daily Deal space in Canada to help them with some advice. What was different from other weeks is that after each call I ended up feeling rather sad. In each situation I recommended to the founders that they cut their loses and pretty much pull the plug on their startup and seek other ways of earning  living.

Although these were easy recommendations for me to make, the fact that tens of thousands and, in one case, a few hundred thousand dollars would be lost is a reality that I take seriously. These were all well intentioned entrepreneurs excited about a market that seemed worthy of their attention and investment. Unfortunately, they each made crucial mistakes in terms of overall strategy, marketing execution and sales execution.

This industry is not an easy one. Although the moving parts are few, they are nonetheless expensive to master.

-Getting merchants to sign up is expensive. Sales people need to be hired and paid. Merchants signing up is certainly not as easy as it used to be. They are more jaded, more cautious and far better negotiators nowadays.

-Getting an audience, getting consumer to sign up to your service is also expensive; to the tune of $4-$8 per subscriber. If you have investment, great. If you do not, then you had better figure out a way to get subscribers at a lower cost.

-Processing costs: Credit Card transactions cost between 2-3%. You cannot get around this unless you find an alternative way of charging customers. One way is to add interac to your payment structure. Their fees are less than credit cards and have the added bonus of having a lot less charge backs. Have a look at Admeris to supply you with interac. Or just visit interac website.

-Platform costs: If you built it yourself, there are no variable costs, only maintenance and ongoing development work. If you use a white label platform like Nimble Commerce or Deal Current, then the cost will be between 6-8% of gross billings.

-Sales people: beside their base salary, their commission are typically between 7%-10% of net revenue.

-Affiliates? They’ll take 10-15% of gross revenue.

Once you start adding all these costs, plus operational costs, then it becomes extremely clear that you cannot operate a profitable business if the daily deal site only takes a low percentage of sales for themselves.

I feel for the startup in this industry. Especially if you do not surround yourself with expert advisers in this industry to help lead the way. It is quite disheartening to know that many of the 150 or so deal sites in this country have absolutely no marketing or sales experience whatsoever and it shows in the way they market, they sell, and in their results.

This industry is all about controlling your operational costs while maximizing your sales and marketing efforts first. It is certainly not about technology or if you have a nicer looking website. If deal sites are struggling to survive and have no way of reaching an audience other than through google or facebook and if they continue to publish the same deals that are on the larger deal sites or promote C-class merchants, then my recommendation is the same as it was with the 3 startups I advised this week; Sell, Merge, Partner or Shut Down. There are far better avenues to seek out to obtain a better ROI, no point continuing to give facebook and google your money or some web development firm to continue work on your platform. Stopping operations is a bitter reality. Take this experience, learn from it, dust yourself off and move on with confidence and passion to your next project. The hardest part is realizing when to stop and it certainly pains me to have to recommend it. Nevertheless, it is the reality of any fast moving industry.

If, on the other hand, you have built assets, value, a subscriber base and some sales on a monthly basis, then there is always the option of trying to sell to a potential buyer or contacting other deal sites of the same size and merging to form a more effective entity. I believe more and more small deal sites should merge with each other in order to build a more dominant larger deals business. That is better for the industry, for merchants, for sales reps, for founders and for consumers.

To all the smaller deal businesses trying to find their way; good luck, be persistent, get expert advice and when reality bites, ride into that pain and deal with those tough decisions.

 

2 Comments
  1. davesoyka@yahoo.ca'

    Great column Albert! your analysis is bang-on, no matter how hard it may be to hear. and as a marketing guy, I’m glad to see the value you ascribe to good marketing and sales experience as a key success factor.

    • al@canadiandealsassociation.com'

      Thank you Dave.. Yes, this industry is first and for most, about sales & marketing. Once sales & marketing have been looked after or focused on then it is about operational effectiveness, like any business. There are way too many individuals trying to enter this market or who are already in this market that are struggling through because they lack the sales & marketing experience or know how to make this business model work. See our next few posts, this will be a topic. thanks again