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Groupons- good or bad for businesses? [moved from Prairie Provinces board]

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  • hsk Nov 22, 2010 04:34 PM
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[NOTE: We' ve moved this digression from the topic at http://chowhound.chow.com/topics/7433... -- The Chowhound Team]

I went to the one downtown. I read an interesting article in the NY times about the founder of Groupon and they mentioned ``Companies have been overwhelmed or even destroyed by running a Groupon special``.
http://www.nytimes.com/2010/11/18/bus...

That got me thinking about what Derfster said, and I seem to recall that Metropolitan Grill sold over 700 groupons. If it`s true they have to give $30,000 worth of food for $7,000. They`re a pretty big outfit, I`m sure they can handle it but I`m not sure that the numbers would work for smaller businesses. So if I had another groupon I would use it fairly promptly.

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  1. Groupon campaigns can be so successful that they are crippling to a business. It can often be a good deal for the consumer but the business owner has to understand the math behind the promotions. This article shows what happens when a Groupon campaign is too successful.

    http://www.retaildoc.com/blog/groupon...

    4 Replies
    1. re: sirdinealot

      Great article Sirdinealot

      Not surprised that dinner at restaurants providing deep discounts isn't turning out to be as good as expected....

      1. re: Gobstopper

        Groupon and similar are only good for high margin businesses like restaurants, or service businesses like yoga studios, where additional variable costs are low to nil.

        Merchandise companies that use Groupon deserve to go out of business since they clearly don't have a clue about their business. (except maybe dollar stores where margins are huge)

        Also, the owner cuts the deal with Groupon and if they can't negotiate a resonable deal with proper terms and limitations, then, well, "Darwin" applies here as well.

        1. re: Scary Bill

          Restaurants are high margin businesses? That's not what I hear. Apparently profit margins are razor slim in restaurants.

          1. re: purple bot

            Gross margins are what I was referring to. Having said that, the real cost of Groupon to a restaurant is typically only food cost, which margin before other semi-variable costs is even higher. seni-variable costs might drive that margin lower if, say, Groupon increased business to the point that addditional labour, utilities etc were required.

            Here's a look at some actual fast food margins:

            http://seekingalpha.com/article/17328...

            Margins on "fancy" restaurants with higher prices would generally be higher.

            The costs that can kill a restaurant are high fixed costs, rent, property taxes, management, etc., if sufficient contribution margin isn't generated.

            Profit margin is the bottom line, after all the above expenses and taxes, and that is not a constant as you suggest. In the link above, take the Operating Margin, deduct taxes, and you'll get bottom line profit margin.

            It's all in the definition. (fun for accountants)

    2. Re: hsk's comment about Metropolitan Grill giving out $30K of food for $7k. You have to look at this in terms of advertising costs though. A 1/6 page ad in the Herald would probably run about $2500 (haven't done any recently, but kind of remember that as being close...). So this is about the price of 10 ads and if you sold 700 groupons it gets 1400 people in your door, guaranteed. Don't know what the ROI on newspaper advertising is these days, but I think groupon (and other social media) is probably just as good as print.

      7 Replies
      1. re: Dan G

        Also consider the number of people that won't redeem the coupon in time.

        1. re: Shazam

          At least if you run an ad you know what it is going to cost you. It is defined. With Groupon you are exposed as a business. What you just have to hope is that some of the coupon holders will become regulars and not just looking for the next great special. Just as important is remember the servers. The coupon holder determines what they will or will not tip. An ad in a magazine doesn't cost them lost grats.

          1. re: sirdinealot

            If a business owner doesn't know what a Groupon deal will cost them, well they are on their way out of business anyway, with or without Groupon.

            Also, having use Groupon, the establishments (I assume you mean restaurants as other businesses use Groupon, not just restaurants) I have gone to give you two bills, one without the Groupon discount so you can see the true menu pricing, and one with the Groupon discount applied, so that the patron can see the "real cost" and tip on it. I think that most people will tip as they usually do, so servers aren't likey getting shafted as you suggest.

            1. re: Scary Bill

              There is no way a business knows what a Groupon actually costs them since they don't know how many will eventually be sold. They may know their COGS but not the absolute number that they will have to redeem. Reading on the web there is definitely an issue where restaurant servers do not get paid grats on the pre-discounted amounts. Good to hear that restaurants are showing customers the pre-discounted amount. It can't hurt.

              1. re: sirdinealot

                COGS and average receipts is all that is needed as in most cases diners will spend more ( at least I have) than the value of the coupon, so, what an owner has to do is take an average table receipt, and they can come up with the cost, which is more likely to be a contribution to profit as it will in almost every instance cover variable costs (COGS). It's cheaper than an out of pocket ad tv spot, etc.

          2. re: Shazam

            http://blog.etundra.com/restaurant-tr... that businesses hope for a 30% breakage rate (breakage is unredeemed coupons) but as this article points out http://techcrunch.com/2010/08/01/grou... it's more like 10%.

            1. re: Chris VR

              Thanks. I suspect the breakage rate is higher than what Groupon says.

