February 24, 2011

Groupon Redux

So I cranked out the following analysis in a fit of pique over on Facebook. Decided not to put it there (why stir things up) but I'll put it here. In lieu of actual blogging, which I have been doing little of, lately.

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So here's one way to think of it. East-West sold 345 "groupons" this morning. They sold $10 (lunch) and $15 (dinner) "deals", worth $20 and $30 worth of product. Let's average it at $12.50 and $25.

Now, Groupon takes the money from the Groupon, and sends something to the restaurant. I don't know the details but for low value deals like this it's at maximum 50% (and could be nothing, I've read that for $10 deals, Groupon takes $100%).

So East-West has just assumed liability for $25 (average) x 345 = $8625. They (hopefully) get paid $7.50 x 345 = $2588. So today's Groupon advertising cost them a bit over $6000.

Now folks will bring friends, buy more than the Groupon amount, etc. (all good) - and a certain percentage wll not be redeemed. But that $6000 in lost receipts is coming from somewhere. Assuming that the restaurant is making 10% profit on gross receipts (very optimistic, from what I have read), then East West needs to boost sales $60,000 to break even on the Groupon.

It works out fine if there are a lot of empty seats or folks visit during off-peak hours. But I don't go to East West on weekend nights - it's often full with a wait for a table. So one can assume that some of the Groupon customers are going to be taking seats from full priced customers for a while.

One can do an awful lot of advertising and buy a lot of goodwill with existing customers for $6000. But I think Groupon sales folks are pretty good at communicating "you don't have to pay anything, look at all the new customers, and we'll send you a check!" and businesses do not figure out how much all this advertising will be costing them in the long run.

I do think Groupon makes sense for a lot of businesses - if you can steer customers to off peak or slack times, if you have extra capacity, if you are new in the market or are branching out into new areas.

OK, I'm done kvetching (no, really!).....but please, if you DID buy a Groupon this morning, please tip your server based on the full, regular price of the meal. One of the gripes about Groupons is that folks tip based on the post-groupon bill - so the server / staff gets the raw end of the deal. And undertipped waitrons might be cranky and take it out on customers - even the full-fare ones. Yet another hidden cost of the Groupon experience.

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I've been a long time customer and fan of East-West Grill from the very start, and I want them to stay in business. Have no idea how well they are doing these days. But I would hate to think that one bad decision to advertise with Groupon might push them under.....so call all this sturm und drang self serving.....

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