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Restaurant Marketing: To Groupon or not to Groupon?

Groupon coupons for restaurant businessAbout two years ago, a new word was entered out lives: Groupon. This company came seemingly out of nowhere and created an entire new industry. Thousands of coupon junkies are now glued to their computers waiting for the next daily deal to show up that they can share with their friends. Groupon is now arguably the fastest growing company ever promising to reach the $1 billion in sales mark within two years of its history.

Seth Godin, a marketing philosopher and the best-selling author, says that if other people are copying you, you have done something remarkable. By this standard, Groupon is an outstandingly successful company that has over 200 copycats in the United States alone and over 500 worldwide.

Andrew Mason, the founder of Groupon, has created an extremely profitable business model. Groupon sure does know how to make money for themselves.

The big question is, does it or does it not make sense for your restaurant to participate in the “daily deals” campaigns?

Let’s take a look at how “daily deals” campaigns work.

You offer a number of gift certificates redeemable at your restaurant at a significant discount (usually around 50%). The offer is valid only if the target number of certificates sold has been reached. The money your campaign generates is then split between you and the vendor (Groupon or one of their competitors).

An offer like this is designed to bring in a lot of first-time guests who have never heard of and have never visited your restaurant before. Such a campaign can literally put your restaurant business on the map.

As it is usually the case, the positives come with quite a few negatives.

This type of heavy couponing is going to bring in price-conscious customers. Many restaurants who have tried the daily-deals style of marketing report that the guests who show up with a coupon in their hand tend not to buy beyond what the coupon offers. Many don’t bother to read the terms and try to combine the coupon with other deals or discounts you may have going on that day.

Several restaurant owners commented that these guests tend to not tip a lot or not tip at all and are on a lookout for a “gotcha” even though you offer the same food and level of service as you do to non-coupon guests. What’s worse, few of these guests end up coming again.

When you plan a marketing campaign around a daily deal, you have to be prepared. Yes it’s nice to have a lot of new guests to come in and discover your restaurant for the first time. You, however, need to make sure you know how to make money and how to bring these people again after their first visit.

Train your staff on how to work with coupon holders. Add first-time guests to your newsletter, VIP club, birthday club or other type of customer loyalty program you may have in place. Teach your waiters how to capture guests’ contact details table-side. Consider programming your POS system to automatically include the tip into the check.

Offer Groupon deals only on days and hours when your restaurant is slow and only on the items that offer you a high profit contribution margin. Your food cost is probably anywhere from 28 to 36% of the menu price. Given that you only get 25% of the value from Groupon, you are almost guaranteed to lose money on this marketing campaign, even if some of the coupons do not get redeemed.

Remember: Each coupon customer walking in door puts you further in the red unless you do something to drive more add-on and repeat sales.

Managing Food Cost Recession Style

Two weeks ago, we talked about the futility of managing food cost by compromising quality, reliability, or supplier relationships. (See Food Cost: This Horse Is Lame. Stop Beating Her, Brother…“)

Here’s the deal: You shouldn’t be paying more for the ingredients than the other guy but you shouldn’t be spending the majority of your time checking prices either. Cost is just a part of management and not a whole other job.

It is easier to grow your revenues by 5%
using the right marketing tactics than it is
to bring your food cost down by the same 5%

I know it’s a stretch but… if you were to knock down your food cost by 5%, what would it mean to you in terms of profits? On a $100K monthly revenue and $30K in food cost, that’s  a respectable $1.5K in new profits. Not bad so far.

Alas, you don’t have to be a betting man to know that inevitably food cost will go up again, wiping out the savings you have worked so hard to create.

On the other hand, when it comes to marketing, you have 2 options:

  1. Get more new guests to check out your food, or
  2. Bring in existing customers more often.

The latter is much easier than the former. One good way to do that could be a V.I.P. Club. Not only can you get them to come in more often, you can get them to bring their friends too.

A V.I.P. Club that increases your revenue by the same 5% will put an extra $3.5K in your pocket — that’s $5.0K in extra revenue minus $1.5K in food to feed all the additional customers!  The best part is, you can do this again and again, month after month. Once a successful marketing method is in place, it works month after month, indefinitely, with little additional effort.

Now, which one would you rather have: A doubtful $1.5K once or a more likely $3.5K over and over again?