        2. In general, a groupon isn't really much different than having a sale. If a place can't handle a sale, then it won't be able to handle a groupon.

          3 Replies
          1. re: Shazam

            Not really- for a business to have a sale, they put up signs and are in business. People either see the signs and come in to buy when they hadn't planned to, or they are in the store anyway and buy it.

            As previously mentioned here, Groupon takes 30-40% of the cost of the deal as their commission. If you're selling $40 worth of product through Groupon for $20, it means you end up giving up $40 of product for about $14. That $6 (per deal) makes a big difference between a regular sale and a Groupon sale.

            What businesses hope for (and is part of Groupon's marketing pitch) is that people will buy other products and services from you, or will return again, but as some of the other articles here point out, that's not consistently true. The more I see about the back side of Groupon, the more I wonder how such a predatory business model can stay around.

            1. re: Chris VR

              Hmm...

              Not sure what you mean by the first point. It's the same thing with the groupon - users see the ad, they sign up or not.

              Sales are typically not totally borne by the retailer themselves. Their suppliers will usually also accept less for their product. Companies that use Groupon should be doing the same, but who knows if they are or not. Even with a traditional sale, there are overhead costs (advertising, usually) so it's not as straightforward as it seems.

              A proper sale can make up on volume. Whether or not this is viable for the business depends on how much of their costs are fixed or variable.

              1. re: Shazam

                With a small business holds a store-based sale, the people who see the signs/advertising are, for the most part, local shoppers. With group-buy sites, you'll attract buyers from a larger geographical area. As someone here (or maybe on one of those links) pointed out, these types of buyers are chasing the sale. They may travel once for a good deal, but they're not at all likely to convert into return shoppers. So businesses offer these group-buy deals with the intent that they'll get new, repeating customers, and instead get a large group of coupon clippers, who buy the exact minimum and never return. Contrast that to a non group-buy sale, where you're targeting savvy buyers, but they're local buyers, who are much more likely to return either for your next sale or for your regularly priced merchandise.

                I think the problem with Groupon is they are targeting small businesses (often with less-experienced business owners) with a lot of exciting-sounding numbers. As some of the horror stories in those linked articles point out, these businesses don't understand what they're getting themselves into until it's too late, and the mistake can be a fatal one if they sell enough of the deals.

                And to bring it back to the topic at hand, the sales we're talking about here are restaurant sales. I don't see how a "$40 gift certificate for $20" deal would be borne by a supplier, and that's what I see at pretty much every restaurant around me on these sites. Given the thin margins already existing in the restaurant industry, when a restaurant gives away $40 of product for $14, they're probably in the red on that transaction, or close to it. When they do it on a very large scale, and the buyers don't engage in the add-on buying they've been led to expect by Groupon's pitch, you can pretty easily see how these types of deals can put a small business out of business.

          2. I am a regular groupon user - typically only for restaurants. One thing I've noticed is that no matter how much my groupon was for, I usually end up spending above and beyond my groupon. In fact, I've noticed that I still end up spending around the same amount *in addition* to the groupon that I would've spent without the groupon.

            I also thought that it was interesting in one of the articles presented here that they associated groupon users with "coupon clippers" who pinch pennies and typically won't spend more than what the coupon is worth. While I'm sure that this may be the case for some, I don't think of groupon users as coupon clippers. Most people I know (including myself), do fairly well for ourselves and don't really have the time or the interest in scouring the papers/internet for coupons. The primary difference is that groupon (or livingsocial or buywithme etc...) is that it's in our face. There are apps on my phone, emails sent to me. So when someone shoves $50 worth of food and drinks for $25 in my face at a place I've been wanting to check out but is often off my radar, how can I resist?

            I imagine that there are others out there like myself that balance out the numbers to some extent (again, in dining groupons, not considering retail, other services, etc.). Thoughts? Non-biased stats? Just curious about opinions or experience with the buying over the limit regularly.

            1 Reply
            1. re: weathermasta

              Always. Maybe not double the face value of the Groupon,, but always.

              The Groupons are priced so that it is difficult (in a restaurant) to spend only the face value if there are two (or more) of you.

            2. For those who think Groupon (and similar) are predatory, a bad business model, won't last, here's someone who thinks it's a pretty worthwhile investment:

              http://alturl.com/74wba

              1. they're not really giving $30k worth of food for $7k; who goes into a restaurant to redeem the EXACT amount of their groupon? I have gotten 4 restaurant groupons so far, and my total bill has always been 200% to 300% the value of the groupon. Just as an example, lets suppose everyone's total is 200% of groupon value, that's $60k worth of food that the restaurant sold for $37k, that's the equivalent of running a promotion of 38% off.

                1. Let's see what Google does with it. http://digitalagemarketinggroup.com/u...

                  3 Replies
                  1. re: HillJ

                    Looks like Group on decided to say "no thank you" to Google.

                    1. re: HillJ

                      I have both seen and been part of this kind of egotistical internet inspired greed. It invariably turns out bad. So will this one. Wrists will be slit.

                      1. re: HillJ

                        They said "no" to $5 or $6 billion dollars? (That's BILLIONS, in case you missed that) Dumba$$es!