In 2008 the US economy crashed. People were freaking out… especially brick and mortar business owners. As sales dipped, local merchants flirted with the most dangerous marketing device ever created: the daily deal. The daily deal, while innocuous on the surface, was probably the most detrimental action any business owner could have taken. Think about the math behind it: a third party sells your product, which normally costs $100, for $50. THEN, the third party takes half of that ($25). The business owner earns $25 for a $100 worth of product. Keep in mind the average business owner ekes a 5% margin on average. In order to reach breakeven on the marketing, the customer who bought that $50 daily deal would need to return – at full price- a staggering 14 times! You start to think about how many times the average person eats out per month, the kinds of customers who are interested in 50% off, and these metrics look ever worse for business owners. The chart below shows a diner who uses a Groupon on the first visit, and how the restaurant’s balance sheet looks over the next 14 visits.
So how could a business owner overlook this straightforward analysis and execute a daily deal? Simple! Business owners commonly fall for the “butts in seats” fallacy. The “butts in seats”, or BS as we like to say, is a notion that as long as someone comes through the door, it’s good for business. We disagree with this fervently. Yes, that customer will result in quick revenue. But if that customer is not served properly, they will cause a massive drop in revenue over time.
Imagine you convince a new customer to come to your business and you serve them a foul tasting dish. That customer will tell all of her friends how horrible your food is. Or perhaps this new customer orders and doesn’t see the server again for an hour. Again, the patron is leaving with a negative impression of your business and spilling the beans on a review site. Or you attract a customer at such a ridiculously low price point that they cannot associate your wares with your full asking price.
The long and short of it is that success is not built over night (unless you get incredibly lucky like Facebook). Even Google’s founders tried to sell the company to Yahoo for less than $1M. It takes consistent, methodical and disciplined action to grow – especially brick and mortar. If you look at the histories of large retailers they didn’t go from $0 to $1B in a month… which is what a lot of the “butts in seats” vaporware promises.
That is not to say that marketing efforts do not work. Quite the contrary! Smart marketing takes into account the true value of customers, the cost of the campaign, and an understanding of your profit margins to know when campaigns should be above water. Yield management technologies employed by hotels and airlines have perfect this beautifully, and there’s no reason those learnings cannot be harnessed for brick and mortar merchants.
Business owners need to critically reexamine the “butts in seats” philosophy. What good is a gaggle of new customers if you are not profitably serving the customers you already keep? In more sophisticated businesses, you’re going to have a hard time selling the CEO on a larger budget if your current operations can’t perform well. “But we just need more butts in seats” will get a lot of groans in the board room.