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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.

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.

Brand Promo: The 9% Solution

2 Jun

You want to know how to kick start a brand in a new territory? Hint: it’s not Facebook.

Our client is a franchise restaurant with a new franchisee who’d been sucking wind since opening his Kansas City-area location about a month ago. Was the location lousy? Right behind the Wal-Mart — probably not. The food? Nope; they sell a fantastic charbroiled burger and fries at a reasonable price in a pleasant fast casual atmosphere. Besides, there hadn’t been enough customers since opening to judge the food good or bad.

We‘re engaged to help the franchisor build their brand for the long term. But this franchisee needed help — fast. With limited money, a fractured media environment and a ticking clock, we opted for a traditional solution — direct mail promotion — figuring if we could get a 1% response rate, delight the new customers, collect some contact info, and follow up, we’d help save the location and worry more about the brand essentials in the morning.

To his credit, the franchisee was willing to pony up a serious promotion — a free 1/2-lb. burger, fries and soft drink, no other purchase necessary.  Doesn’t get much better than that. We created a strong oversized postcard, communicated the brand essentials, and let it fly.

What a pleasure it was when we got the email one afternoon about lines of customers leading out the door into the parking lot. All told, we made almost a thousand new customers in less than two weeks — over a 9% response! And all of them sampled the signature dish.

Was the promotion a substitute for strong brand development? Of course not. Can we promote our way to success? No way. But in case we needed a reminder, we proved plenty of customers will respond to a big ol’ promotion simply delivered. And once you make new customers, a strong brand will keep ‘em.