Deal or No Deal?
Everything you REALLY need to know about those deals but were too afraid to ask…
By Michael Said
This has been an exciting year and it has been quite a while since I put fingers to keys (used to say pen to paper in the old days), waiting for something, besides the terrible state of the restaurant industry, to rouse my interest. I do not wish to belabour the dismal state of the industry, except to say that it has operators clutching at straws and throwing a fair amount of “Hail Mary” passes into the air.
Enter Groupon et al and all the promises of new customers, repeat business and full restaurants. Groupon and other local and international deal makers have proven to be wildly popular. What’s not to like? I can get a R500 massage for R199, I can get my hair done at a fraction of the price, learn to use all sorts of equipment and dine out at 60% off. Who wouldn’t like it?
Well, apparently, some merchants aren’t too enamoured with it and before you sign on the dotted line there are some things you need to consider.
On the upside there is the marketing shpeeeeeel you will surely be dealt.
We bring a lot more customers to your door… You certainly do attract more customers who were never going to visit you at your regular prices. The only problem is, will they return when the price is back to “normal”?
We will advertise your business for you… Granted this is a BIG plus. They have huge data bases and resources that few restaurants/businesses could reach on their own. So if you are doing this as a brand building exercise and if the costs are right, go for it.
We will help you move stock… Great, just make sure it is stock you were not moving already and try to ensure that moving all that stock isn’t actually costing you money.
We will help you build relationships… Well not with a one-time deal, but what if you could structure a deal that rewarded customers if they came back a few times in order to get the benefit of the deal?
We generate revenue… If you have a low cost or fixed cost business, this would be ideal. Let’s say you owned a bowling alley with fixed costs and overheads and a product that was not being depleted (besides a little extra maintenance), this would be fantastic. Maybe a hotel room or conference venue that was standing empty, but if you are reading this, you may own a restaurant with high input costs and possibly even turnover clauses with both your landlord and your franchisor… now things get a little tricky to say the least.
So even the upside appears to have a downside and I haven’t even mentioned the real problems you may anticipate.
Before we take a closer look at these, the first thing you need to understand is exactly how a discount affects your profitability. For the purposes of this exercise we do a simple calculation using the example of a restaurant. Assuming the restaurant generates sales of R10, 000 at a 40% cost of sale (here’s where I hope you know your cost of sale) and your overhead expenses amount to 45%, effectively this means that for every R10,000 in turnover you are paying out R8,500 and retaining R1,500 for yourself. If I am erring at all, I am erring on the generous side. Quite a number of restaurants are retaining a lot less.
Now if the restaurant generated R10,000 in sales at a 55% discount, round about what they will explain to you “works” as a deal, you receive only R4,500. From this you must deduct your dealmakers charges, which I have on good authority is between 20% and 50%, as well as a processing fee.
While overhead costs may reduce fractionally, let’s be generous and say by 10% to R4,050, production cost will remain at R4,000. The deal still cost you R8,050 and if you are lucky you will get back R3,500. This little marketing exercise ONLY cost you R4,550 per R4,500 of turnover (i.e. R10,000 turnover less your discount offer of 55%).
Now the deal is over and you are waiting for all those customers to come back and enjoy your faire at the “normal price”. (Don’t hold your breath). Let’s say they all do come streaming back, (yeah right). To recoup the money you expended on running the deal, at your current retention of 15%, you will have to generate an additional R30,333 in sales. I am no accountant or rocket scientist, but basic mathematics seems to be at work here.
Aren’t you glad I got all the good news out of the way first?
Now let’s take a look at some “challenges” (us marketers hate to say “problems”) you may encounter.
Deals are simply not good for your brand image! Now that you have offered that deal at a discount price how are you going to convince everyone that the meal/product/service is still great value at the old price? Have you been fleecing them all along? Will you be fleecing them now?
Deals don’t generate repeat business! Chances are you will never see those “new” customers again without another voucher in hand. Research in the US shows that, on average, only 19% of voucher users become repeat customers, that means it takes a long time to recoup that “marketing spend”.
Deals attract bargain hunters! The majority of voucher users are “deal seekers” and bargain shoppers, translating to a low spend per head and little chance of generating repeat business. Also, the greater the number of vouchers redeemed the higher the cost of your marketing exercise, so be sure to limit the number of vouchers sold.
Deals are not profitable! While I don’t wish to belabour this point, please ensure you have a clear grasp of exactly what is at stake.
Of course there is one other point they may not mention and that is “breakage”. Nope, this is not what your waiters drop, it is the term used in loyalty programs for deals not redeemed. Let’s say they sell 500 deals on your behalf, but only 400 people arrive to redeem within the allotted time, you only receive payment for the redeemed vouchers, less their commission of course. So, in fact, unclaimed vouchers are more valuable to them than claimed ones.
My good friend Nick from Global Wrapps Franchising took the trouble to write to me and point out the following positive aspects of these programs. Thank you Nick.
· Excellent method to create awareness of a new brand, new location or new product range.
· The ability to target a specific market segment. Those with internet access and credit cards.
· It is up to the store owners and staff to create return customers, by providing excellent service and quality products.
· Voucher users are usually big talkers/facebookers/tweeters who tell everybody about their great deal thus spreading brand awareness.
· All advertising costs money and the mathematics thereto apply to all advertising campaigns. Compare the cost of such a voucher campaign to running a radio campaign, TV ad or billboard. We know print ads are costly and the results of these campaigns are hard to measure. Undoubtedly nothing beats word-of-mouth advertising, but Groupon style campaigns certainly have their place and that place is certainly ahead of print campaigns and for most small traders ahead of radio and TV.
Of course there are many instances where deals will work and I am not suggesting for a second that you dismiss them out of hand, but please go in with your eyes wide open, not like Posie Bakery & Café in Portland Oregon (Visit http://posiescafe.com/wp/?p=316 for the details).
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