The effectiveness of Groupon has been questioned in the press recently. A number of merchants have complained about too many customers. Groupon has responded to help business better prepare for the influx in customers. One recent study by Utpal M. Dholakia at Rice University found that 1/3 of Groupon deals are not profitable for the businesses. Lets ignore the significant chance that businesses don’t know when these promotions are profitable (it requires a level of tracking and analysis beyond the capabilities of most restaurants). Assume they aren’t profitable if you can’t get guests to become return customers. Here are 5 pieces of advice to make an unprofitable Groupon promotion a success:

1) Be prepared for the rush and provide excellent service. Assume the promotion will not be profitable unless 10% of the guests become return customers. At a delivery restaurant in Beverly Hills, we always make sure to overstaff on days when direct menu mailers hit. We compared the lifetime value of a guest and calculated that if we have a 1% response rate, we need about 15% of those customers to re-order. If we take more than 45 minute to deliver the food they would be unhappy, so we doubled the drivers on call and took a small hit on the margins. When you run a Groupon promotion, DOUBLE the staff for your entire restaurant. Use an extra hostess to make sure that NO GUEST leaves angry. If you have a long wait, pass out appetizers to people in line.

2) Collect contact information. Groupon throws 500 new people at your restaurant; making them stick is the big challenge. To increase stickiness put out the comment card and ask guests for e-mail addresses. This might also be a good time to get Fishbowl (they will type up all those contact cards for you).

3) Track the results. Add a new menu item to your point of sale system called “Groupon promotion” to track the behavior of Groupon users. If you have MyMicros or any basic reporting system you can look at check totals and tip averages. You may discover that doing a Living Social campaign in 6 months makes sense. You might also find that automatically including 20% gratuity is necessary to keep staff from revolting (in one promotion Eat Metrics tracked, we found that guests were tipping 18% of the pre-discount total and 22% of the post-discount – which is awesome!).

4) Use the right deal-a-day service. A restaurant in Los Angeles that uses Eat Metrics ran a Blackboard Eats deal and had a great experience. The check average for the campaign was better than expected (about 20% off the normal average) and was slightly north of break-even. If your check average is higher than the average Groupon restaurant, take a look at Bloomspot or Blackboard Eats. Be sure to study the promotions and comparable restaurants on all the deal sites.

5) Share your results with the community. If you take the top 4 points seriously you will have some interesting data to help others make similar decisions. Let us know what percentage of guests actually joined your e-mail list, if they were good tippers, or if they spent more than the face value of the Groupon.

Last Comment

Although I am skeptical the Groupon user base is a highly desirable group of customers, few people have actually made a convincing argument that shows they don’t return in significant numbers. Yes, Groupon should do a better job of limiting the number of coupons sold (at least to make it a positive experience for their users). Yes, they should work with restaurants to ensure they are prepared for the rush and have systems in place to benefit from those new guests. But ultimately, the most damning Groupon discovery would be that their user base will never become loyal return customers. Until anyone figures that out, the verdict is still out on Groupon effectiveness.

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