If I had been the founder of Groupon when Google offered up $6 billion for it, the door wouldn’t have hit me on the back-side as I rushed to the bank to cash the cheque! While I think Groupon is an interesting concept, they are really greedy, and ultimately, it will be their downfall. Let me explain.
Groupon seeks out businesses that are willing to offer deep discounts for their goods and services. Usually, the discounts are around 50%. Groupon takes another 25% or so for publicizing the offer and collecting the funds from the bargain-hunters. That leaves the business with only 25% of what it would normally take in on a sale.
Groupon talks businesses into signing up by claiming that they may lose a bit on the first sale, but they will make it up on subsequent sales. Nonsense. Alternatively, if businesses have excess capacity, they can accommodate lower-paying customers, because they only have to cover the incremental (or marginal) cost of servicing the customer. This works for spas and other similar businesses. There aren’t too many businesses that have a marginal cost less than 25%.
What about restaurants? They are probably the most popular Groupon category, based on demand. Is it worth it for a restaurant to sign up for Groupon?
This will be the last in my series of articles on Groupon certificates (I hope)! Previously, I’ve written about the accounting for Groupon certificates, setting up a Point of Sale system to accept Groupon certificates, using QuickBooks to account for Groupon, and the tax implications of doing a Groupon promotion. This article looks at whether you should consider using Groupon to promote your business. Since this is a site dedicated to restaurants and their owners, I’ll focus on them. However, most of the concepts apply to any business.
How Groupon Sells to Businesses
Groupon claims businesses will get a fair amount of repeat business (1 – 2 subsequent visits), at full retail. Many restaurateurs think that, if they could only get people in the door, they would experience how great their restaurant is and return again and again. In some cases this will be true, but for most it will not. You can’t take anyone off the street and get them to like your restaurant. They have to be the type of people who would value the dining experience you are providing and would be willing to pay the price you need to charge to maintain that level of quality, service and ambiance. In other words, if you can get potential customers in your target market to try your restaurant, you have a chance at winning them over.
Now, if a Groupon bargain-hunter finds your restaurant to be a good value, with the deep discount, is it likely he’ll feel the same way when he has to pay full menu prices? No. No. No! The value proposition, that was there with the heavily discounted price, disappears when the regular menu prices are in effect.
Having experience with deep discount programs, like Toronto’s Summerlicious and Winterlicious, where restaurants provide three-course lunches and dinners for a set price, I can tell you that very few of these diners ever return to your restaurant. I estimate that perhaps 1% do return when regular menu prices are in effect. The conclusion is that these discount diners are not your target market. They simply do not recognize the value of your offerings, at regular menu prices.
Where Groupon Works
I know of one restaurant that uses Groupon (and other similar programs) quite a bit. It is a large establishment that is rarely filled to capacity. The Groupon coupons cost $30 and are redeemable at $75. This allows the individual to buy two main courses and they have to buy everything else at full menu prices. The only way this works for the restaurant is when the Groupon diners buy appetizers or desserts and wine or other alcoholic beverages. It’s better than getting nothing for an empty table. If they were busier, it would make no sense at all for them to use Groupon.
It helps that this restaurant has relatively high prices. A couple, using a certificate, has to purchase more items to complete a normal dining experience. The high prices for all items ensures that there is some marginal profit for the restaurant, even if they aren’t covering all costs. Servers need to be especially adept at up-selling and cross-selling to make this model work for the restaurant.
It works for this restaurant, because the total revenue from the diners is greater than the variable cost of providing the food and beverages (plus linens, credit card discounts and any other variable costs). They don’t care whether the coupon diners ever return to pay full menu prices, because they will not. These customers will only return when the next coupon batch is issued.
Where It Doesn’t
Another restaurant has offered Groupon discounts at various times. It is a popular restaurant that is difficult to get into without a reservation. I suspect they will discontinue all Groupon discounts in the near future, because they aren’t adding to their loyal customer base, and most likely, they are risking their existing customers by making it harder for them to get reservations and by making them pay full price when transient customers are getting deep discounts. They are damaging their profitable customer base, to go after fickle, extremely price-conscious customers who don’t value their dining experience nearly as much. That’s just bad marketing.
What Are The Risks?
A lot of restaurateurs know that these types of promotions are not good deals. Still, quite a few say, “let’s give it a try”, “what’s the risk?” You’d be surprised. Let’s take a look at those risks.
Have you considered your restaurant’s brand image? Accepting Groupon changes your image from “quality” and “successful” to “cheap” and “desperate”. Is that what you want? The internet, Facebook and Twitter all ensure that your acceptance of Groupon, even once, is etched in digital stone for all to see, from now until the end of time (or your restaurant). All of a sudden, that simple promotion has become extremely expensive.
Are you still clinging to the belief that some of these coupon clippers will become regulars at your restaurant? Even if you provide exemplary service, impeccably prepared and presented mains, appetizers and desserts, they’re not going to be overly impressed with your efforts. True, they will tell their friends about their good experience at your establishment – one or two of them, according to research. Undoubtedly, these two people will be similar-minded consumers. They won’t be coming to your restaurant, unless they have a coupon.
What if the service isn’t so great, the dishes are not so perfectly plated and tasty? What if your expert service staff really were able to up-sell and cross-sell. These coupon diners are not going to be pleased. They’re going to think they were “ripped off”. Well, now, you will have unleashed a torrent of critical word-of-mouth. The internet, Facebook, Twitter, Yelp and many more sites will ensure that everyone knows what you did to this poor, unfortunate couple (who probably came in on their anniversary or birthday for a very special evening). Word-of-Mouth advertising cuts both ways.
What about your “regulars”? How do you think they will feel, paying full menu prices, when you’re giving the food away to people who will never return? I know how I’d feel, and I’m sure you do too. So, do you make sure your regulars can get in on the deal too? Why in the world would you do that? They already appreciate the value proposition you have developed for your successful restaurant. You don’t need to convince them with a lower price.
If your restaurant gets inundated by coupon shoppers, how will you make sure that your regulars get a seat when they want one? The good customer who can’t get a reservation at your place today is going to go somewhere else. Somewhere that cares about their customers and may be on the way to earning a new “regular”.
This begs the question. Why are you investing so much time and effort trying to market to non-target customers? Wouldn’t those resources be better used making sure your regular customers are properly looked after and trying to win over more similar minded people?
The Bottom Line
If you really are intent on giving away money, why not give it to potential target customers? Most restaurants rely on neighbourhood residents (or businesses) for the majority of their clientele. You may think that everyone knows about your restaurant, but they don’t. Instead of giving away money to people outside of your target market and target area, why not provide a reasonable trial discount to people (or businesses) in your area? The added benefit is that you don’t have to pay Groupon or anyone else for the right to give away money!