Backhouse Business $1.01- Groupon or Groupoff- Where Do You Stand?

There has been a ton of publicity in the past few years with companies like Groupon, LivingSocial, BuyWithMe, or any of the other social media deal sites.  I am sure everyone knows how it works on the surface because it is as popular as Facebook, Twitter, and Google.  It is probably the most successful online businesses out there, which makes marketing departments lick their lips with anticipation to get on board.  But is it really what it is cracked up to be?

The Upside to Groupon

Since its inception in 2008, Groupon has been a great opportunity for businesses to reach out to a much wider audience.  It is a much more effective way to reach existing and new customers than newspaper ads, radio spots, and even local TV commercials.  Each deal is spotlighted for the day and even comes with a well written
description of the company.   The written paragraphs are very flattering and the reader gets a good impression of the
company even if they have never been to the establishment. 

There is no up front costs to the business.  Groupon handles all the administration of the sales and all you have to do is enter the coupon serial number into their web based site.  Even if the coupon is never redeemed you still get your portion of the sale.  There is an expirey date for the coupons which helps spread the traffic over a period of time.   This enables smaller businesses to project a positive impression to their guests instead of the negative effect of a huge
influx of business; when they are not prepared for it.

The final positive aspect of Groupon is that it screens the businesses that they partner with and have the final say on whether they post or not.  This means that you will not see any inappropriate businesses like escort agencies, strip clubs, shooting ranges, and sex shops soliciting customers along side of your business.

 The Downside to Groupon

One of the biggest criticisms of Groupon is their cut of the pie.  Say for example you have a Groupon that
offers $20 for $40 worth of fare at your restaurant.  Groupon takes 50% off the top for their administration and advertisement of the offer.  This leaves you with $10 for $40 worth of fare.  Next lets assume your food cost on your menu averages 30%.  That leaves you with $3 for $40 worth of fare ( $10 x .30= $3).  Now figure out this little piece of math ($3 divided by $40 = .075 or 8%).  This gives you a 8% return on your investment for our little example.  To
the customer it looks like a 50% discount, but in reality it is a 92% loss by using Groupon.

To be honest there is no other negative that could come close to comparing with the above example.  We could talk about the swamping of customers to your business trying to redeem their Groupon before the expiration date.  We could talk about the loss of quality of product because your staff (Front and Back) is swamped.  But the real reason you should think twice about Groupon is the 92% loss you will be taking.

So Where Does This Leave Us….

You know it is very funny, the restaurant business has the highest failure rate out of any other business out there.   There are two aspects that a lot of restaurant owners overlook the most- the first being lucrative location and the second is lucrative marketing. 

The first part (location) we will save for another article, but the marketing is pertinent to this topic.  A lot of restaurants jumped on the Groupon phase thinking it was a “sure thing” until they realized the true cost of the campaign. 
The Groupon business model is very successful for businesses who don’t have a high cost of goods sold.  This
marketing is ideal  for tourist attractions, bowling alleys, movie theatres, golf courses, spas, ski hills, the list goes on.  But when you use it for a business which on average returns a 10% profit at the end of the year, it makes
little sense to expose yourself.

There Is Hope Out There After All

After all this you might determine that Groupon is the last marketing idea you want for your restaurant.  Wait there is  one way to use Groupon  effectively.  The one thing we know about it is that itputs people in chairs. So it would only make sense to use it for your opening promotions; to spread the word of an unknown or brand new restaurant.  If you are opening a second location in a new community, or town and you need to spread the word, it might be the tool you are looking for. 

If you are trying to drive business to your restaurant because you are experiencing a slow period then Groupon will just put you in a spot where you are not making progress.  In fact it will probably just drive a plethora of bargain seekers into your already struggling business.  As we mentioned before you will virtually be giving your product away with no ROI (Return On Investment) which defeats the purpose of a well thought out and executed marketing plan.

Til next
time See Ya On The Flipside…..