Despite the explosion of daily deal sites such as GroupOn and LivingSocial, the auto repair industry seems unaffected. I have not seen deep discounts on tires or coolant exchanges; instead, there is a deluge of spa, salon and restaurant deals. (Relevant side note: 77% of daily deal subscribers are women.)
Why the resistance toward daily deals among repair shops and dealerships? Part of this may be a unique change resistance in the automotive industry compared to other brick-and-mortar small businesses. But, consider the following characteristics of daily deal sites that are favorable to auto repairs:
- Deep discount deals help service businesses more than product businesses. Service businesses, like spas or contractors, have *low* variable costs. Think about a spa marking up the skilled labor of a masseuse by 50% or more . Product businesses, like Staples or Sports Authority, have *high* variable costs. These retailers are simply reselling products with more modest mark-ups. With this in mind, a service business has more flexibility to offer deep discounts because they have higher margins.
- Appointment-based businesses are better for deep discounts because the appointment process regulates the flood of new customers. In contrast, a restaurant (that does not require reservations) may have to worry about 50 or 100 new customers showing up for lunch or dinner, which can be operationally overwhelming.
- Daily deals tend to be breakeven or even loss-inducing for small businesses unless the deal results in new, repeat customers. See the analysis below, modified from a helpful template provided by Yipit.com.
The analysis below shows two of the most sensitive inputs into the daily deal analysis: 1) the margin of the product or service being discounted and 2) the conversion rate of new customers into repeat customers.
Auto repair providers are appointment-based service businesses with high gross margins. Why no daily deals?
Here are some possible reasons:
1) General aversion to deep discounting. Many auto repair providers are open to discounts on small-ticket items, like oil changes, but are reluctant to offer deep discounts on multi-hundred dollar repairs.
2) Tough to craft a deal for a *repair* business. Consumers tend to visit repair shops when work absolutely needs to be done. And each consumer’s vehicle has different needs. It is much tougher to offer a broadly applicable deal in the car repair business under these circumstances. (However, there are common maintenance packages which could be deal-worthy.)
3) Deals attract the wrong type of customer. I suspect this is the killer. The last customer a repair shop wants to see walking through the door is a discount seeker who is highly unlikely to pay for extra services (no “overage” opportunities) and equally unlikely to return for future services without a large discount.
I expect we will see a few deals on repair services in the near future, and I am cautiously optimistic that they will work. But, as the analysis above shows, the deals will only work if the repair shop can successfully convert new customers into long-term, repeat customers. Here is where a premium service tool like ClearMechanic can be critical; and where the standard auto repair experience can be harmful. With a premium service experience, the repair shop can wow the customer today, and earn their business tomorrow. Daily deals in conjunction with ClearMechanic will be an interesting experiment for the industry.