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

3 thoughts on “Why daily deals are bad for business

  1. 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?

    • 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.
      Louie

  2. 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.

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