Groupon: Like a one night stand for restaurants

[image via the Marketoonist]

Daily deal or deal with the devil?
It’s been hailed as a savior and slammed as a scourge of the restaurant industry.
It’s become a major force in dining, every month adding tens of millions of new subscribers.
As Groupon prepares to go public —in a hotly anticipated offering that could be the biggest initial tech company valuation ever—we have to ask: is this a good thing?

Here’s the deal:
Each day Groupon sends out an offer to its subscribers. It’s usually a discount of 50% or more off of products or services, heavily skewed toward dining and lifestyle categories. It’s activated only if Groupon delivers a specified number of customers to the vendor, encouraging subscribers to spread the word. Groupon and the seller split the proceeds, so at 50% off, a restaurant ends up with 25% of the offer’s value.

What’s in it for the restaurant?
Restaurant profits typically hover in the range of 5-7%, so it would appear that the owner loses his shirt on each Groupon sale. He’s counting on a few things to save him: the offer will bring in new customers who are converted to regulars; the Groupon customers will pay full price for menu items beyond the scope of the deal; and that a certain number of discount vouchers will be purchased but never redeemed before the expiration date (usually 6 months ahead). Rarely does it go as planned.

Usually the restaurant gets slammed immediately after the Groupon offer is floated, although often it’s just the regular customers coming in at discounted prices—a Wall Street Journal investigation found new customers to comprise as little as 10% of Groupon sales. When it has brought in substantial new business, the seller might struggle to maintain service and quality, alienating an original base of customers in the process. By virtue of their association with Groupon, you can assume that the new business is skewed toward bargain-hunters who are there for the cheap eats and will never return to pay full price for the same meal. The unredeemed coupons are often the only way a restaurateur makes a buck.

This is the restaurant equivalent of a one night stand. There’s a quick thrill from the initial rush of customers, but ultimately the brand is cheapened by the offer. This is not the way for businesses to build sustainable, customer relationships.

 

 

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3 Responses to Groupon: Like a one night stand for restaurants

  1. Wham bam thank you, ma’am, my questions are answered!

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  3. Shane Seaman says:

    This sadly only paints a one-sided story when it comes to websites like Groupon, Living Social, etc.
    Firstly, if you are looking at using these websites strictly as a revenue/profit generating vehicle then yes it doesn’t appear to make much sense.
    Secondly, if the operator/business isn’t properly prepared for an increase in traffic as a result of the campaign then he/she has bigger issues than dealing with Groupon.

    If you look at these types of sites as a form of direct marketing in which you have almost total control then it starts to show some value. You can control the number of coupons sold, the length of time they are valid for, AND with some common sense and strong execution generate some new loyal customers OR increase the number of visits from existing customers.
    Lets look at the numbers in this more accurate context (These #’s are taken from an actual deal one of our restaurants did with a similar website-just so you don’t think I’m specifically supporting Groupon):
    We did a $40 for $20 deal and sold 1500 coupons (we actually negotiated a $12 payback instead of the usual $10/50%-as the number of these websites grows I STRONGLY encourage you to do the same as they WILL move on these %’s). So when you look at this as a marketing venture you should then only factor in the actual cost of the raw product (Food/ALcohol) at that price (as your staff, rent, utilities, etc would all be functioning regardless) which at around 30% for most restaurants means the hard cost is around $12 for a $40 voucher-using this math we basically broke even on every coupon redeemed (if we are using it as a marketing tool not a profit vehicle).
    Now if all the coupons were redeemed by existing customers who would have been in your business anyways and only spent the $40 value of the coupon then yes this IS a one-night stand venture where you receive little to no benefit. HOWEVER, we saw (as I am certain 90% of other businesses do) an increased overall customer count for the weeks following the deal (+25%) which means we were getting new customers OR our current customers were coming more often! We were able to track the incremental spend on each coupon with the following results: 30% spend $100 or more, 24% spent $75-100 and 37% spent $50-75. Our overall sales increase during the weeks following the Groupon ranged from 34-56% which contradicts that the use of and association with Groupon only attracts the “bargain hunters” (I actually think that in todays economy 100% of all consumers are looking for value and 95% are at least price “conscious” when deciding where to spend their $-additionally in our marketplace the scope of restaurants using these websites range from the local pub to some of the highest end restaurants in town!) and I am confident it created some great traction for long term results as well!
    How often do restaurants place ads in local papers, magazines or on billboards with no REAL way of tracking the results? How about radio or tv ads? Do more people come in? Do they spend more? It is very tough to quantify the results from these avenues! At least with these new discount coupon programs you the business owner are in control of almost all the variables: how much the coupon is good for, how long it can be redeemed for, it cannot be combined with existing discounts (Wing nights, Happy hours, etc) AND you have the ability with todays technology to not only track the direct results but also increase your data base for future use.
    Bottom line is this-if you look at this a quick way to put more $ towards your bottom line/bank account it probably won’t give you the results you want. If you operate a strong business (and look at these as a form of marketing) and are prepared for a short term boost to your customer traffic and execute well when it happens you can and will see long term benefits to your business

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