[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.