A Restaurant’s Guide to Groupon: Do it Right or Not at All.

19 Nov

I usually write about branding in this space. But at one time or another every brand builder has to face the issue of promotion and what to do about it. Having spent a significant portion of my career in retail marketing, I understand well the lure and peril of promotions. When you want to “drive traffic,” nothing’s easier to execute than a big ol’ sale. I’ve advertised a gazillion of ‘em, myself, which has given me ample opportunity to witness their aftereffects: busted margins and often an ensuing drought of customers who — having already gotten what they wanted at a discount — can only seem to be reeled back in by… another sale. And so the merry-go-round begins.

I remember a number of years ago being exposed to supermarket scanner data for Coke and Pepsi sales that illustrated the point perfectly. As if by they were Siamese twins, the two soda behemoths had coordinated their promotional calendars to alternate promotions every few weeks — one week Pepsi, the next Coke, and vice versa. One week Coke would crest, then dip to a trough and plateau; the next week it would be Coke’s turn. Clearly the plateaus represented brand loyal customers and the crests on top of the plateaus represented customers more loyal to the promotion than the brand.

That’s the way the world is in every category: some people buy brands and some people buy price. People who buy brands get happy when their brands are discounted, but people who buy price won’t come back to your brand unless it’s discounted again. So if you think price promotion is your ticket to building a loyal clientele, think again.

It’s not that promotion is a bad thing; simply that it’s strong medicine that needs to be taken in measured doses to treat specific issues.

Which brings us to Groupon and all its socio-promo clones. Like all bright and shiny things, they are difficult for small businesspeople to resist, especially for restaurants suffering in the current economy, who account for over 30% of Groupon promotions. Groupon has been great for Groupon investors and exciting for all us folks who have been getting $40 of sushi for $20. But is it good for restaurants? And if it can be good, how do you make sure your restaurant is one of the winners.

A recent study of Groupon effectiveness by Utpal M. Dholakia of the Jesse H. Jones Graduate School of Management at Rice University reveals a lot that many of us have suspected and some of us have experienced for ourselves. Here are the raw facts:

  • Overall, Groupon promotions were profitable for 66% of the study’s respondents, but for only 58% of the restaurants.
  • Only 44% of the Groupon redeemers came back for a second visit. That number is only 13% at locations that reported an unprofitable outcome, which means about half of all the restaurants.
  • The factors that appear to either drive the numbers of Groupons sold are the duration of the promotion (longer is better); an upper limit on the number of Groupons sold (a limit is good); and whether the Grouponing business is a restaurant (people buy lots of restaurant Groupons). In other words, Grouponers favor restaurants, yet restaurants still struggle to make the promotion popular, and most Grouponers never return.

So should restaurants use Groupon or not? Well, yes, IF:

  • You are a new restaurant, desperate to ramp up your clientele. According to the study, effectiveness in reaching new customers was a primary reason for retailers to want to repeat a Groupon promotion. Even though the promo may not be profitable and most customers won’t be back, it may be one way (but not the only way) for a new restaurant to make customers. 13% is better than nothing.
  • Your employees are prepared to handle the Groupon rush and prepared for the likelihood of low tips. By far the greatest driver for businesses who want to repeat the Groupon promotion was employee satisfaction with it. The study relates lots of anecdotal evidence that restaurant employees resent the deal-prone Groupon customers (“waiters were frustrated by low sales and low tips, since guests didn’t tip the full amount”). So if you’re a full service restaurant, be forewarned; if you are QSR or fast casual, it may be OK.

If you do decide Groupon is worth a try, how can you get the most out of it?

  • Make sure your promotion lasts a month or more. Longer is better, not only because it gives people more opportunity to redeem their Groupon, but because it decreases the potential of a stampede.
  • Set a limit on Groupons sold. This should both drive demand and limit liability. 2000 to 2500 seems to be an effective number.
  • Don’t overdo your price cut. The study shows that Groupon value actually has a negative effect on demand. Rather than cut a full meal 50%, or offer $40 of food for $20, try offering up a single item at a discount, or a free side with another purchase. You ought to still be able to drive demand, but retain enough margin to increase your chances of coming out on the profitable side.
  • Use the opportunity to collect customer data. If your goal is to increase tour customer base (and it should be), you can’t afford to miss the opportunity to onboard your new arrivals onto your email and/or mobile marketing lists and encourage them to “Like” you on Facebook. If you’re not ready to do those things, hold off on your Groupon until you are. It could be the difference between a successful promotion and a money pit.

Oh, and one more thing: avoid the Groupon clones. They’re even less effective than the original.

5 Responses to “A Restaurant’s Guide to Groupon: Do it Right or Not at All.”

  1. Sridhar November 20, 2010 at 4:56 am #

    Bob – Very nice.

    What did u mean when u wrote

    Oh, and one more thing: avoid the Groupon clones. They’re even less effective than the original.

    • Bob Fiddler November 20, 2010 at 4:39 pm #

      Thank you, Sridhar. Groupon’s success has spawned a number of copy cats, including livigsocial.com, eversave.com and others. The study I alluded to did not include them in its numerical data, but did collect some anecdotal information, which was not positive, but which jibed with other comments I’ve heard. The Groupon clones do nit drive the same kind of traffic that Groupon does, but do have the same kind of downsides, i.e. profitability and repeat visits are a problem. So if you’re in it to drive trial, with the hopes of keeping enough of the first-timers to develop a more steady clientele, th other sites are a worse bet than Groupon.

  2. 監視器 November 23, 2010 at 12:09 pm #

    Undoubtedly, one of the best article l have come across on this precious topic. I quite agree with your conclusions and will eagerly look forward to your coming updates.

  3. kcb January 17, 2011 at 8:00 pm #

    You’re killing me! I don’t want my restaurant groupons to stop! I, for one, shop both brand and price and if the two should meet–that’s my idea of a good deal! Now, as a marketer, I see your points. But, as a consumer–I want my deep discounted, everything’s included groupons! (And, by the way, I tip on the “real” amount…not the groupon amount!) 🙂 Hope all is well in brand world!

    • Bob Fiddler January 17, 2011 at 8:13 pm #

      Hey, as a consumer I think there should be many, many more deep discount vouchers. In fact, all restaurants should be free!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: