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.
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.
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.
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.
The only thing that might be able to touch that
is some alcohol sales
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.
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.
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.
Yeah, they're that valuable.