[vaksel]

at this point groupon has more or less a monopoly so they can easily rape the businesses..

but this article seems to blame groupon instead of the business owner.

1. why would you price your promotion at a loss? 2. losing "$8,000" may sound like a lot...but in reality it should be looked at as $8,000 worth of advertising. And getting your message out to 200,000 or so local customers for that little isn't that bad.

[jcnnghm]

1. That's groupons business model. The average profit margin in the service industry is less than 10%. If you give people a 50% discount, you are definitely going to be losing money. The idea is that you let them try your place, then they keep coming back. In practice, most of the places I've talked to haven't seen it this way.

2. It's really expensive for what it is, and could easily tank a small businesses cash flow. I know of two different places that did $30 gift certificates for $15. Of the $15, $7.50 went to Groupon, so the businesses got $7.50 per transaction. Both sold over 1000 coupons. If half of those coupons are redeemed in the first month, and it costs $27 to service each $30 transaction, you would see a negative cash flow impact of $9,750, and a total cash flow impact of $19,500. The average restaurant spends about $850/month on advertising, so a single groupon would soak up their entire budget for two full years.

Everybody that I've talked to that has used groupon (~10 restaurants) has said that they would never use it again. It's too expensive, and the people that buy it aren't the people they want to attract.

Ultimately, I'd be surprised if somebody else didn't come in and offer the exact same service for free. It doesn't take a genius to sell stuff to people for less than it costs. Incidentally, I did a survey of some of my customers (http://barsannapolis.com) about offering the service for free, and they largely weren't interested because it doesn't produce the results they want.

[mediaman]

Both of your statements are based on equivalency between marginal cost and average cost.

The marginal profit in the service industry is not less than 10%. It would be nearly impossible to pay for all the fixed costs of running a service company (rent, labor, depreciation of PP&E) if that were true. Yes, the net profit margin is less than 10% (typically 5-7% for restaurants). The two are not the same.

Many gross margins in the service industry are 30-50%, or often higher. Think of the actual cost of a cup of coffee, or of the ingredients in a sandwich. It's not high relative to the price charged. But quite a few must be sold in order to cover the fixed costs of keeping the store open.

This is why location matters so much in retail. It is not because it allows you to charge significantly higher prices, usually. It is because it gets you much higher volume, which is principally what determines the net profit of a retail outlet.

That's why Groupon actually works quite well for many such service businesses. It drives volume, which is what matters for net profit. But it would be loss generating for a low gross margin business to use it, such as a high volume mass retailer.

[jcnnghm]

If you are losing money on each transaction, you can't make it up in volume, you can only lose money faster. Your gross margin would have to be 75% to make money with a groupon promotion, without accounting for any of your fixed costs. The only thing that might be able to touch that is some alcohol sales, assuming you could control employee theft and shrinkage, which you can't.

Let us also not forget that a restaurant isn't infinitely scalable. If your tables are full of people using coupons, you can't just keep packing them in, eventually people are going to go somewhere else, and the guy that is going to leave isn't the one that already paid.

[wooster]

   The only thing that might be able to touch that 
   is some alcohol sales

Or coffee. Drip coffee margins can be greater than 70%. Espresso drinks can be greater than 80%.

[bbqtom1400]

Thank for your opinion and you are on the right track. It actually is a bit worse than people whom aren't in the restaurant business probably realize. The average restaurant in the U.S. makes between 2.4 and 3.6 on every dollar without alcohol sales. Restaurants that serve any alcohol along with their food sales actually do a bit worse on the average, 3.4% on the higher end. The average is the key and folks who think it is much higher don't do the books. On the average most cannot afford many hits on their controllable costs besides giving 50% away on their food sales (coupons for alcohol are usually illegal). For every dollar spent on advertising or live music I need $4 or $5 back to break even with what was given away, coupons as an example, or spent. I have even put a coupon, as a lesson to a coupon salesman, with no reduction in price, on purpose. I received many,30 the first day, but no one I saw or spoke with ever came back to pay full price. At least the coupon salesman stopped bugging me. Groupons are OK if you are a new business. In my experience they fill your business with folks who rarely return. Thank you.

[xentronium]

2. It's -$8000 net gain which means that advertising cost them $8000 plus any additional profit it brought.

I still don't get it why you would vouch for such a thing like groupon. For me, it's quite obvious that you'll get a line of people wanting to buy coffee and a cake for this coupon and nothing more. With zero conversion AND negative profits.

[potatolicious]

I find that curious also. Based on every single Groupon retrospective I've seen by any business, all of claimed that repeat customers in that demographic are almost non-existent.

How is Groupon dealing with this? Clearly their current business model is only sustainable while businesses still believe they can net repeat customers via these promotions. Given the increasing amount of negative press - most commonly from small businesses - it's only a matter of time before everyone clues in.

[cludwin]

By that logic you argue that $40 CMP's are reasonable for a email marketing campaign.

I haven't priced that kind of a service and on the surface it sounds pricey. However it may in fact be much cheaper than some other mediums with that type of each like radio or TV ads.

You could always advertise using google local which would be much cheaper, but something tells me that being the groupon deal of the day is a much more compelling proposition.

I guess I agree, it isn't a bargain but it's probably not the worst investment considering the the alternatives.

[il]

Not sure about Groupon but FYI a well-targeted list usually goes for about $60-$80 CPM for a single mailing.

Yeah, they're that valuable.

[espadagroup]

Thrillist charges $200+ for it's email ads.