Overcoming the Groupon Effect: How to Sell Merchants on Your Start-Up Deal Site

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If you're sick of the daily barrage deal-site emails that flood your inbox, imagine what it's like for business owners.

The field of daily-deal sites, which includes giants like Groupon, Living Social and Google Offers, has grown by leaps and bounds in recent years. Not only are niche sites sprouting for kosher and vegan foodies, but there's even a daily-deals website for digitally distributed goods and online services.

In December of 2011, the industry saw a grand tally of nearly 1,800 daily-deal sites in the U.S., roughly the same number as the year before, according to Daily Deal Media, a Troy, Mich.-based firm that tracks the industry.

That glut of daily-deal sites is driving some merchants to grow skeptical of newer deal sites and apps, according to upstart deal-site founders. They've grown weary of the endless stream of pitches for discount programs that enter their premises on a daily basis, says Gabriel Savit, the 21-year-old co-founder of bring10, a site that allows users to receive deals for products and services they want.

Related: Is Your Business Ready for an Incubator? 5 Tips from a ‘TechStars' Grad

"The hardest part is getting in front of someone you need to speak to, an owner or a general manager," says Savit. To build up the business, which has already signed up 70 restaurants and bars in lower Manhattan, Savit is currently taking a year off from Princeton where he was majoring in aerospace engineering.

Jeremy Galen, the 30-year-old co-founder of the now-defunct Mirth, a hybrid-deals platform that rewarded users for patronizing their favorite shops, had faced similar difficulties attracting clients to his site, which launched in May. "There's a lot of technology involved with restaurants and there's a real kind of weariness and the potential for exploitation," says Galen, who plans to pivot Mirth into a site for developers called Rakupos.com.

"Seamless Web, Open Table, they take a significant percentage of sales, but they offer a valuable service. Credit-card companies also take a percentage," says Galen. "These poor, small proprietors are pummeled with an endless flow of pitches, this rising cost of doing business."

Related: Picked the Wrong Major? Here's How to Pivot Into Entrepreneurship

What's more, customers who do wind up using the discounts may never become full-price shoppers, says David Rose, managing partner at Rose Tech Ventures, an early-stage angel investment fund in New York City. "I'm not sure it legitimately works out for the vendor because people who are trapping for a discount are typically not the kind of life cycle customer that you want to get. They're typically one-shot, in and out," he says.

So what's a young daily-deals entrepreneur to do? One idea: pitch your company's services as a marketing expense.

The best use of deal apps isn't necessarily for a business to increase profits in the short term, but for strategic brand exposure, says Chris Willets, co-founder and publisher of the Skint, a daily listing of free and inexpensive events in New York City. His company has partnered with deal companies such as Scoutmob and Signpost to produce and promote custom events around New York City.

Related: How Square Earned a $3 Billion Valuation

"Business people want to get people into their stores. Entrepreneurs create these sites because it's a hungry market out there for deals and they can get commission off of these sales," he says.

Willets adds that companies like Gilt Groupe offer discounts, but, at the end of the day, the high-end products that are showcased for a fraction of their retail price still command a hefty chunk of change. "People buying those deals are not the ones who are underemployed or unemployed. It's the people who are working but who want a glamorous experience at a lower price," he says.

Likewise, Rose thinks that to achieve long-term sustainability, deal-site founders will need to break it down in dollars and cents for merchants. "You list the price [of a product] at $1,000, but [tell customers] you can get it today for $200. As long as your marginal cost is $100, you're in good shape."

How have you overcome too much competition in your industry? Let us know in the comments section.

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