For Daily Deals Sites, It’s Evolve or Die

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Victor Wong is a guest author. To submit a guest post, click here.

Today’s daily deal sites are experimenting with every variation and vertical for their offerings — they know that not only is disruption on the horizon, but their own expiration date is as well. And it won’t be a new entrant into the deals space that ends them; instead it will likely be a very familiar brand entering local advertising: Google, PayPal, Square, or one of the other numerous payment services companies.

Some people mistook the innovation of daily deal sites to be a seemingly risk-free way for businesses to attract new customers by only charging a percentage of revenue for delivering paying customers. The mistake was overlooking the (now widely covered) risks of servicing a horde of bargain hunters, devaluing one’s brand, and losing margin on existing customers.

However, these sites did make a major innovation, which was a closed loop model for local commerce. Many merchants have been willing to take the risks of daily deals (especially when their businesses were not doing well) because they could at least feel confident their marketing dollars were working. They might have been over-risking and overpaying for a closed loop model of how their marketing dollars worked, but they could know that it did something.

Still, many more merchants don’t use daily deal sites, than do, because of those risks, and the desire not to overpay for marketing. As a result, most merchants still rely on word of mouth and/or advertising — which don’t cheapen their brands with a daily deal site’s discounted prices and which enable maximum upside from a fixed spend.

Payment companies have the potential to move “beyond the click” and “close the loop” for advertising.

Advertising is known to deliver customers, but without a voucher or coupon to show offline conversions, it’s been hard to quantify ROI in the same way that daily deals have. The risk of advertising is simply the amount being spent on the media, so there’s limited downside, provided that the financial commitment isn’t extraordinary.  But because they are unable to show what the tangible upside is, many media companies lose out local marketing dollars.

Payment companies have the potential to move “beyond the click” and “close the loop” for advertising. Customers who are exposed to an ad can be shown to have converted from online to offline by comparing transaction data to ad targeting data. If this loop is closed, media/payment companies can quantify the ROI on ad spend, which changes everything.

In the near future, merchants would be able to pay a fixed fee for advertising and enjoy all the upside on their own rather than sharing the revenue with daily deal companies. Paypal, Google, or another company with a digital wallet could target ads to their users and show whether they spent money with the merchant over a reasonable time period. When viewed from this lens, many of the industry moves make sense: (A) eBay’s acquisition of WHERE and the launch of the PayPal Media Network as well as the launch of PayPal at retail point of sale systems; (B) Google’s commitment to Offers and Wallet; and (C) Visa/Mastercard’s experiments in ad targeting.

Advertising is a much more stable and growth business to be in because merchants don’t fret about running too many ads the way they are worried about running too many discounts. That’s why these payment companies won’t be simply offering a competing “deals” product but more likely providing a powerful advertising solution.

Daily deals sites are arguably payment companies themselves (pre-paid gift cards practically), so maybe they will lead the next evolution in local payments and marketing with some unforeseen innovation. In fact, Groupon is reportedly working on a credit card reader now among other things. But if daily deals companies don’t innovate on their model, they may end up just being the stepping stone towards the future model for “online-to-offline” commerce.

Victor Wong is the CEO and co-founder of PaperG, a local online advertising technology company. PaperG partners with leading online publishers including AOL Patch, Hearst, The Boston Globe, and more to better monetize their sites by capturing untapped ad revenue in the local markets they serve. PaperG powers the online advertising of 10,000+ local businesses.