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The Age of the Groupon: Does It Make Sense For Restaurants?



The Age of the Groupon: Does It Make Sense For Restaurants?Groupon, along with BlackBoardEats.com and a whole array of other discount coupon websites have proliferated in the last year as restaurants struggle to get customers through their doors.  These sites operate by getting large discount vouchers from restaurants (usually in the 50% range) and then marketing them to a large list of potential customers through email and the internet.

The argument made to restaurants goes like this: bite the bullet on this deep discount coupon and you’ll earn a repeat customer who comes back for more, making you money in the long run. It’s a compelling argument, and already many restaurants have tried it.  There is still quite a bit of debate, however, about how effective these deep discount coupons actually are at getting a restaurant repeat business.

The first school of thought is that butts in seats are better than empty chairs, no matter what it took to get them there.  These restaurateurs are indeed biting the bullet and hoping for some repeat business down the line.

The second school of thought takes a more skeptical approach.  The biggest fear with bringing in customers on such deep discounting is that all the new business is there because of the once-in-a-lifetime deal being offered by the restaurant, not because they have or plan to have any connection with that establishment.  Without repeat business, the Groupon concept is completely sunk, because there’s no money in that first visit for restaurants.

Naturally, Groupon claims a 90% return rate for customers who use their coupons.  That number hasn’t been independently verified.  It’s also a bit of a logistical problem to track customer visits after they redeem their Groupon coupon.  The fact that coupons are good for a year on average also makes it difficult for restaurants to track exactly how successful their discount program is, since it can take a long time for all coupons to be redeemed.

The X factor in making a calculation about using a deep discounting coupon service for your business is the number of guests who actually redeem their coupons versus the number who purchase a coupon.  This is known as the “breakage rate” and can really help a restaurant get back some of the money they’re giving away on coupons that are redeemed.

Unfortunately, statistics are spotty on breakage rates.  Many restaurants hope for 30% (i.e. 30% of customers who bought a Groupon coupon for their restaurant never redeem it), but since it takes up to a year to find out exactly who is redeeming these coupons, business owners may have to wait awhile to find out how high their breakage rate actually is.

Thus it comes as little surprise that many restaurant owners view these deep discount sites with a healthy dose of skepticism.  That’s not to say these coupons can’t ever be an effective tool for restaurants.

Some restaurateurs have used deep discounting sites like Groupon or BlackBoardEats to promote grand openings or significant additions like a new dining room or patio or a new menu.  In situations where it’s important to build a lot of buzz very quickly because you’re offering something new, a deep discount program can be a great way to reach customers en masse.  You’re not as worried about getting repeat business as you are about filling your establishment for a specific reason.

The jury is still out about deep discounting, but in certain situations, like opening night, it can be a surefire way to pack your restaurant.  For restaurants with an established brand and customer base, deep discounting appears to be a much more risky proposition.

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2 Responses to The Age of the Groupon: Does It Make Sense For Restaurants?

  1. Michael D. September 4, 2010 at 5:14 pm #

    Using Groupon (or most of the other Groupon-type companies) is a cry for help.

    Why in the world would you do a “Get $35 for $15″ (average deal) with Groupon..?!?

    My observation is that a restaurant will sell around 2000 of these deals and pay Groupon about 33% of the receipts from the deal. That breaks down to receiving $20,000 for $70,000 worth of your restaurant’s food and drink..!

    From my research:
    -Around 80-90% of people redeem.
    -Redemption is usually with 6-8 weeks.
    -These are “bargain shoppers” not loyal customers.
    -They don’t necessarily come back to the restaurant (they aren’t usually given a reason to…)

    How do I know?

    My wife is a Groupon junkie and we have visited 10 restaurants in less than 3 months. We have 4 more Groupons stored for local restaurants we want to check out.
    Out of the 10 we have been to we think we might go back to 1.
    (That’s a restaurant that we had already been to “on our own dime.”)
    -None of the restaurants were exceptional in food or service.
    (most of the time it was mediocre food and service.)
    -None of them invited us back.
    -The number of servers who attempted to “up-sell” us at all was…0 (zero!).

    In my opinion:
    Restaurants that offer Groupon deals are desperate and in no way marketers.
    (The restaurant business is really the marketing business.)
    People like us and I eat their lunch…and profits.

    BTW- we go to our favorite restaurant every 2-3 weeks (yes, at full price).
    We have had 3 groups of 8-10 people there in the last 5 months.
    We have to get there by 5:30PM to avoid an hour wait. (no reservations).
    It’s clean. It’s fun. The food is awesome.
    The servers remember us and up-sell us every time.
    We gladly spend $100 as a couple and tell everyone we know.
    We use Groupons for the other guys that we don’t go back to (accept for one).

    I’m not trying to sound (or be) brutal, it’s just what we do to have a better lifestyle in tough economic times.

    I believe that we represent the majority of Groupon users.

    Groupons are a cry for help (and a “red flag”).

    • Greg McGuire September 7, 2010 at 5:49 am #

      I think more and more of the restaurant industry agrees with you Michael. In the end there’s no substitute for good food, excellent service, and smart (but maybe longer term) marketing strategies. Groupon and sites like it don’t promote restaurants so much as professional food shoppers.

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