Online coupons: Good deal for businesses?
Herewith, a jaundiced view of the Groupon phenomenon. Aren't there better ways for restaurants to build their customer base, and to show their appreciation for those who eat at their place?
They're known, collectively, as social media coupons. Groupon, Goldstar, Living Social, Bogopod, Tippr, Gizmodo, Wrazz, DealPop, and many, many others. They offer a "deal," sometimes half off some product or service (often meals in a restaurant but it could be hats or haircuts, spa treatments or medical consultations), sometimes free, if you get three or four of your friends to sign up with you.
Retailers — small, independent, not particularly skilled at numbers — jump at the chance to offer their products to a wider audience, but it's possible many of them are making a big mistake.
As consumers, we like the notion of a deal, of paying less than "retail," of something for nothing. Our collective Puritan heritage of thrift has instilled in contemporary American culture a distaste for profligacy and virtually demands that we seek the lowest price. "I can get it for you wholesale" is part of our psyche as well. Still, in jumping at the chance of getting something for next-to-nothing, we're only helping the merchants commit suicide.
We have to assume that retail businesses price their goods and services accurately. That is, the cost of goods (supplies, ingredients, whatever) plus overhead (labor, occupancy, administration), plus profit. Where's that 40 percent discount going to come from? Payroll? Rent? Even if you lose a couple of bucks on every transaction, you're not going to make it up on volume. If a neighbhood restaurant, day spa, or boutique can show me that their 40 percent Groupon discount comes from a budgeted promotional campaign that's part of their budgeted admin expenses, well, I'll eat my hat. Otherwise, I then have to assume that the original price was bogus.
The business model we've become used to is a relic of supermarket wars: the weekly specials, announced in vivid color every Tuesday. Buy one chicken, get a second chicken free. Hamburger, $1.29 a pound. A free bag of carrots. Yogurt, 4 for $1. Tuna, 50 cents a can. But we forget two important points. First, the average supermarket carries 50,000 items on its shelves, and modest cost of discounting the price of a dozen or so best-sellers (carrots, chicken) is built into the budget. Second, the rest of the promotions in the weekly mailer (the yogurt, the tuna) are actually offered by the manufacturers or their distributors, and don't cost the store a dime. The point is to entice shoppers into QFC rather than Safeway, the fight is between half-dozen supermarkets, not 4,000 restaurants. (Similarly, the Cascade yogurt guy's competition, once you're in the door at QFC, is Tillamook.)
Supermarkets have a captive market, and they know it. Their promotions aren't designed to help shoppers but to take business away from the competition. If the supermarket model were transformed to the world of restaurants, there'd be six restaurant chains in Seattle, plus maybe a few quirky, neighborhood burger bars, and they'd be the only places in town where you could buy anything to eat. Each restaurant would have 1,000 or more seats; there might be a weekly steak special for $5, but sides, drinks, and dessert would be extra. Your tab, every time you sat down, would wind up the same, about $75, regardless of which restaurant you patronized or what you ate.
Oh, but we just want people to come and try our pizza — burgers — spa treatment, the retailers say as they offer coupons. To which I reply, recast this. They're really saying, "We're so sure that our pizza, etc., is so fabulous that after you pay $10 the first time, you'll come back and pay $20." One more time: "We're going to train you to think that our $20 pizza is only worth $10." I call this the Happy Hour fallacy.
One appeal (for the merchant) is the promise of quick payment. The offer is posted for one day, to be redeemed within a year, but Groupon usually remits half the net proceeds to the merchant within a week, the balance within 30 to 60 days. For example, if Groupon sells 1,000 coupons at $25, the merchant's 50 percent share is $12,500, with half that amount paid almost at once. For many cash-starved restaurants, this promise of immediate cashflow often seals the deal.
Mark Netsch, who writes PerformanceScope, an industry newsletter, recalls going to a new wine bar in his neighborhood, lured by a Groupon discount. The staff was woefully unprepared. He wrote some advice to merchants, "Groupon and similar services are indeed a good way to bring in new customers. But before you Groupon, ask yourself if you and your team are ready."
