Groupon

Your Guide to Groupon

Underline Image
Is the online couponing site really good for your business? Find out.
By Nevin Martell October 2011 Marketing & Promotions

To Groupon or not Groupon, that is the question many restaurateurs are asking themselves these days. Since the online coupon company offered its first daily deal in November 2008, it has become a bona fide phenomenon. Now operating in over 400 markets in 23 countries, the company boasts over 115 million subscribers worldwide. As of the end of the first quarter of this year, Groupon had 56,781 merchants as customers, who sold 28.1 million Groupons in just that first quarter.

Restaurant Groupons are usually the most popular offers in any given market, so these stats seem to indicate that almost everyone is doing one. But before you sign on the dotted line, you need to know exactly what the service can offer, how to maximize its potential and be aware of the possible downsides.

The Deal

According to Groupon spokesman Chad Nason, the typical Groupon deal involves the merchant taking 50 percent of the revenue and Groupon retaining the other 50 percent. So if a restaurant offers a Groupon for $25, the consumer gets a Groupon for $50 worth of food and the restaurant earns $12.50. However, several restaurateurs we spoke to for this article, who asked to remain anonymous, said that Groupon had offered them higher percentages of the revenue. When asked about the flexibility of Groupon’s profit splitting, Nason would only say, “We’ll always be coming up with different deals and different structures.”

Many restaurateurs are understandably wary about Groupon’s large cut of the pie. Paul Fehribach, the chef-owner of Big Jones, a 70-seat sit-down restaurant in Chicago, hasn’t done a Groupon yet. “To take half the profit just to send an email, write the blurbs and create the videos is ridiculous,” he says. “If I did a Groupon that netted $20,000, I’m going to get $10,000 and Groupon is going to get $10,000, but I have to buy all the food and do all the labor. It just doesn’t make sense to me.”

Though Groupon markets itself as a revenue generator, restaurateurs should treat it like an advertising tool. “You should never go into a Groupon deal thinking it's going to make you any money,” says Neil DuPaul, marketing associate at Speedy Incorporation (Speedy-incorporation.com/blog/). “Restaurants can make money, but most of it will come in the long term.”

Lisa Alvarez, owner of Maya’s Mexican Bistro in Kansas City, Missouri, has offered three Groupons since the company came to her market. She had one goal: “To get new people through the door and get people we haven’t seen in a while back through the door to reintroduce them to our product.” She considers all of her promotions a success, since they brought in many customers from beyond her neighborhood that hadn’t ever frequented her restaurant before. “We had diners in from the whole city,” she says. “And it brought in old customers that moved away, because we gave them a good reason to come back and see us.”

Incentivize It

To ensure that your Groupon generates the most revenue possible – even if it doesn’t generate a profit – you need to design a deal that guarantees diners spend more than just the worth of the coupon. Minty Charupa is the co-owner of three 80-seat Tuk Tuk Thai Restaurants in and around Denver, Colorado. Over the past year, Charupa has done three Groupons for her trio of establishments and has seen a 90 percent redemption rate for her offers. The last two deals have been for $30 Groupons, which cost the consumers $15 each. This amount covered a pair of $12–$13 entrees and two nonalcoholic beverages, but nothing more.

Charupa says that about half her customers only spent as much money as their $30 Groupon allowed, while the other half spent $15–$20 more, usually by buying appetizers and alcoholic beverages. “I make my usual profit margin on that overspend,” she says. “Which helps offset the cost of Groupon’s fee.”

This type of incentivized deal structure makes Groupon a winner for restaurants at any end of the scale, according to Nason. “If you’re a high-end steakhouse, a $40 for $20 Groupon or $60 for $30 Groupon would make sense,” he says. “That won’t cover the full bill, but the customer still gets a great discount. And because of those savings, they’re more apt to buy a full bottle of wine than a glass, or order a dessert.” So, even if you don’t make back the cost of Groupon’s cut, you’ve at least significantly reduced it.

Getting Ready

Restaurateurs have to be ready for the sudden influx of customers that Groupon deals create. The largest numbers of Groupon-generated customers will always happen at two key points over the course of a promotion’s lifetime. “You’re always going to get a rush at the very beginning, because people are excited that they bought it,” Nason says. “And there’s going to be a rush at the end, because they don’t want it to expire.”

Remember the Boy Scouts’ motto: Be Prepared. “You need to prepare your employees; make sure you have extra product on hand and extra cooks in the kitchen,” Nason says. “Everything needs to be running at a smooth, manageable pace before you run the Groupon deal, because it will expose any real fallacies you have in your business model.”

If you’re not ready to handle the increased business, your food and your service may be negatively affected. This leads to bad customer experiences for both first-time diners and longtime patrons, which is often quickly reflected in the reviews posted to sites such as Yelp. Online backlash can quickly damage a business’s reputation. A recently released study by researchers from Harvard and Boston University shows that businesses that offered a Groupon saw their ratings fall by 12 percent on Yelp after the promotion, which averaged out to losing half a star rating.

More Data

Once everything is in its right place at your business and the Groupon goes out, the work has only just begun. Groupons are a great tool for getting customers in the door to try your product, but after that it’s up to you. “You have to always remember that you're looking for repeat customers,” DuPaulsays. “So you want to add names to your email list; you want more fans on your Facebook page and followers on Twitter.” Currently, Groupon does not share any marketing information with merchants, so restaurateurs must gather this data from diners themselves.

One option is to include comment cards or surveys with the check, which could serve as marketing-information harvesting tools and a way for a restaurant to advertise its online presence. Servers should then alert diners to the presence of these forms to ensure a higher participation rate. If you enter respondents into a drawing for a gift certificate or restaurant merchandise, the response rate should be even higher. Another tactic is to offer Groupon customers a second, smaller coupon upon the completion of their meal in exchange for a few small pieces of marketing information.

More Advertising                                         

Restaurateurs have to remember that Groupon users are loyal first to Groupon. “When you get flowers, do you remember the florist or the person giving you the flowers?” asks Bob Phibbs (Retaildoc.com), author of Groupon: You Can’t Afford It – Why Deep Discounts Are Bad For Business and What to Do Instead. “Groupon is the one giving you the flowers; your restaurant is just the florist. You’re not building your brand; Groupon gets the brand building.”

Therefore, owners need to advertise their eatery’s website address and social media presence prominently. By the time they finish, diners should be alerted to all the ways they can find you, follow you and friend you online. There should be tactfully placed signage throughout your establishment, and this information should be printed at the bottom of receipts or on postcards that are given to each dining party.

More Money

Tell your servers to get their game faces on, because they need to upsell, upsell, upsell to Groupon users. Groupon wouldn’t share any figures about what percentage of users overspend on their coupons and by how much, but numerous restaurateurs we spoke with indicated that large numbers of Groupon users only spend the amount of their Groupon. That means it’s the restaurant staff’s job to entice diners to purchase more than they planned. Make sure they’re promoting top-shelf liquors when cocktails are ordered, side dishes and appetizer options when entrées are ordered, and dessert and post-meal drinks once the main courses are cleared. All the extra purchases add up and help your bottom line.  

A Helping Hand

If merchants run into problems executing their Groupon at any step of the way, the company does want to help out. The main tool the company offers is Grouponworks.com, a website that answers common questions, provides video tutorials on various aspects of the Groupon experience and gives merchants the contact information so they can call a Groupon merchant manager if they need human intervention. “Their whole job is working with merchants to make sure they’re prepared before, during and after the deal,” Nason says. “Our merchant managers and sales reps are constantly working with our Groupon merchants to make sure that they’re handling redemption properly and, if they are having a rush of customers, what we can do to better manage that.”

Groupon on the Go

Groupon has recently expanded its offerings with Groupon Now!, a mobile app that alerts users to deals available in their vicinity in real time. Deals are purchased through the app. Customers just present merchants a unique barcode on their phone, which the merchant scans using the Groupon redemption app. Currently, the service is only available in 25 markets, though Groupon is planning to expand its reach in the near future.

Groupon Now! differs significantly from traditional Groupons, because it can be turned on or off by merchants once they are set up in Groupon’s system. For example, if a restaurant owner arrives at his establishment one day and finds fewer customers than usual at lunch service, he can instantaneously begin offering a special through Groupon Now!, which can be set to expire at a certain time or after a certain number of Groupon Now! deals have been sold (the restaurant operator can also turn off the deal manually at any time).

Nason says that Groupon Now! offers restaurateurs a unique revenue tool. “Those tables are perishable inventory,” he says. “So if they are laying vacant, you want to fill them up.” Merchants can also set up Groupon Now! deals to automatically appear during traditionally slow times at their eateries. To make the new product even more attractive, Groupon takes a lower cut of the proceeds in the transaction, though Nason demurred from giving specific figures.

Looking Forward

Since arriving on the scene three years ago, Groupon has spawned a number of competitors, including LivingSocial, Google Offers and Scoutmob. Despite the competition, Groupon remains the leading daily deal website with the highest revenues and largest customer base. “I don't believe Groupon has much to worry about,” DuPaulsays. “They have the most name recognition by far. If Groupon plays their cards right, there's no reason they shouldn't be the top dog in this space for years to come.”

Groupon’s growth and the rise of various competitors both speak to the public’s growing – and seemingly insatiable – desire for more deals. “People love deals,” DuPaul says. “They always have and always will.” According to new figures from market researchers BIA/Kelsey, it looks like people really, really love them. The firm estimates that Americans will spend $2 billion on daily deals this year and it expects that figure will hit $4.2 billion in 2015. By comparison, the firm estimated only $873 million was spent on such products in 2010.

It looks like digital deals are here to stay, so make sure you use them correctly so you can build your customer base, increase brand awareness and maybe even boost your bottom line.