Are Daily Deals Good For Merchants and Consumers?

Rocky Agrawal has written a series of articles about Groupon on TechCrunch. His most recent post deals with consumer protection laws and the daily deals industry. Rocky raises some valid points of concern but he skips logical steps by failing to make critical distinctions, a flaw that ultimately leads him to false conclusions. This post addresses whether daily deals should be treated as gift cards. It does not address the other points that Rocky raised because the gift card issue covers a lot of ground.

Full disclosure, the company I co-founded, troopswap.com sells daily deals that are provided by merchants exclusively for veterans, service member and their immediate families. I’m a third generation soldier and a combat veteran. Almost everyone in my family (my dad, my mom, my grandfather, my little brother, my uncle, my sister-in-law) is military. For me, these consumer protection issues are incredibly important because I view the customers we serve as family. I also know that the American military is the most selfless community that exists. I will not tolerate any business practice that could be perceived as capturing value from that community regardless of what happens to the bottom line.

Rocky’s Take On Gift Cards

Rocky argues the following:

“Everyone knows about gift cards. It’s a $90 billion business. Most people don’t think “gift card” when purchasing a daily deal from Groupon, LivingSocial, or the rest. But the law may see no such distinction.

The basic legal definition of a gift card varies by state, but generally has all the same requirements as a daily deal. It is prepaid, good for a predetermined value, and can be redeemed for goods or services at a specified business. Both Groupon and LivingSocial have already been sued under various state gift card statutes. One suit against Groupon was dismissed according to the Groupon blog.

Because the consumer prepays for the vouchers, daily deals may be considered a gift card. 27 states regulate gift cards. Although most daily deal vouchers have an expiration date, this may be against the law and the disclosures may violate state laws as well. (Some states require that expiration dates be printed in a certain font size, for example.) Many states have expiration dates that are significantly longer than the six months or a year attached to daily deals.”

In Massachusetts gift cards are valid for 7 years and are based on the face value of a gift card. So 6 years after buying a $20 gift certificate for $10, the consumer could go to the merchant and redeem it for the full $20. Washington requires that consumers be able to use the remaining value on any gift card, which is something daily deal providers often prohibit. California requires that remaining value below $10 be returned to the consumer in cash.

Groupon puts expiration dates on its deals, online and in print. Groupon also sends out reminders when a Groupon is about to expire. In the fine print, it states that any expiration is subject to provisions of state law.

In the states Edelman and Kominers looked at, it is largely unlawful to “sell” gift certificates with the prohibited expiration dates. In that case, voucher services could also be liable years later.

In the U.S. and Canada, merchants benefit from Groupons that go unused. Elsewhere, Groupon benefits. Daily deal companies sell breakage on unredeemed vouchers as a benefit to merchants. (In fact, it may be the only way a deal becomes profitable.) But the merchant may be on the hook for redeeming the voucher long after the stated expiration date. Having to cash out residual value also makes the economics worse for the merchant. Because some merchants use daily deals as an introductory offer to build a book of business, they may not be inclined to offer the deals if the obligations extend for years.

Daily deal providers will generally refund the value of “expired” vouchers, even if the merchant won’t. If consumers become more aware of their rights regarding gift card expiration, this could hurt the deal providers’ bottom line.’”

My Take On Gift Cards

Rocky clouds the issue by failing to separate a daily deal into its component parts but I’m going to cut directly to the chase. A daily deal is a gift card and it is not a gift card. Rocky fails to note that a daily deal combines the cash value paid for the deal, which should be treated as a gift card, and the promotional period above that cash value, which can expire. Let’s run my definition of a gift card through the Common Sense test by examining the actual mechanics of the deal, whether or not a daily deal creates value, and the rationale behind why consumer protection laws exist in the gift card space at all.

Let’s say I purchase a daily deal on troopswap.com that requires me to pay $25 upfront for $50 dollars worth of food at a local restaurant. Then, let’s say I wake up the next day and I’m really grouchy. I decide that I don’t want to redeem the voucher and I want my money back. So I call up troopswap.com. How much money does Common Sense dictate that I should receive? Of course, the answer is $25! If I were to demand $50 for my refund then that would be completely unreasonable. Everyone who had access to the internet would purchase daily deals in order to capitalize on the arbitrage opportunity to effectively print free money by exchanging $25 for $50. And that doesn’t make sense because clearly both consumers and the majority of merchants benefit from daily deal offerings.