Unless the restaurant is guest-ready to deliver on all its marketing promises and its brand's points of differentiation, Netsch warns, "You will undermine your mission. Redeeming 3,000 Groupons at 50 percent off is not the objective, converting those trials to loyal customers is."
Groupon, the hottest and most highly valued of the services, boasts some 20 million bargain-hunting subscribers, and they pounce quickly. In Chicago, there's a two-year waiting list for merchants to get into a Groupon promotion. In Portland recently, a neighborhood coffee shop called Posie's offered a $6 Groupon for a $13 item. A thousand people showed up, swamping the small shop for three months. In a blog post, the owner said that the volume of sales, coupled with the steep discount, actualy threatened her business, forcing her to spend $8,000 of personal savings to pay her employees and the rent. "The single worst decision I have ever made as a business owner thus far," she wrote.
Another misreading of discounts is to confuse lost capacity with lost opportunity. A cruise ship sails whether or not its 2,000 cabins are filled. One assumes that an analyst knows exactly how many full-price cabins are needed to cover operating costs, after which every additional passenger is "gravy," so you can, indeed, get space on some cruises for insanely little money. Fancy hotels are in a similar bind. Come 6 p.m., they've probably run out of customers for the night, though they may not want to cheapen their brand by dropping their price too far. Airlines have similarly inflexible capacity, but they've mastered the art of flexible pricing; it's called "yield management," and it works. When's the last time you were on a flight with more than a couple of empty seats?
But a restaurant, oh my. Fifty seats, let's say, capacity of 100 dinners a night, 700 a week. Average check in Seattle these days, industry stats tell us, is $30. In theory, then, a modest restaurant could gross $3,000 a night, a million clams a year. Could, but, for whatever variety of reasons, doesn't come anywhere close. But Otto the Owner, he hears the siren song of coupons and makes a pact with the devil. "I'll gladly take an extra 200 clients a week," he thinks, and his fate is sealed. The 200 coupons spend $15 instead of $30 and tip like misers. It costs Otto ten bucks a plate to feed these mooches, who fill up tables and keep his kitchen busy, his servers frantic, and annoy the hell out of his regulars.
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Comments:
Posted Fri, Jan 21, 10:41 a.m. Inappropriate
I sit here, as a business owner, scratching my head after reading this. Think like Nordstrom? OK, advertise 'loss leader' deals to draw customers in with the hope that they will buy more. Think like top Seattle restaurants? OK, participate in a one month 30 for $30 prix fixe meal. Every restaurant has a built in governor regarding volume: the number of table turns it can accommodate. In addition, they can control how many 'deals' are available via an online coupon. Lastly, if a business can't figure out a marketing plan that makes business sense, well it's just a matter of time before they go out of business. At least in this case, it won't be for lack of exposure to a larger market.
Posted Fri, Jan 21, 10:52 a.m. Inappropriate
Bobo, you've almost got it. Exposure to a larger market isn't the problem, though. Most small businesses don't have "marketing plans," they're more like dogs chasing squirrels. My advice would be: write a marketing plan and stick with it. Don't try to be something you're not (whether it's Canlis, Tavolata or a hotdog stand). Don't even think about "loss leaders." That's a concept for department stores and supermarkets, not neighborhood restaurants. I don't blame bargain-hunting consumers or gullible restaurants; the villains (and, yes, I believe they're villains) are the promoters who spin these business-destroying coupon offers.
Posted Fri, Jan 21, 2:28 p.m. Inappropriate
Isn't this along the same whine spilled here? http://crosscut.com/2010/10/18/food/20260/Restaurant-promotions:-assisted-suicide/
Those comments still hold:
I read this drivel awhile back and moved on as the bile rose in my throat.
Today I looked to see what other wrote and I could not agree more with:
realfoodie's- "I find this article disturbing on so many levels; it lacks vision and critical thinking... I’m not sure why you feel the need to degrade an event that requires so much hard work and that the masses seem enjoy."
sgo73 in its brilliant entirety!("I owe Mr. Holden an apology.
I am one of those people who looks forward to Restaurant Week every year. I see it as an opportunity to eat out more often, to try new restaurants and to visit different parts of the city.
