Groupon: Restaurant Friend or Foe?

Groupon may be wonderful for customers. It lets them try new things at unheard of discounts. But do restaurants experience equivalent benefits?

In reality, there is no one outcome for restaurants that do Groupon. A restaurant’s success or failure from a Groupon campaign depends on a host of factors. Those factors, along with understanding both the goods and bads of Groupon, are critical to making the right choice on whether Groupon fits that particular restaurant.

Groupon is a relatively new force in the restaurant industry. Only a few years ago, its popularity soared and was once deemed the the fastest growing company in history. The idea of offering real discounts to people in local markets, providing signature daily deals and exposing people to new products and services at deeply discounted rates has attracted a groundswell of consumer support and influenced other companies to start similar businesses.

The company attracts a well-educated, affluent crowd that responds enthusiastically to local restaurant deals. Restaurants can reach a targeted crowd without investing any money in advance and use their inventory and services to pay for their marketing while hopefully upselling customers and landing long-term regular customers.

Background

For those of you who are unfamiliar, Groupon is an online service that every day offers a local deal which is available to customers only if a certain number of customers purchase the deal. Normally, restaurants offer a meal at fire-sale price. Accordingly, it seems wise to be skeptical if Groupon really pays off for restaurants since it combines an over-the-top promotion with less appealing customers (bargain shoppers).

Andrew Mason founded a website in 2007 that was dedicated to putting people together to accomplish various goals. Unfortunately, the business didn’t do so well, so as an incentive, the site tried offering a group coupon or daily deal to bolster business. Groupon experienced immediate success and attracted major business advertisers in Chicago. The word spread, the company was featured on the Today Show and Groupon expanded to other cities, eventually entering most major international markets.

Although the company might not enjoy the name recognition of Facebook, it has developed along similar lines of accelerated growth. Mason’s company changed its focus from doing good to doing business, and the result was one of the fastest trajectories in business history. Within a few months, the startup company that was facing bankruptcy grew to a value between $6.4 billion to $7.8 billion and refused a buyout offer from Google of $6 billion.

How It Works

The premise is simple — companies get free coupon advertising without paying any upfront costs. Merchants sign up and agree to certain promotional limits, and Groupon does the rest.

  • Groupon writes the advertising copy and publicizes the offers to its substantial client base.
  • Merchants offer significant discounts of on meals, products or services. The minimum was once 50% but has since there is a greater range of discounting possibilities.
  • Groupon sells the coupons, collects the money and issues the coupons.
  • Each coupon has an expiration date.
  • Customers can use the coupon to pay for their meal, just like cash.
  • The amount that Groupon collects is split 50-50, but the merchant pays for the credit card processing fees.
  • If your minimum-sales figures aren’t reached, then the deal doesn’t take effect.

Groupon keeps current with restaurant and marketing trends and responds quickly, such as implementing updated versions of its apps to reach people who use their smartphones for restaurant searches. Local campaigns reach the people whom restaurants most want to attract.

Although primarily designed to attract new customers, Groupon deals often appeal to existing customers, which is a big problem for restaurants. Another concern is that merchants can be essentially selling food at about 23 percent of regular prices.

Effectiveness

Groupon achieves spectacular results in selling coupons, but those deals often go to people who are just trying food that they couldn’t or wouldn’t normally eat. Regular customers also buy coupons to save money. Restaurants must always be careful not to devalue their restaurants and menu prices by offering too many discounts. Customers might get used to paying the discounted prices and refuse to pay full price when discounts aren’t available.

Targeting the Right Customers

Upscale, fast casual and full service restaurants can find a ready audience at Groupon. Even fast food companies occasionally advertise specials, but the nature of daily deals lends itself more to higher priced meals where customers can save about 50 percent.

The biggest targeting problems of using Groupon are that your existing customers might buy the coupons to save on their regular visits and customers might resent the fact that other diners are only paying half price. Another common issue is that Groupon customers might be dabblers who just want to try a more expensive restaurant without ever planning to return and pay full price.

Technology and Options

Groupon offers all the latest technological bells and whistles for restaurants, so that’s seldom a concern. In fact, the company is beginning to offer multitasking solutions that include credit card processing, tablet ordering and a POS system that integrates Groupon orders seamlessly with other restaurant operations.

