Tag Archives: coupons

Are daily deal sites like Groupon good for restaurants?

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With most of these sites, you offer a gift certificate that is sold on the site for 50% off. That’s a pretty big hit already, and by itself would turn one of these deals into a money loser. To make it really expensive though, these deal sites demand 50% of the money that is collected, and expect you to pay for the processing cost of the transactions for your gift certificates.

In numbers, here is how the “deal” looks.

  • You offer a $50 gift certificate for $25.
  • Groupon keeps $12.50, you keep $12.50.
  • You pay a 3.5% processing charge on the full $50 sale, which is $1.75.
  • You net $10.75 for $50 worth of your product.
  • The customer comes in and spends $10 over the gift certificate with a net tab of $60 (if you’re lucky).
  • You run a food cost of 33% on your product meaning that the food you sold cost you $20 to sell.
  • You normally run a 30% labor cost. You think it will go down when these deals get redeemed since you are busier, but you forget to factor in your loss of revenue so your labor cost actually goes up to 40%, not down, costing you $24 in labor.

Without calculating in other costs like laundry, chemicals, wear and tear on furniture, fixtures and equipment, and every other cost of you doing business outside of the 10% of your budget that is fixed, this daily deal that netted you $20.75 in sales (thanks to the extra $10 they spent) cost you $44 to sell. That’s a net loss of $23.25 for every deal that you sell. Since most deals sell 1000+ gift certificates, you could be looking at your Groupon, Restaurant.com or LivingSocial “advertising” campaign costing you $23,000 or more.

In contrast, that amount of money could buy you a premium billboard location ad for a year, two years worth of cable TV ads or 6 months of prime network television ads, two to four years of radio advertising, two years of service from a professional public relations specialist or full page color ads in two premium magazine circulations for an entire year.

One of the “selling points” for the daily deal is that the cost is spread out so you don’t have to pay for it all at once. In truth though, all advertisers will do this for you. The daily deal sites are doing you any favors or offering you anything you can’t get from another advertising medium. What they ARE very effective at is getting customers through your door, who will likely be loyal to the daily deal site instead of your restaurant, who will tip your servers low because of their low check averages, and who you will likely never see again.

There are a few businesses that daily deal sites could be good for, but restaurants are not one of them. For some great analysis on other problems created by these sites, for both business owners and buyers of these deals, check out the following article from USA Today, based on a study by Applied Predictive Technologies…

Daily coupon deals may not work for buyers, sellers | USAToday.com

Brandon O’Dell and O’Dell Restaurant Consulting offer operations and marketing consulting for independent restaurants, private clubs and food services. Learn more at www.bodellconsulting.com.

Can I use coupons to build my business? It works for restaurants like Papa John’s.

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In most cases, coupons are a path to disaster. Coupons undervalue your product, and getting customers to come in with coupons doesn’t give them a good idea of what type of value you really offer. You end up with customers that think your restaurant is a good value, “with a coupon”. Then, they wait til the next coupon to come out before they come back to your restaurant.

As far as chains that use coupons, they know something the average independent operator doesn’t. They have a sales history showing them how much of their sales are given away in the form of coupons. They track their discounts, and they price their coupon marketing strategy into their menu. If a pizza costs them $3.00 to make, and they need to make $7 gross profit for every pizza they sell, they know they have to make the regular price of that pizza $12 or $13 so they can send you a coupon and make you think you’re getting a good deal paying only $10.

How many people really pay $18.00 for a large pizza at Papa John’s? None. People wait until they have coupons. Sure Papa John’s makes money, but they know they’re not earning repeat, full price, customers by sending out coupons. They know how much money couponing is costing them, and they adjust their prices accordingly. They then use coupons as a “trick” to build value into their product.

Can coupons be used responsibly and still allow for a profit? Sure, if that is part of your marketing and pricing strategy from the get-go. Outside of that, coupons should only be used to promote items that earn you MORE gross profit than you need to make money AFTER the discount is applied. Even then, I suggest never offering a flat percentage discount, and only using coupons to promote package values, or to give freebies that are “extras” that won’t detract from the gross profit you’ll make by selling the rest of the meal at full price.