But I had no idea that my bad-tipping, cheap-skate ilk and the chaos we cause was such a terrible burden on Mr, Holden and the other real restaurant-goers of our fine city. I'm sorry that our presence offends him so greatly that he is not only put off his food, but is forced to flee in terror!
Be strong Ron! It'll only be a few more days! In the meantime, I hope you've stocked up on enough canned goods and freeze-dried meals to see you through this mini-apocalypse!
— sgo73")
Crosscut, you can do better!
Posted Fri, Jan 21, 3:18 p.m. Inappropriate
I don't understand dman's antipathy. Of course, there's a party line in Seattle that deep discounts are an acceptable form of promotion.
Perhaps Brian Couch's parable (http://www.briancrouch.com/2011/01/a-groupon-tale/, and republished by Biznik) will make it more apparent: consumers don't win when their deep-discount, Groupon patronage helps put the merchant out of business. The only winner in the Groupon game is Groupon itself, an argument that is finally gaining traction online. Bravo to Crosscut, I say, for giving voice to this perspective.
Posted Fri, Jan 21, 3:59 p.m. Inappropriate
Let's take this article in context. Primarily it is critique of what these type "deal of the day" companies offer a business in the long run. I've used Groupon and Living Social and grabbed myself some fab deals but have learned not to redeem them within a day or so of purchasing said deal simply due to volume sold. Something, I imagine, a high percentage of folk do NOT do when they buy such a deal, say for example, a restaurant coupon and often use it immediately. My first purchase via Groupon was frankly a dire experience at a local restaurant who were wholly unprepared for the onslaught of ‘cheap diners’ that evening. Service was difficult and frustrations were felt on both sides of the table -patron and servers alike. As for the long term benefit to a restaurant utilizing companies like Groupon to get people into their establishments? Well, I think the jury is out on that one. In fact most folk simply get bitten by the discount coupon bug and are high unlikely to return to the same restaurant twice, preferring to simply grab themselves a deal at another place and so on. Bravo Ronald highlighting this issue!
Posted Fri, Jan 21, 7:45 p.m. Inappropriate
These sites are rather new, so I could see the process working itself out as it matures. At least for restaurants.
Posted Fri, Jan 21, 9:38 p.m. Inappropriate
And at the risk of flogging this horse once too often, the problem isn't so much disappointed diners but overwhelmed small businesses. There's a reason they're small: they don't know how to handle volume, they don't really want to handle volume, but--just as the customers are drawn by the siren song of a cheap dinner--they're dazzled by the glitter of easy riches. Groupon cares not if its advertisers go out of business within six months of a promotion; the list of suckers is endless.
Posted Sun, Jan 23, 5:51 p.m. Inappropriate
Perhaps Groupon should buy the ferry system, and advertise 4-for-1 walk-on coupons at a 1-fare rate, good for October - March months, just not during rush hour peak travel.
Posted Tue, Jan 25, 9:14 a.m. Inappropriate
Besides being online, what exactly is new about Groupon and its ilk that is suddenly such a threat to the businesses that participate? The Entertainment Book coupons have been around forever. I get mailers with buy-one-dinner-get-one-free coupons all the time. Restaurant.com has been selling their $10-for-$25 coupons for years now.
Yet despite Ronald's paternalistic protestations -- clearly he knows better than these restaurant owners how to run their businesses -- life has gone on. It's another form of advertising -- you could spend that money putting your ads online or in the local newspapers or whatever.
I'm sure there are restaurants that will suffer because they miscalulated their participation in these promotions. But my hunch is that those are restaurants that were likely to struggle anyway.
Posted Thu, Jan 27, 10:53 a.m. Inappropriate
BigYaz, I don't disagree with your evaluation that Groupon is advertising, but the restaurants that offer Groupon don't, as a rule, understand the economics. They're often unsophisticated mom & pops who don't realize the HUGE cost of a Groupon promotion; they only see the short-term cashflow and bump in never-to-return customers. Entertainment books are different; they bring in relatively few new customers, spread out over a year's time. Let me assure you that restaurants with more advanced financial controls shy away from Groupon like the plague it is.
