Case Study: A Deal Company’s Power Is in the Size of Its Mailing List

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Savvy Cellar Wines owner Brent Harrison has an email subscriber list with more than 3,500 addresses, a Facebook page with more than 2,200 fans, and a Twitter feed with more than 500 followers. Still, the Mountain View, California, entrepreneur says getting the word out about his small business is the No. 1 reason he runs daily deals on a regular basis. In the past two years, he’s worked with Groupon, LivingSocial, Facebook Deals, Plum District, Yelp Deals, and others.

You ran a deal with Groupon recently. What other daily deals have you run in the past?
We were one of the first businesses that worked with Groupon when they were just opening up in the South San Francisco Bay Area almost two years ago. Then we ran again in a new location late last year. During that time I’ve experimented with probably half a dozen of the services. We were one of the first betas for Facebook Deals. Full disclosure, I am actually on Facebook’s local advisory, so I worked with them on their beta. So, [I’ve done] Yelp, Groupon, Facebook, LivingSocial, Plum District, and FreshGuide — now it’s been rolled into Sugar Media. As you might imagine, I’ve been inundated by a number of others that we haven’t pulled the trigger on.

How do you decide which deals to pull the trigger on?
There’s been an evolution in our thought process. Two years ago, we were always looking for new ways to experiment. This is my wife’s business, so it’s been a great sandbox for me to move beyond the theory and actually put a lot of new marketing ideas into practice. Back in the early days we just wanted to try something. We literally were just looking for ways to get more people in the door. [Our first deal] was moderately successful, but we didn’t know what to compare it to. The second time around, we were marketing our new location. Again, it was less about the upfront deal; the economics are not attractive.

The power of these services is in the fact that they have large mailing lists. I’m sure they wouldn’t want to be marketed in that fashion. But if you look at our social and online footprint, we’ve been at it five-plus years now, and we’ve got a mailing list with 3,500 people. We’ve got 2,200 fans on Facebook. We haven’t focused too much on Twitter, but we’ve probably got 400 or 500 followers. We’ve been experimenting with mobile marketing for the last year and probably have 400 or 500 fans on that. So, we have a reasonable ability to reach people, but nothing in terms of the magnitude of what some of these services [can offer].

I don’t want deals that are margin negative. When you talk about a 50% deal, then you get 50% of that and you’re making 25%. You have a huge obligation to deliver at a negative margin. That’s not good business.

Do you retain the contact information for customers who purchase your daily deal coupons?
That’s not provided by any of the services. I actually think that part of the model is pretty broken. I’m sure there are some companies that have done better than we have in terms of [gathering customer data]. We’re not doing a good job at capturing information from them, other than what we already do systematically. We have the ability to sign [people] up for our mailing list on our credit card receipts, there’s indicators on our menu about Facebook, you can get a discount if you join our mobile fan list, and so on. The short answer is no, we haven’t done a good job, and no, the services are not sharing that information.

Is it easier to negotiate on the terms of the split now that so many deal companies are competing for your business?
I think what we’ve seen is that the 800 lb. gorilla is Groupon and they’ve set the baseline. I’ve heard many pitches, and a lot of the pitches are relative to Groupon. [They’ll say], “unlike Groupon, who stages your payments in three; we’ll pay you in full!” Literally, I could rattle off handfuls of sales pitches that are basically trying to differentiate along some contractual dimension relative to Groupon. But the basic mechanics are similar.

Is there anything you’ve struggled with when it comes to running these deals?
What I’m finding on this third go-around when talking to the big three — which are Groupon, LivingSocial, and Yelp — is that I’m putting terms in place and they are basically saying “No.” I don’t want deals that are margin negative. When you talk about a 50% deal, then you get 50% of that and you’re making 25%. You have a huge obligation to deliver at a negative margin. That’s not good business. [We need customers] to buy more when they come in that one time or become long-term customers. I don’t have hard numbers on the latter, but my analysis and experience tells me we haven’t been successful there.

The big issue for us [is that] we have busier times and less busier times. Not surprisingly, [daily deal customers] come in when we’re already at peak capacity. What’s happened when we’ve done these deals is for the first week or two we get inundated beyond the point of being able to meet the demand. We’ve seen a quantifiable or discernible dip in our reviews. [Coupon buyers] come in and they can’t get a seat, or the service is slow, and then they go to Yelp and they complain. When you set a high standard for service delivery and you don’t deliver — especially with new customers — then it defeats [the point of] the deal. Not only do we not get [customers] to spend anything more than [their coupon], but they tip horribly and our servers are not happy. Where’s the win in that? This is an area I think the services are working on — both the scheduling aspect around trying to drive customers to non-peak times and having the ability to do more targeted marketing.

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This interview has been edited for length and clarity.

Stephanie Miles is a journalist who covers personal finance, technology, and real estate. As Street Fight’s senior editor, she is particularly interested in how local merchants and national brands are utilizing hyperlocal technology to reach consumers. She has written for FHM, the Daily News, Working World, Gawker, Cityfile, and Recessionwire.