[reitzensteinm]

The numbers do not add up. Assuming 1,000 customers;

$8,000 in losses is an $8 loss per customer. With $3 of revenue. So they're claiming $11 in variable costs to service each customer, for $13 worth of product. No way that is correct - if it is, Groupon is merely the straw that broke the camel's back. Their markup on product should be way higher.

Also, that's assuming no increase in follow on transactions, and that all coupons were cashed.

I don't buy it. Although it definitely could have been a net loss, it wasn't of that magnitude.

[dzlobin]

Are you familar with the restaurant/food industry? For most places, profit margins are pretty awful. I'll admit ~14% is low for the type of venue this is, but believe me this is common

[reitzensteinm]

I think you're confusing gross margins on individual items with the overall profit margins. My understanding - and I'm not especially familiar with the industry - is that markup on individual items sold is high (after all, how much does a cup of coffee cost to make?), but the fixed costs - rent and employees - are also high.

I'm saying the number didn't make sense because you have to look at the marginal cost of servicing those customers. The rent didn't go up because more people were coming in. Extra employees were only necessary if the place was already busy, etc.

[mediaman]

You've got it exactly right. I found data showing that the restaurant/cafe industry (publicly traded ones, anyway) earn gross margins between 25-70%, depending on the company and how they account for COGS versus operating expenses (the real number, measuring only the raw inputs of goods per sale, is toward the higher end of that range).

Retail is all about generating enough volume to cover fixed expenses.

[jlees]

The item they're selling for $13 could be a low/zero margin product usually used to bait further purchases or tips. Another issue they noted was people not tipping as if they had paid $13, but tipping as if they had paid $3.

[reitzensteinm]

That would explain it - however, what items fit that profile in a coffee shop? Certainly I can't think of anything from my local.

The tipping is a legitimate issue, however, I bet there are people that spent less than the full value of the coupon, tipping the scales back in the other direction, so I believe my back of the napkin analysis stands.

[smackfu]

Coffee shops are interesting because the food / pastries are low-margin while the coffee is high-margin. And people are much more likely to just buy coffee than to just buy a pastry. So as your average check increases, your margins go down.

[wiredfool]

What I learned in food service is that a general formula is 30% food cost, 30% labor, 30% overhead, 10% profit. If things are running well, you take home some money at the end of the day. The margin for error isn't huge.

[mtr]

So assuming that these customers didn't buy anything over $13, her COGS should have been $13 * 0.3 = $3.90. This also ignores the fact that there are people who paid $6 for the coupon and never redeemed it.

Now lets assume that some people didn't redeem the coupon and that her COGS is a bit lower, so COGS = revenue. As labor and overhead are 'fixed', she shouldn't have lost any money as long as these weren't existing customers who decided to use the coupon.

If 100% of her existing customers used the coupon she certainly would have seen her profits hurt. If 100% of these people were new to the business, she wouldn't have made/lost any money on each transaction, but she would have obtained a lot more exposure.

So before deciding to do one of these deals a business owner needs to have a clear handle on their costs, the expected mix of new/existing customers, and the expected revenue from the new customers over some reasonable length of time.