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According to a report by BIA/Kelsey, in just a few short years, consumer spending on 'daily deals' like those offered by Groupon and LivingSocial could reach $6bn.

So it's no surprise that the concept has been commoditized and everyone is jumping on the daily deal bandwagon. Take for, instance, major publishers like the New York Times which is launching its own daily deal service called TimesLimited.

Yesterday, Microsoft announced a new addition to the Bing search engine called Bing deals, which aggregates "more than 200,000 unique offers in over 14,000 cities and towns across the U.S." from sites like Groupon, LivingSocial and Restaurant.com.

The obvious goal: tap into this booming market by making it easy for consumers to find discounted local services.

The fact that a major search engine has developed an aggregation service for deals tells us one thing: there are an awful lot of 'deals' out there.

This raises an existential question for the growing number of businesses turning to deals in one form or another: at what point is a deal no longer a deal?

At some point, the 'sale price' effectively becomes the 'list price'. If the average rate for a one-hour spa treatment is $100, but consumers can always find one nearby for $50, the $50 price no longer represents a deal,it represents the going rate.

Consumers aren't stupid. I can tell you that a one-hour luxury spa treatment is normally sold for $120 and that you're getting a bargain because I'm only charging $60, but nobody is really going to believe that the treatment was worth $120 in the first place.

Unfortunately, in many cases, the deal price transforming into the list price will be something businesses not offering deals will have to grapple with. After all, it can be tough to compete when competitors have created the expectation that your service is worth 50% less than what it used to be.

So how can businesses deal with deals? Is it possible to compete and thrive in markets where discounting is prevalent? Here are several suggestions.

Be careful

To be sure, discounting can be a productive sales and customer acquisition tool, but it's often very, very tough to get right, particularly when running a discount at Groupon-style scale. More often than not, a solid strategy is lacking, which is likely to result in a loss leader that leads nowhere.

The bottom line: don't succumb to peer pressure. If you're unsure whether you can discount to a successful outcome, go with your gut and press pause.

Focus on differentiation

To avoid a race to the bottom and survive in a market where competitors are discounting themselves to the graveyard, a business needs to be fanatically focused on maintaining and establishing compelling differentiators.

The good news is that this is often easier than it sounds. Using the spa example again, a competitor might be flooded with new 'customers' thanks to a daily deal.  

Some of those customers might be those that couldn't pass up the opportunity, but take advantage of the fact that delivering a boatload of (likely unprofitable) spa treatments is going to make it very hard for your competitor to provide consistently good experiences.

Don't worry about your customers going elsewhere to take advantage of a deal; instead, do your best to give them a long list of reasons to come running back to you regardless of price.

Be picky

If you're going to discount, be selective. Consider that there's usually far less benefit discounting for strangers (read: prospective customers) because it sets certain expectations which may not be healthy for you.

Instead, where appropriate, consider developing ways to reward existing customers for their patronage. In many cases, you'll find that rewards don't have to be monetary, and when they are, they don't need to be so steep that you can't turn a profit.

Patricio Robles

Published 4 March, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (1)

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Sally

Nice article i knew that Microsoft and other giants like Google would have the deals business sooner or later and anyways the deals system is now very common but i dont think they would be able to fight against groupon deals.... i think groupon deals would be way ahead of Microsoft's because groupon is real!!!! and ms would be cloning groupon! so they better find their new ideas to put in business!

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