Statistics

Statistics provide both negative and positive feedback about Groupon’s deals, so restaurants need to consider their strategies carefully to craft an effective offer. Statistical highlights about Groupon include:

  • About 44 percent of Groupon users are already regular restaurant customers.
  • 34 percent of buyers were infrequent restaurant guests.
  • Employee behavior was listed as the primary key to successful Groupon promotions.
  • Most guests didn’t feel they were poorly treated because they used coupons.
  • Customers usually base their tips on the full meal price instead of the discounted price.
  • Restaurants that use Groupon typically monitor their online reputations, social chatter and competitors’ promotions.
  • About 70 percent of Groupon merchants run more than one daily deal.

One study by Utpal M. Dholakia of Rice University found that the main factor that determined success and profitability was the satisfaction of employees. Three things work against restaurants. First, Groupon customers tend to be looking for discounts, and they often frustrate employees by tipping on the discounted price rather than the full price. Next, Groupon may also displace existing customers, disrupting a normal stream of business and the customers that make up that stream. Lastly, the volume of customers from a Groupon promotion can strain the resources of almost any restaurant and its employees. Researcher Dholakia argued “right now, these deals are tilted too far in the customer’s favor.”

Comparison to Competitors & Marketplace

Groupon may have become a billion-dollar force virtually overnight, but the company faces stiff competition in an industry where creative entrepreneurs have few barriers to challenging the company’s business model. In fact, Groupon currently has about 400 rivals offering similar daily deal specials

Of course Groupon’s resources ensure that the company can continue to offer its customers the latest apps, technology and cross-promotional services. The company maintains its market share with millions of motivated visitors monthly. Of course, you might do better by putting your money into carefully crafted promotions that you can control more directly.

Advantages of Using Other Companies

Sometimes, aggressive or small, dedicated coupon companies might have more appeal because they match your concept or customer base. For example, some might specialize in green technologies, environmentally sustainable sourcing and other themes that better engage your audience.

These options might include coupon companies like Living Social, social media promotions and niche companies that can offer combined hotel, travel, entertainment and vacation packages. Think of the advantages of using a Groupon-type company that focuses exclusively on bakeries, fast food for lunch, coffee shops or neighborhood gastropubs. Alternative options to Groupon include:

  • Direct Mail Coupons
    A classic strategy. targeting customers in appealing neighborhoods often generates high conversion rates. Restaurants can control every aspect of their promotions more directly.
  • Living Social
    Living Social, which frequently advertises to a female audience, might be an ideal alternative to Groupon. Targeting women’s concerns, restaurants can craft family-friendly promotions and healthier menus for dieting while reaching nearly as large an audience as Groupon because the company is owned by Amazon. Taking a broad approach, the site is ideal for promoting gourmet dining options, one-of-a-kind celebrations, foods for family outings and unique restaurant experiences.
  • Signpost
    This New York-based company offers more flexible discounts through emails and other deal sites. Restaurants can set their own terms and avoid the risk of spending too much money on any given promotion.
  • Restaurant.com
    Restaurant.com combines couponing with digital marketing. Unlike the recent rash of Groupon imitators, Restaurant.com has been offering online deals since 1999. Customers must spend at least 150 percent of the value of any incentive offers, so restaurants can make money on every table.

The Future of Daily Deals

Groupon appears well-situated for growth, and the company’s long-term strategy involves offering POS services and apps that integrate daily deals and give restaurants the ability to offer instant deals, based on real-time business. The company is developing a POS system with Breadcrumb that includes a credit-card swiper, cash drawer and wireless access. Other Groupon initiatives include:

  • The company bought Savored to give it the ability to reserve tables at more than 25,000 restaurants in 28 states. More recently Groupon integrated Savored into its Local offerings.
  • The Gnome, a tablet-based ordering system, allows restaurant staff to track cash, redeem coupons, handle credit and debit transactions and integrate with accounting and marketing software.
  • Breadcrumb’s POS system will allow restaurants to integrate their Groupon offers
  • Groupon’s customers can already run their promotions on a continuous basis instead of only for a limited time.

Daily deals aren’t the only type of promotion, and a deal might not be right for your restaurant. Your customers might respond better to a social media promotion, value incentive or promotion where part of the purchase price goes to fund a community or charitable cause. New marketing and promotional ideas are always developing, so you never know what might be the best option for your restaurant in the future. Choose what works now to accomplish your business goals, and refine your strategy continuously.

Cost-Benefit Analysis

Groupon has such a commanding lead over its competitors that it makes sense to use the service sparingly. Doing the math, however, is essential for marketing success. You need to craft your offer, possibly restricting the coupon to the most expensive menu items or poorly selling items. Don’t include alcohol, daily specials or other high-profile foods to give your servers something that they can upsell. Another important component might be to limit use of a Groupon coupon to one per table.