Posted Thu, Jan 27, 11:55 a.m. Inappropriate
As a local restauranteur I would like to explain the difference between Restaurant Weeks, Coupon Books and Groupon vulture sites.
Restaurant weeks are largely controlled by the restaurants participating and allow many business owners to pool advertising dollars in an attempt to appear in high-dollar advertising mediums. These promotions involve a small to medium size discount, which allows for the merchant to remain profitable and develop repeat business. Our restauarants participate in these all the time and they are wonderful. I urge you to continue to attend them!
Coupon books devolve slightly from this, and start getting into deeper discounts. I have never participated in one of these books but am told that the transaction generally remains profitable (or at least break-even) despite the deep discount of one diners entree. Items sold in addition to the free entree (wine, appetizers, desserts etc.) tend to cover the cost of the one deeply discounted item.
Groupon group gropes are the ultimate devastation for small business owners because it offers a deep discount on the ENTIRE transaction. The customer buys the offer for 50%, and then GroupGrope takes another 25%. Leaving the poor business owner with 25% of his original price?! This is not even enough to cover food and labor costs! And off runs GroupGrope with 25% of the entire transaction free and clear. And they have no cost!! All they do is send out an e-mail. Sending an e-mail is free! Can anyone spell BAMBOOZLED?
But the very worst part of GroupGrope is their predatory nature. There is no person more vulnerable than a business owner who is not doing well. They will cling to any promise that might allow them to hold on a little while longer. GroupGrope deluges business owners with daily e-mails promising them huge advertising exposure and hoards of repeat customers. It is all lies. Studies have clearly shown that the customers never come back. They are too busy buying their next GroupGrope.
As a nation, we just sat back and watched while corporate America sucked the equity out of American homes.
Don't just sit back and watch the GroupGropes suck the profit out of America's small businesses.
Please. I implore you.
Posted Thu, Jan 27, 4:35 p.m. Inappropriate
Groupon is predatory on small businesses and attracts customers who are not necessarily at your business because of your product, but because they want the "deal" and like the thrill of the hunt by pouncing on the Groupon "deal".
The non savvy business owner who does not do the numbers will be skinned alive by Groupon. In many cases Groupon takes 50% for posting the "deal" of the day.
Basically the small business has to work harder to make less and the Groupon customer most likely will not come back and pay double or full price.
Posted Thu, Jan 27, 4:53 p.m. Inappropriate
Bravo Ron!! No dull knife you!
This is right on, and I agree with you completely.
Some small businesses in the area have already gone under thanks to Groupon and the mooches who use it.
You are right about spending the money to treat your customers who are paying full price like kings and queens and building relationships for return business.
Rome was not made in a day.
Posted Tue, Feb 1, 3:17 p.m. Inappropriate
Okay, so I'm chiming in a bit late, but I have to take exception to the characterization here of Groupon users as mooches. There are, in fact, Groupon users who are fiscally responsible, budget-minded, home-owning, child-raising, upstanding citizens who are happy to take advantage of a deal when it is presented, and also keep the context of the business in mind.
When I bought my Groupons and Living Social deals for the Gap, Nordstrom Rack and Amazon, you bet I used them to my full advantage because those businesses are huge and one assumes they've covered the discounts in their marketing plan. When I use my restaurant discounts - such as the Groupon I just purchased for Smash Wine Bar in Wallingford - I have every intention of ordering full meals with salads or appetizers like I would have anyway and applying the $25 discount toward an extra fancy wine selection or a decadent dessert to augment the meal and sweeten the experience. Just because I bought a $50 deal for $25 does not mean my bill will only come to $50! I have also eaten here before - for full price - and will do so again. In fact, I've never purchased a Groupon, or any other online discount, for a restaurant I have never before patronized.
The assumption that all Groupon users are callous cads, rather than returning full-price-paying customers is arrogant and ignorant.
Posted Sat, May 7, 1:19 p.m. Inappropriate
While some businesses have used online volume couponing successfully, it is far and away the most dangerous marketing tactic that I have seen in my 15+ years as an Internet marketer. We have just finished a 5-part series on our blog exploring couponing, Here is the link if you are interested - http://www.406strategies.com/?p=3211
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