Survey: Restaurants get raw deal with Groupon

A recent study from the Jesse H. Jones Graduate School of Business at Rice University concluded that restaurant businesses fare the worst of all service-oriented businesses that run Groupon deals.   

Utpal Dholakia is the author of the study and is associate professor of marketing at the Jones School. He conducted surveys with 150 businesses spanning 19 U.S. cities and 13 product categories that ran and completed Groupon promotions between June 2009 and August 2010.

The results?

Groupon promotions were profitable for 66 percent of the businesses surveyed; however, more than 40 percent of the respondents indicated they would not run such a promotion again. Among the service businesses (restaurants, educational services, tourism and salon and spa), restaurants fared the worst; salons and spas were the most successful.

For the unfamiliar, Groupon is a social promotion site that features a daily deal for each city in which it operates and offers consumers a significant discount for a local good, service or event. The discount is valid only if a minimum number of consumers purchase the deal.

The company has gotten a lot of press since its 2008 debut – lately, for sheer market penetration: At the end of August, Forbes ran a story calling Groupon “the fastest-growing web company in history.”

But how good for business the site’s promotions are is a point of debate. The Jesse H. Jones study provided evidence that "satisfied employees" is the most important factor for the Groupon promotion to work successfully for a business. If employees remain satisfied through the promotion, the likelihood of its profitability is significantly higher. The percentage of discounts offered and the number of Groupons sold did not predict the deal's profitability. It also did not offer a percentage of Groupon users who purchased beyond the Groupon’s value or bought the item again at full price.

"Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal," Dholakia said. "So employees need to be prepared for this type of customer and the sheer volume of customers that might come through."

Other restaurant-relevant findings of the survey included:

  • Businesses with unprofitable promotions reported lower rates of spending by Groupon users beyond the Groupon's face value and lower rates of return to the business again at full price.
  • Respondents indicated they had largely negative perceptions of Groupon's competitors.

"I think these findings show that social promotion companies need to better balance consumer appeal with positive outcomes for the small businesses offering them," Dholakia said. "Right now, these deals are tilted too far in consumers’ favor."

Dholakia outlined some strategies for success that included using promotions for building relationships, such as the offering of smaller discounts for repeat visits. "Instead of offering $60 worth of food for $30, parcel it out to offer $20 worth of food for $10 over the customer's next three visits," Dholakia said. He also suggested crafting deals to push unpopular items.

 

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User Comments – Give us your opinion!
  • Paul Stewart
    111300367
    If a restaurant offers a half-off Groupon, as in the example, say $60 for $30, it's no wonder the initial deal isn't profitable. When you factor in the cost of each Groupon, since they receive about 20% of the charged value, each transaction barely reaches break-even. Satisfied employees are only part of the solution, attracting satisfied & loyal customers is more important, especially in a controlled local market. Groupon can attract many customers outside the "real" market radius who will never translate to regular customers. Social marketing isn't always smart marketing, local marketing builds better business, and customer loyalty. It's not just getting them in the door the first time, it's what you do to make them come back the second time, with their friends. Groupon continues to prove that discounts usually only profit those that sell the discount schemes to others.
  • Jason Russell
    110454321
    Smaller businesses can now compete with the "BIG" guys without breaking their ad budget. While its true that the initial offer a business allows should not COST them money, it should be attractive. A key here for repeat business is and OPT IN program. Enter Ad Splash Mobile. Go to www.AdSplash.net and see how Mobile Cell Phone Advertising can not only generate IMMEDIATE income through discounts and coupons, but captures iapp/itouch, mobile web, internet users, and SMS texting to, once or twice a month, send messages with new specials, offers, or even another discount...directly to their cell phone! They just bring the cell phone to your place of business and show you the coupon. They win, and you win! www.adsplash.net...tell all about it!
  • Eric Carlson
    108270999
    The important thing to consider when using Groupon is that it is not going to make you money on the number of Groupons sold. They will even tell you this! You'll have an opportunity to make money (or break even) on the upselling of items and/or additional items bought at the restaurant as well as repeat customers. You really need to consider this as advertising dollars and not coupons or gift certificates. You're gaining access to the hundreds of thousands of members of Groupon. Instead of paying several thousand dollars upfront for an ad, you are paying a little bit each time a Groupon is used. There are a lot of pros and cons. The full study is interesting to read. I have plans to use Groupon in the near future, and will find out soon if it is a raw deal or a good deal.
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