18 Months after the Groupon Invasion

Here we are again. A writer shoots across the Internet an article from saying that Groupon is the next messiah. Well, nothing has changed over the last few months. Felix Salmon, who writes a media blog for Reuters, urges restaurant owners to jump on the Groupon boat, a decision that restaurant owners should think twice about. Let’s be frank, Salmon refers to a study done by Rice University, and seems to have not read it, or actually considered its findings. As Salmon writes that Groupon is a guaranteed windfall for restaurants, the study proves the exact opposite, stressing how Groupon worked better for other businesses.

It comes down to understanding what works in the restaurant business and the psychology behind diners and Groupon users. But let’s review the study and catch everyone up to speed. The most relevant conclusions were that:

  1. Success in a Groupon promotion correlated with employee satisfaction. This finding puts restaurants at the greatest disadvantage as they cannot control tipping (and customers with broad discounts tend to stingier) and volume tends to be stressful on restaurants who use Groupon. Part of that is inside the restaurant’s control, part outside. An owner can prepare employees and address their concerns during the promotion, but Groupon customers come with a different mentality, low tip or not.
  2. Groupon customers tend to fixate on price and therefore are reluctant to spend more than what they need to receive the rebate Salmon says otherwise, but since we do not have his source, I am going to attribute it to Groupon (which loses credibility in my book because they have not adopted the Rice University’s stat on merchant recommendation). The study states: “There is widespread recognition among many business owners that social promotion users are not the relational customers that they had hoped for or the ones that are necessary for their business’ long-term success. Instead, there is disillusionment with the extreme price sensitive nature and transactional orientation of these consumers.” In sales terms, Groupon is a cold call, not a collection of solid leads. A restaurant only survives on a steady revenue stream and that requires a steady customer pool (something Groupon cannot create overnight). Unlike Groupon fanatics, a restaurant cannot live discount to discount.

    There are few other things that are small now but will definitely hemorrhage once Groupon becomes bigger and more frequently used.

  3. Another downside is that Groupon implies whether subconsciously or consciously that the food on the restaurant’s menu isn’t worth the normal price. Discounts through Groupon are so deep that one cannot avoid making the leap that the restaurant is desperate. The impulse to return and pay the full price becomes slightly less desirable. This is less so with discounts that are limited. One thinks if there is a special offer for Monday night that Monday is a slow night. Whatever is not discounted comes off as worth every cent. That creates desire or at least, stops the person that take advantage of the discount from feeling cheap (instead they feel smart). Indeed with Groupon, there is some self-loathing involved for those who check for coupons religiously especially when they are the ones who have to convince their friends to buy in (and feel discouraged if the restaurant is not good). Suddenly, a person suggesting a restaurant to another is not based on some insight into the quality but the price. Since millions know of Groupon now, no one receives points for finding a deal through it anymore. Call me crazy, but Groupon is not a win-win-win. It’s because too much takes place between the interaction of money and people that undercuts simple enjoyment.
  4. I will add something that is often overlooked, but we see it with OpenTable: customer’s allegiances shift from the restaurant to the service they access it through. Groupon users connect with Groupon under the correct belief that Groupon’s business model is responsible for their savings and their knowledge about them. Add to that, customers confront Groupon daily while restaurants come and go, ending up in the Trash folder of their email accounts. I expect this detachment from the restaurant to be even more pronounced through Groupon than OpenTable because in Groupon, you are impelled to rally your friends around a discount (which is more powerfucl because in a social environment we commit ourselves more). The discount/Groupon becomes the thing; the restaurant experience takes second fiddle. A restaurant is essentially accepting a master; since Groupon takes 50%, it is no wonder restaurants feel like serfs when it comes to the divvying of proceeds.

Salmon’s article is also flawed because we don’t know who he is writing for. Is he writing for restaurant owners or Groupon users? Sometimes, it’s not clear especially as he mixes up the actual behavior of Groupon users with how he thinks they should be using the service (his logic isn’t necessarily theirs). No offense to Salmon, but people aren’t looking for instructions on what to get out of Groupon; desire isn’t something that’s taught. It’s quite obvious that a restaurant accepts many expectations from customers when they use Groupon that are difficult to meet whether it’s rational or not.

Groupon’s model is smart. And attractive to customers. But customer behavior and human psychology cannot be summed up in a simple formula (as Salmon may know from his intelligent writings on the financial crisis). Many variables are involved and the four factors above are not where it ends. The illusion of Groupon’s effectiveness, at most, really threatens restaurants and at least, wastes time. The idea that there is not substantial risk disregards the fact that a restaurant’s margin normally falls around % 5 or less. Those over % 5 are doing well enough that they don’t need Groupon; those under, all I can say is tread carefully.

The Groupon boat may not be the Titanic, but nor do I think it is sea-worthy for most restaurants (at most a ferry).. In other words, it sure isn’t a long-term business strategy. And I believe, except in circumstances where a restaurant is becoming truly ignored and desperately needs a customer pool (although that means it probably isn’t on a sound financial footing make this an all the more risky maneuver), Groupon is a distraction from developing and implementing strategies that will fuel your business for years to come. Hopefully, your restaurant will thrive beyond when Groupon has become passe or forgotten amongst whatever new quick fix there is.