Customers benefit from daily deals – after all it’s the fastest growing industry of all time. Furthermore, research conducted by Professor Utpal Dholakia of Rice University reveals that approximately 68% of merchants who ran a daily deal said that it was profitable. This actually makes sense. Daily Deals bring in customers at cost or slightly below cost to the merchant. If the deal brings in: 1) lots of new customers and 2) if those customers spend significantly more than the top end value of the deal so the discount is negated and 3) if those new customers return to buy stuff again in the future, then the deal will be profitable. In that sense, running a daily deal is, in effect, small businesses betting that they have a product or service that will delight customers. If customers come back then you have delighted them with your product. If they don’t come back then you or your employees haven’t delighted them and you might not have made it anyway.

Rocky also argues that merchants would suffer if they had to redeem vouchers beyond their expiration date. That fails the common sense test. Let’s accept my argument based on our first common sense test that the promotional value of the deal – the amount provided above the actual cash value paid for the deal – can expire. In that case, the merchant only needs to redeem the voucher for the actual cash value paid. How does that event negatively impact the merchant? I argue that it doesn’t.

Once the promotional value of the deal expires the consumer should still have the recourse to recover the cash value of the deal which they purchased so there is no loss to them. For the merchant, they are in a pure win situation. There are two scenarios that could result:

1)      If the deal is never redeemed because it is lost or the buyer decides not to use it, then the merchant does receive money for free as it were because it never provided that customer with a product or service – but that’s not why you run a daily deal. You run a daily deal to get new customers. I highly doubt that merchants count on the revenue they will get from unredeemed deals to sustain them, especially if they only run one deal a year. For the daily deal site like troopswap.com, an unredeemed deal is horrible because a customer who does not redeem a purchased deal is probably less likely to purchase one in the future.

2)      If a customer does decide to redeem the deal in the future then let’s return to the three variables that make a daily deal profitable according to the existing research and common sense: 1) new customers 2) customers that spend significantly more than the top end value of the deal so the discount is negated 3) new customers returning to buy stuff again in the future. Clearly, the first variable is not affected by a customer who redeems a deal in the future. The second variable is a positive effect for the merchant because the coupon is worth only the cash value paid so the customer is likely to spend more money on products at full price. Lastly, I believe that the propensity of the customer to return again in the future will almost exclusively be dictated by the degree to which they were delighted with the way they were treated by the business offering the deal.

In the first scenario, the customer and the daily deal site lose in the long run; it’s a marginal gain for the merchant. In the second scenario, the customer and the daily deal site break-even and the merchant gains the most. Given this insight, the most important thing to communicate to consumers is that they can redeem their gift card beyond the promotional period of the offer for the cash value paid for it for at least five years according to Federal law. But, to contradict Rocky’s claim, I argue that merchants win in both scenarios.

In most cases, a traditional gift card is not discounted and the value equals the amount of cash that was paid for it. The reason laws exist to prevent a gift card from expiring is because, in effect, a consumer exchanged cash – which obviously never expires – for a form of currency that can only be redeemed at a particular merchant. The Feds and various states enforced long time horizons on gift card expiration dates in order to prevent merchants from predatory practices that allowed them to capture the cash value without allowing enough time for the consumer to redeem the offer. Gift card laws exist to protect the cash value paid by the consumer – not the additional promotional offer that was not explicitly paid for by the consumer. That is the core of the distinction between daily deals and gift cards that Rocky fails to make.

Clearly, there is no such thing as free money. You don’t get to pay $25 bucks and turn around and demand $50. But you do have a right to the $25 you paid until you have actually received a service as protected by Federal and applicable state law. It’s as simple as that. Rocky’s post does not distinguish this point clearly enough so he makes daily deals seem like they are harmful to customers. I would argue that the deals are actually wonderful for customers – that’s why this industry is the fastest growing ever. At troopswap.com, we are very upfront with both our merchants and our military customers. We pride ourselves on rewarding a life of service, providing employment opportunities to military spouses, and donating 10% of our profits to the Wounded Warrior Project.