Groupon and similar deals (there are many imitators) are usually a bad idea for restaurants. This is one of the services that we believe is borderline predatory. They make it easy for restaurant owners to sign up when the details are well hidden and never explained.
The “Deal”
So, what are these deals? Basically, Groupon sells "gift certificates" worth a given amount to its customer base for half the given amount. A $100 gift certificate is sold for $50. We hope you are starting to smell something fishy. The restaurant must give out the $100 worth of food and Groupon is only collecting 50% of it. Just wait it gets worse. Groupon then keeps another 25% for itself. Now things should look very bad.
The restaurant will only receive 25% of the value of food that it must give out. It will only receive $25 for each $100 certificate the restaurant must honor. The profit loss is so high that it is likely that the campaign will not even come close to bringing in enough sales to cover the cost of the Groupon. The $100 of food will cost a restaurant somewhere around $90 (assuming 10% profit margin), of which Groupon will only give the restaurant $25.
Cost
The restaurant is losing $65 (The cost of food $90, minus your revenue $25) for each certificate that is sold. These campaigns require different minimum numbers of certificates, but it is usually in the hundreds, which could bring the total cost of a campaign close to $6500!!!! This they will not tell you.
The details may be slightly different, and Groupon will play around with the share amount. It is imperative that a restaurant work the numbers on any given deal. This is a huge cost, and because a restaurant only makes about 10% on the food it sells, it will have to sell $65,000 in additional food to pay for the ad. These ads will not deliver that kind of return.
New customers
A restaurant may find a new customer from the ad, but it is much more likely that the deal taker is already a customer and just waiting for a deal. We have seen restaurants that do these Groupon deals every couple months, with disastrous results. The customers will just wait until they can get a Groupon and will not come in until then. This customer will never pay full price for their food.
For $6500 a restaurant can do a very large radio or tv buy. A campaign that will bring in the $65,000 in sales by increasing its profile in the community and bringing in long term customers, full retail paying customers.
Low Margin Business
Groupon deals may have their place, but low margin businesses are not it. If a business’s margin is very high, like spas, lawyers or other service type businesses, then the numbers may work out. Just not in a restaurant. We hate to see naïve restaurateurs being misled and taken advantage of by pushy sales people and we hope it doesn't cost them their business.
There are other issues to be aware of with these deals. One is that Groupon will not pay the restaurant right away, in fact it can take up to 90 days to get your 25%. The restaurant will have to cover the cost of the full $100 of food, labor and overhead for up to 90 days, which can be deadly to its cash flow. The restaurant is outputting a lot without anything coming in.
Stampede
Also, all the people get their certificates at once which can lead to a stampede of customers. A restaurant can be caught unprepared and run out of items and wind up providing subpar service because you just can't handle the volume you may receive. This can give a restaurants new customer a bad experience, one which it may not be able to get them back. Then their bad experience can influence others as they are likely to post the bad experience on online review sites.
Will Groupon go away?
Thankfully many restaurants are catching on (or the ones that aren't are going out of business) and Groupon seems to be fading for restaurants at least. Some of the imitators have tried to improve some of the bad aspects of Groupon but they are likely not worth it, even if you are trading for radio / tv spots.
Remember a restaurant only makes 10% or so on its food. Any ad that costs more than 10% of the sales it brings in is not worth it, unless the intangibles are very good, like exposure or access to new customers. We would say that the bottom line with these type of ads is don't do it. In almost all cases they are not worth (no matter what the sales person says) it and the marketing dollars could be spent in much better ways.
Do you have a sales person hounding you about one of these types of deals? Consider restaurant coaching membership, we would be happy to work through the numbers of a specific deal with you.