The High Cost of Daily Deals

Daily deal promotions target customers who are looking for extraordinary bargains, and you must pay a high premium to offer something appealing. The incentive can cost you more than you can afford in some cases and could devalue your restaurant among existing customers and prospects. The best promotions target a specific area of the menu — perhaps combined with some sort a of package deal — and give you room to upsell, cross-sell and incentivize customers to return. If you can’t get these advantages from your deal, the high costs of implementing these coupons and ensuring that your staff provides high-quality service make Groupon a poor choice for advertising.

Since the restaurant business works on relatively small margins, it may not make sense to partake in Groupon, unless more reliable marketing strategies have  tried and has failed. This is why. Say a restaurant gives 50% off a $100 meal. The restaurant brings home only $25 out of the $100 as Groupon takes their 50% cut. The $25 goes nowhere near recouping anything on the discount. And bargain-seekers, for the most part, are very careful to not spend much more than necessary. These customers may be chasing discounts and are less interested in quality and building relationships (always chasing the next discount/deal).

That said, you can also learn something from every offer or deal. The learning curve could provide enough information and feedback so that you could craft more effective deals in the future. You can determine the optimum number of vouchers to sell and put better limits in place to prevent losing money on food costs.

Read the Fine Print

You need to craft your offer so that you can afford to receive 23 percent on the dollar for a certain number of redemptions in any given service period. Remember that you might have other coupons coming in from various marketing promotions, so craft your offers to prevent excessive coupon redemptions.

You should plan your offer in such a way to get the best possible response from new customers. This includes offering a Groupon deal on an expensive tasting meal where customers get a taste of each of several entrées or including a wine or cocktail tasting event for a party of several customers. Avoid letting Groupon set too many of the offer’s details because you could end up with a dining room full of Groupon users who’re just trying to save money. Limit Groupon and other promotional offers to different redemption periods to prevent ending up with “all-coupon” days.

Service Issues Can Destroy Your Promotion

The biggest problem with Groupon is that restaurants might not be prepared for the rush or dealing with atypical customers. The idea here is to upsell people and get them to return. Unfortunately, some Groupon users might be poor tippers because they’re coupon-cutters. Overwhelmed staff might easily treat these customers as second-class citizens, nuisances and one-off visitors. People who aren’t respected and treated poorly certainly have no incentive to return, no matter how good the food.

Even if your staff performs like the champions that they usually are, an influx of customers could slow service to regular customers or create a different dining environment. That’s why it’s essential to troubleshoot any customer-service issues quickly. Your staff can’t neglect either the Groupon users or their regular customers. After selling hundreds of deals, restaurants should prepare for an upswell in business on the same day, the next day and the first weekend after the deal by scheduling extra staff or having workers on-call to deal with the extra business.

Recommendations

Careful number crunching and using Groupon selectively can be quite effective, but the process takes some detailed planning.

What We Like

Customers seems to love Groupons and respond well to legitimate offers and great service at restaurants where management understands what’s at stake. You get a guaranteed minimum number of sales, which is a great way to promote slowly moving foods or underrated menu items. We like the simplicity, ease of use and advanced technology for printing coupons or using smartphone technology for the coupons. We like Groupon’s new, more inclusive approach and pricing strategy for crafting local offers for businesses like restaurants.

What We Don’t Like

There’s a fundamental flaw in discounting. People who pay one price for food one day hesitate to return a few days later and pay twice as much for the same meal. The more attractive your offer is to consumers, the more likely your regular customers will use it to cut their costs. We also don’t like the possible bunching of Groupon deals on busy nights when restaurants don’t need help putting people in seats. We don’t like the fact that some Groupon customers might get treated poorly by staff members, which defeats the purpose of offering a coupon incentive.

From studies on Groupon, we used to advise restaurants to to steer clear of promotions that have one-time transactions, but Groupon has become more flexible in pricing. Another mistake of Groupon is that instead of focusing on a specified item, the discount is given for the whole bill. Lastly, because it doesn’t direct customers to one product or unique selling point, it doesn’t take advantage of products that are unrecognized or underutilized.

Final Assessment

If you want to attract new customers quickly and efficiently, Groupon is the premier website offering the kinds of daily deals that will get you exposure. You’ll also get access to the customers’ email addresses for direct marketing. If you can craft your order intelligently, upsell customers when they arrive, train your staff to treat Groupon users like valued regular customers and limit your advertising to rare occasions, Groupon can be an effective marketing tool.