Websites like Groupon may be all the rage with consumers, but does it make good business sense for your restaurant? As a restaurateur, you need to understand the benefits as well as the drawbacks so you can decide whether an online deal site can increase your bottom line.
How Websites like Groupon Work
Daily deal sites such as Groupon or LivingSocial function as coupon creation and delivery systems. For online subscribers, Groupon, for instance, sends by email a daily “Groupon,” a coupon for a price-off deal at a local business. If enough people purchase the Groupon, then everyone receives it. Groupon is just one of more than 400 sites that market similar deal-a-day offers.
As Forbes describes it, “Groupon, a “name that blends “group” and “coupon,” presents an online audience with deep discounts on a product or service.”
The consumer typically would receive a gift certificate at half-price, and the website would split the cost of the gift certificate with the restaurant at a 50/50 rate. Thus, for a $50 gift certificate, the buyer pays $25 and the restaurant and the website each receive $12.50.
Consider the Pros
- You attract customers and advertise your business. Groupon alone has more than 150 million subscribers and offering a deal is essentially an ad for your restaurant. Signing up is free for consumers. Everyone who has signed up in your city receives notification of the deal. Even if potential customers don’t buy the deal, they have been exposed to your restaurant’s name.
- You earn pure profit on unredeemed coupons. An estimated 20 percent of purchasers don’t redeem their coupons, which makes the 50 percent fee more palatable.
- You can increase sales. Nearly half of the coupon users spend more than the value of the certificate, either by bringing a larger group or by “splurge-spending” on items such as bottles of wine. Also by offering your promotion during a slow period, you can benefit from higher than average sales.
- You can negotiate a more favorable split. On RestaurantOwner.com, one proprietor reported settling on a 60/40 split with Groupon.
Consider the Cons
- You may lose money on the deal. A study by Utpal Dholakia of Rice University’s Jones Graduate School of Business surveyed 324 businesses in 23 cities and found that 27 percent of merchants reported losing money on online daily deal promotions and 18 percent broke even, with restaurants faring the worst of the ten categories of businesses. The study discovered that only 44 percent of restaurants earned a profit from the daily deal promotion. Looking at the $50 gift certificate example, even if your customer spent $60, you would receive $22.50 on the sale. If your prime cost is 65 percent, you lose $16.50 on that sale, and with tight margins in the restaurant industry it is difficult to recoup that loss. According to an August article in Forbes.com, “Groupon and the whole daily deal business are under pressure because so many participants offer money-losing propositions to merchants.”
- You don’t generate repeat customers. The Rice study, published in June 2011 and focused on five popular websites, indicated that only 20 percent of daily deal customers returned for a full-purchase price, which the study said was symptomatic of the daily deal business model. These deal-seeking customers often have no interest in repeat purchases at full price.
- Your business is inundated by daily deal customers, who don’t receive a positive experience, and employees may suffer. According to one restaurant/bar owner contacted as part of the Rice study, “People also don’t tip on the vouchers so it’s bad for employee morale...Since almost half the people came in the last week, it was very difficult making sure everyone had a good experience and we weren’t overwhelmed.”
- Restaurateurs don’t favor running a repeat daily deal. An owner who reported a positive experience with a daily deal in RestaurantOwner.com, responded, “One time only. I agree, repeating would be detrimental.” The Rice study found that only 35 percent of restaurant/bar owners would run another daily deal promotion in the future, which was the lowest percentage of respondents in any business category surveyed.
- Better deals are available. Daily deals are not the only game in town. For example, you can offer a discount or promotion on a Facebook fan page.
If you decide to run a daily deal promotion, the Rice study recommends, “Offer a daily deal of relatively high face value ($50 or more), with a shallow discount (at most 25 percent off face value), a short redemption period (three months or less) and place a maximum limit of 1,000 on the number of daily deal vouchers consumers can buy.”
The study also determined that daily deal sites likely will have to settle for lower shares of revenues from businesses compared to current levels.
Even though a daily deal may expose your business to new customers, you need to determine if it will benefit your bottom line or merely cost you valuable marketing dollars. In sum, restaurateurs should carefully consider the advantages and disadvantages of offering a daily deal promotion before embarking on this marketing plan.
Mary Greiner, CPA, is a supervisor and member of Schenck’s Retail industry team. Mary has more than 14 years of experience providing accounting, tax and consulting services to restaurants, bars, retail stores, and small businesses. She is also a Certified QuickBooks ProAdvisor.