A Restaurant’s Guide to Groupon, Part Two

14 Jan

A few weeks ago, I wrote a post about Groupon, based on a nice piece of research by Utpal M. Dholakia. I did that because a lot of clients ask us about Groupon (and LivingSocial and Restaurants.com and others) and — let’s face it — there’s just no avoiding it. To my mind, Groupon and the others are nothing more than a new generation of ValPac and Valassis, which were themselves a new generation of targeted promotional media in their day. People will always love a deal. Retailers and restaurateurs will always want warm bodies in their establishments. Entrepreneurs will always be finding new ways to put those facts together for their own profit. It’s up to marketers to figure out what works for them.

Now a new paper has been published by the Harvard Business Review that furthers our knowledge of how Groupon and other deep discount vouchers work in the marketplace. In it, the authors develop a model to explore how consumer demographics and offer details interact to shape the value of voucher discounting. Here are a couple main findings and how they affect restaurants interested in Grouponing.

First, “discount vouchers can facilitate price discrimination, allowing merchants to offer discounts to customers who value the merchant’s product less than ordinary customers do.” In other words, Groupon and others encourage trial by those who simply won’t pay your prices. That’s a good thing if their experience is so good they can establish a strong connection between your price and their pleasure and/or your margins are high enough to scrape adequate profit from the voucher users and/or the Grouponers who show up aren’t already customers. That’s a lot of ifs, ands and ors.

Second, “discount vouchers can benefit merchants through advertising, by informing consumers of a merchant’s existence. For these advertising effects to be important, a merchant must begin with sufficiently low recognition among prospective consumers.” Obviously, Groupon and others offer an opportunity to introduce yourself (or reintroduce yourself) to a potential customer. But it comes at a cost. Groupon’s seductive business model — no money down, proceeds from Groupon sales split 50/50 with the merchant — can mask the true cost in lost margin. Giving that margin away to current customers just doesn’t make sense. So if you’re already well-known, but just want to generate a little more sales volume, find a different answer.

So again, the question must be asked: to Groupon or not to Groupon? The answer is yes, if:

  1. You need a big awareness bump at any cost. New restaurants or restaurants that can’t seem to get over the hump may need a jump start. Groupon’s ability to reach many people and induce trial can be very powerful. But it ain’t free.
  2. Your margins are high enough to take a battering. For most restaurants this probably won’t apply. But some have begun raising prices to allow space for deep discount vouchers. In the short term this can look attractive. But it’s no way to build a brand.

Above all, if you do choose to go Groupon, make sure your system for collecting customer data is in place. If you don’t take responsibility for bringing the Grouponers back, you may never see them again.

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5 Responses to “A Restaurant’s Guide to Groupon, Part Two”

  1. Mike Sweeney January 14, 2011 at 1:54 am #

    Love the post Bob. Groupon’s seemingly overnight success story has the average company (especially B2C) thinking they are missing an opportunity that resembles the early days of Google AdWords/PPC. While there is no disputing Groupon’s appeal and reach, restaurants and other organizations need to make sure their Groupon “model” is sound.

    • Bob Fiddler January 14, 2011 at 4:12 am #

      Thanks, Mike. There will always be promotional opportunities. Groupon can be a great one. But if you’re not “Groupon-ready,” you can easily waste it.

  2. Hannah Pemberton January 14, 2011 at 8:59 am #

    As usual guys this is a really interesting article. As the head of marketing for an independent chain of French restaurants in the UK I am asked to consider Groupon on a very frequent basis.

    The challenge with the casual dining sector in the UK (and some premium outlets too) is that deep discounting (or as we call it, ‘dirty discounting’) strategies have completely taken over the market and in some cases, replaced brand in terms of consumer selection hierarchy.

    Established and very well known brands are now rolling various different discounts continuously to engage consumer attentions, it’s no wonder this has been massively adopted during tough economic times – but the challenge is how to recover, and I believe many brands will struggle with this task.

    When a consumer has come to expect your product significantly discounted whenever they consider buying it, this ultimately it erodes brand loyalty. It will be very interesting to see how, and if brands recover over the next 1-2 years.

    I am all for Groupon and other similar sites if they can work for your brand and business, but they need to be approached with caution, and the long term view must be considered rather than just the here and now.

    We’ve found that an overall good value price point of our product, and targeted marketing to our customer base to promote word of mouth marketing is much more effective at allowing us to maintain our brands position and customer loyalty, to protect our margins, and to grow our business and brand.

  3. Ron January 14, 2011 at 12:55 pm #

    Bob

    Some intersting ideas but there are a couple of missing ingredients.

    First is timing. I have not yet spoken to one of our restaurant clients that are happy with their January revenues. Restaurants we know and love like O’Leary’s, Carpaccio’s, Sam’s waterfront, Maria’s and on and on are happy for the exra revenues created locally during January that are created from landmarksgreatdeals.com.
    Secondly is although a small percentage of people acquire the voucher about 100 to 200 times as many people view tha ad, so there is some real exposure value.
    Thirdly this is an opportunity to follow up with a smartly designed social networking program that will maximize the awareness building that takes place which is what Landmarks has been working in.

    Its not the answer, but it can be a part of the answer.

  4. Elegant restaurant January 24, 2011 at 8:17 pm #

    I’m not sure where you’re getting your info, but great topic. I needs to spend some time learning much more or understanding more. Thanks for excellent info I was looking for this info for my mission.

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