Why daily deals are bad for business

I really dislike all the “daily deals” websites. I feel they are a terrible way to market your flight school. They train your customers to devalue your product. In the flight training business, your margin is razor thin already. Daily deals websites would like you to discount your product 50 percent or more and then split the revenue with you. Taking half of the money but leaving you with 100 percent of the fulfillment costs. In the typical “discovery flight” this could leave the flight school holding the bag for up to a loss of $90 per redemption. Any way you slice it, that is a high cost to acquire a customer.

Admittedly, our school tried it once with our simulator. I felt I could leverage the low operating cost of the simulator against the high discount and revenue sharing. The result was mixed. The simulator has about $10 per hour in operating costs plus the significant cost of the simulator. So if we ignore the cost of money to buy and keep the sim, we add the labor expense of the instructor, plus an overhead charge to pay for the operation of the flight school. (we still have to pay to have the lights on, pay someone to answer the phone and schedule the simulator ride, the expenses go on and on). There is a cost of $53 per hour to operate the sim. That is $10 for the sim, $25 for the CFI, and a $18 overhead charge. So we retail this experience for $155.00. The deal site wants to discount it to $50. We will get $25 per deal. So you can see we will be in the hole $23 per redemption. Even if I subtract the overhead charge we are in the hole $5 per redemption.

The promotion ran and 91 were purchased. About 50 are actually redeemed. So you might think if you do the quick math that we broke even on the deal, maybe even made a couple of bucks. You would be correct. However, the problem is revealed in the statistics of the redemptions. Of the 50 redemptions the average age was 15.4 years old. Six redemptions attempted to stack. Which is to say they showed up with two coupons and wanted twice the service. (which we prohibited on the coupon but people try anyway). Two redemptions were current customers who expected to use the coupon for flight training. (Which we also prohibited on the coupon). Finally there were zero conversions to a student pilot, zero enrollments in our Private Pilot Ground School and one conversion to a discovery flight. Also a loss leader.

On the surface, I feel like I am emphasizing the negatives. There is a diamond in the rough. The average age was young, a mere 15 years old. This means kids are still interested in airplanes. A response like this, while not producing immediate sales, makes an investment in the future whose returns are long term and not measurable on the balance sheet.

Here is the thing that bothered me the most. The purpose of any marketing promotion is to generate traffic in hopes that profitability will follow. When the coupon deal salesperson was making her presentation, she emphasized the fact that not all coupon sales would result in redemptions. That slack could be depended on to make the deal more profitable. Without redemptions I never get the chance to create a student from that redemption. Ultimately that is what a flight school wants: students.

This is an article from inbound marketing with a similar story. If you chose to do a coupon deal please do so with great caution. Know that a airplane ride as a part of the deal could be financially worse. Know that many of the redeemers will be chasing the coupon and not necessarily the opportunity to enroll in your school.

–Louie Hilliard, president and chief flight instructor at Hub City Aviation, a 61/141 flight school in Lubbock, Texas

This post originally appeared on Hilliard’s blog, Flight School Business Success

  • http://www.mikepettingercfi.com Michael Pettinger

    I’m a bit confused about this $18 overhead charge. This looks like a fixed cost, but you seem to be including it as variable cost. Do you only pay to keep the lights on and some one to answer the phones only when the sim is running?

    • http://www.hubcityaviation.com Louie Hilliard

      Hi Michael
      That is a great point. I decided I needed to account for overhead some way. So, I took the fixed costs that I could not directly contribute operating an aircraft or other revenue generating activities. Examples include, internet, phone, building rents and the pay for dispatchers bookkeeper etc. I looked at the total billable units from the past 3 fiscal years averaged that number and divided by the expense total. This came out to $18 and change. It is not a perfect way to do it but works well for me to know if a business activity is “pulling its weight”. Another way I will look at it is to calculate it as a percentage of gross sales. So in this case overhead is 12% of gross sales.

