One of my long-time clients approached me regarding running a large Groupon promotion. This client had used Groupon and related websites (LivingSocial, Kijiji Deals, etc.) before with success so I thought nothing of it. After reviewing their deal, which seemed quite generous (but not unreasonable from a profit point of view), I gave my official “go ahead” and they ran the deal.
How Groupon Usually Works
Normally you would talk with your Groupon representative and set up the terms of the deal. Depending on your business the deal could look like any number of different things. In this case, since the client was a restaurant, the deal centered around a 3 course brunch or dinner menu for a set price.
With the deal in hand, Groupon then creates a landing page that stipulates the terms of the deal and would then launch the promotion to its subscriber base. This is the standard Groupon model, and is typically the same model that other “deal of the day” type websites will follow. When this model works, it works very well. In our case it worked too well, and for the wrong reasons.
Groupon does not charge up front, but rather will take a percentage of the value of the Groupons that are sold. So, if a Groupon is sold for $20 you can bet that Groupon is taking between $7 and $10 as their commission. What this means is that the business’ you see offering insane deals don’t actually receive the value of the Groupon that’s sold, but rather what’s left over after Groupon takes its cut. It doesn’t take an imaginative person to see how this could be very dangerous for a business if not carefully orchestrated to ensure some level of profitability (even if just means breaking even).
Our Groupon: An Exercise in Frustration
The original deal that we had arranged with Groupon was very generous: a three-course set menu brunch for $30 (with an approximate value of $60), or a three-course set menu for dinner for $45 (with an approximate value of $75). Both components of the deal were very generous in their own respect, but unfortunately the communication process between the restaurant and Groupon broke down at some point.
Normally, with traditional marketing such as a billboard or phone book ad, the business has the opportunity to preview the ad to ensure that its content reflects the wishes of the business. In the case with Groupon no such opportunity exists. Or, if it does, we were not able to preview the landing page that stipulated the terms of our deal. When our deal launched to the masses we were shocked at the resulting storm of inaccuracies and miscaculations:
- While Groupon did properly state the brunch portion of the deal, it worded the dinner portion of the deal in such a way that caused serious financial loss to the business. Instead of being worth approximately $75 the Groupon that was sold was worded in such a way that it implied a $92 discount. In the interests of customer service the restaurant was forced to modify the menu to best accommodate the “new” deal as dozens of Groupons were being sold every hour, leaving no opportunity to correct the misstatement.
- The initial deal was to run for 1 day, but given the rate of which the Groupon was selling (having sold over 1,000 the first day) Groupon extended the deal over the weekend. As it turns out, this is allowable according to the terms and conditions that Groupon presents you with. In the end the restaurant sold over 2,600 now-unprofitable (nor “breaking even”) Groupons resulting in an estimated loss of $18,000 (or more).
- Groupon did not meet their payment obligations, causing serious financial harm to the restaurant. Groupon states that it will pay 90% of the value of the Groupons sold within 3 business days. In our case, this represented approximately $45,000 that the restaurant was owed. As I’m sure you’re guessing, we were not paid within 3 business days. In fact, nearly two weeks passed before any payment was sent; and, when the payment was sent, it was for $14,500 (far short of the $45,000 owed). It took another 10 days for Groupon to pay the additional $31,000.During this time the restaurant was now swarming with Groupon customers, resulting in a food cost increase of 26%, a staffing cost increase of 20%, and a liquor cost increase of 11% (as it turns out, Groupon customers aren’t partial to drinking).
- Many Groupon customers started complaining and posting negative reviews due to their perceived lack of value from the coupon - Reviews are rife with comments such as “the portions are small”, or “I was unable to use the coupon on New Years Eve”, etc. In fact, I am amazed at the response that the restaurant has received from the Groupon community.Unfortunately, the restaurant had to react when the $75 coupon became a $92 coupon. That $18 difference in value goes a long way, especially when it comes to a 3 course set menu.
The Bottom Line: I Am Done with Groupon
Many business owners flock to daily-deal type sites due to the perceived lack of cost. Unfortunately, many of these businesses soon find themselves overwhelmed with incentivized customers- the internet is rife with stories of businesses having to shut down due to the influx of coupon customers. In this case the restaurant won’t be shutting down, but it’s been a long, hard, painful, and expensive lesson that is harming the restaurant financially as well as its reputation.
The sad thing is that the amount spent on Groupon (approximately $38,000 when you factor their commission and the $18,000 in lost revenue due to their creative and ultimately incorrect description of the deal on the landing page) could have been used to launch a significant multi-media campaign.
Note: I wanted to comment that your mileage with Groupon may differ. Our experience was likely the exception to the rule and certainly not the norm. As I said at the beginning, we had run Groupons prior with success. However, this latest experience was so far beyond unacceptable that to continue to recommend Groupon would be negligent on my part.
As always, do your own research and due diligence… and be sure to read the fine print.