  • phil g

    There are a lot of problems with using the “Daily deal” sites, call me cynical but I think they only still exist because they can keep finding small businesses are desperate enough to believe that cutting your selling price will increase demand.
    The sites must know that many small businesses don’t do their due diligence before accepting their offer. A quick bit of market research will show that most small business wouldn’t use a daily deal site a second time due to the poor response from consumers. They may have had a good response but they couldn’t make a profit from the new customers or they had a poor response like wrong type of customers or only interested in a single purchase and never made enough profit to continue with the promotion.

    There is a perception that the high price of flying is a key restriction to people taking up flight training, which is correct. Consumers aren’t stupid they know they Daily deal offer will only push the up the cost of flight training later into the training process. The only people who will likely take up the offer probably only do it for the novelty factor.

    If price was driving people taking on new products and services, everyone would own a scooter or a moped. Scooters being a much cheaper way to get around should have huge penetration in the market place because everyone needs to get around. Demand for scooters is weak and stays weak for a good reasons: risk and practicality. Risk with most forms of two wheeled transportation is high chance of injury or death in an accident and is comparable to flying. Practicality issues for scooters and flying remain an immovable road block. But you look at how successful HD have been selling chopper and cruiser lifestyle to the target market for aviation.

    Know your customer, know what the customer is really buying!

    One question for the Louie, has the flying industry closed the door on kids learning to fly by washing planes?

  • http://get-aviation.com Rod Beck

    My input on this: if your operation is flying – gross revenue /sales = 2,400 hrs annually X $120/hr “retail” (average), and your TOTAL “adiministrative” (fixed cost) exluding A/C fixed, varble or fixed/varible, is say, $100K. then dividing that into the total revenue would = $41.67 (rounded). To “break-even”- your operating (total) cost on the A/C would be $120 – 41.67 = $78.33. Simply, utilizing these numbers, “profitablity” startes when income exceeds $78.33/hr and typical hourly operating cost for a C-172 nationally.
    A fleet of 4 birds flying (Hobbs Meter) 600 hrs (average) each – are flight schools profitable – convince me! Frankly, the biggest problem is almost ALL flight schools are over fleeted. The ratio of 1 A./C for ever10-12 student/renters is doable IF scheduling/booking is efficent.

  • Roger Parker

    IMHO the biggest problem of Daily Deals is “no ‘new’ consumer loyalty”. Most businesses expect to attract new customers by running a Daily Deal. You’d think that if consumers sample your products or services they’d be likely to continue to do business with you in the future. Not necessarily! Daily Deal Sites are addictive – people love deals and they often move on to the next company who offers them a deal. Why would they pay regular prices when they know there will likely be another deal from one of your competitors? Yet, some businesses have discovered that their regular customers have purchased the deeply discounted Deal, too. And why not? But they’ve been happily paying you full price up until now! Plus there are other drawbacks.. but this is the most imporant, I think. / Roger @ http://jscharter.com

  • http://flywithfred.blogspot.com Fred Perry

    I agree with the article completely and with @disqus_DIQp3evfMn:disqus also. It all depends on customer loyalty. There is huge competition but I think, if before starting any promotional campaign a thorough research is done customer behavior and also on competitors promotional strategy them much can be done to convert new visitors as well as returning visitors

  • Ethan Roy

    There is a perception that the high price of flying is a key restriction to people taking up flight training, which is correct. Consumers aren’t stupid they know they Daily deal offer will only push the up the cost of flight training later into the training process. The only people who will likely take up the offer probably only do it for the novelty factor.

  • http://www.911drivingschool.com/ Jenny Thompson

    Daily deals are bad for business and the perception of your business. The problem is that people are ALWAYS looking for a good deal; and with good reason! The dollar always seems so hard to come by and so easy to have slip away. Something to look for; to save money, is a state where where is no sales tax. http://www.flyhaa.com/en/page/helicopter_flight_training_courses is out of Oregon and is a fantastic flight school.