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The Restaurant Maze

Daily-deal discounts can be like playing with lighted matches


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Last Spring, a small cupcake shop in a suburb of Reading, England, decided to drum-up some business by using the latest in marketing techniques: a daily deal offer through the website Groupon. The result was a flood of customers and a financial loss so bad the bakery nearly went out of business.

The Need A Cake Bakery was so overwhelmed it had to hire temporary employees to handle the rush. The existing eight workers put in long hours to the point of exhaustion. In the end, they made 102,000 cupcakes and lost $19,500 on the deal.

Daily deal sites like Groupon, LivingSocial and their various competitors have a place in the restaurant marketing arsenal. Few marketing strategies are as good at bringing in new customers, quickly. This can be a boon to a new business making an impression, or an old one eager to remind customers they’re still in business.

But for a small company, including many franchises, constructing a daily deal is like playing with fire: one wrong step and the entire business can go down in flames.

A closer look at the deal the bakery crafted reveals some significant flaws that led to the bad experience. How can franchises, restaurants and other businesses learn from this bakery’s mistake? We went back into our past reporting, while using this bakery’s experience, to craft some important tips:

Don’t make the deal too good. The bakery offered Groupon users a 75-percent off deal. Users got a dozen cupcakes worth $40 (£26) for $10 (£6.50). That was entirely too good a deal. Groupon, and other sites, generally take about half the revenue from a deal, so the bakery actually took home $5 for every $40 in cupcakes that were sold. That’s 12.5 percent to the business. Half-off the value of a deal is usually enough of a discount to bring in plenty of customers, while making it easier for a business to break even or limit losses.

Set a low value limit. The bakery let users buy a dozen cupcakes worth $40. That’s an awful lot of cupcakes. Consumers are unlikely to buy many more cupcakes than that. While it’s OK for a daily deal to lose money (because the business is buying access to new customers), the key in limiting losses lies in the willingness of consumers to buy more than the value of the coupon. Set the value limit low, based on your average check, perhaps enough to give one or two people a meal at a full price. Had this bakery set the value limit at half that amount, or even a quarter (because people just don’t eat that many cupcakes), its losses would have been minimized.

Set a number limit. The bakery didn’t limit the number of people who could buy the daily deal. So 8,500 customers bought coupons. Daily deal sites have high redemption rates and bring in a lot of customers, awfully fast. And the surge was too much for the bakery to handle on its own,  which extended the company’s losses. By setting a limit on the number of coupons that could be sold, the bakery limits its exposure while making sure it could better handle the rush of traffic. In addition, big crowds can turn off loyal customers, so in the long run a deal that’s too good may drive existing customers away, which defeats the purpose of the daily deal in the first place.

We might have thought Groupon would have done more to guide this business into crafting the right deal. In public, the Chicago-based start-up blamed the bakery. But it has far more experience with the impact of its deals. And we might remind Groupon that it needs businesses to continue to be willing to use its services, and it certainly didn’t need the worldwide bad publicity the episode generated, especially after its recent Initial Public Offering (IPO). Shortly after news of the bakery’s problems hit, the company’s stock price plunged, embarrassingly falling below its $20 IPO price. As of deadline, it had recovered.

A golden example

Companies looking to make daily deals would be better off following the example of another Chicago-based company—a little burger chain called McDonald’s, which recently sponsored a successful, national deal through LivingSocial. The company sold coupons for five Big Macs and five large fries for $13. That’s half the value of those items. But by giving coupons, the company made it more likely customers would order drinks, which come with a higher profit margin. The coupons made sure people would come in more often, and it limited customers to certain products. The national deal was also capped at 1 million, which ensured people wouldn’t go crazy buying the deal.

There are other tips we can suggest to companies looking into daily deals.

Be strategic. Daily deals are good for introducing customers to a new restaurant. Use a daily deal after opening a new unit, or if you’ve taken over or remodeled an existing restaurant, or made some other major changes you think would be nice for prospective customers to see at a discount. But if you’re struggling and desperate for business, you should probably think twice about daily deals because of the potential of a money-losing deal.

Train staff. If you do such a campaign, make sure your staff is ready for an onslaught of customers. One key point is to treat daily-deal users like a full-paying customer—businesses that treat those users like second-class citizens ensure they don’t return. That defeats the purpose of a campaign.

When in doubt, don’t do it. Seriously, if you don’t know whether a campaign would be right for your restaurant, don’t do it—or use one of the lesser-known sites with fewer members instead. And remember: There are other social-media strategies, such as loyalty programs and email lists, that can also be effective at bringing in customers without half of the revenue going to someone else.

Reporter Jonathan Maze writes a daily blog for our sister publication, The Restaurant Finance Monitor, in addition to being Franchise Times’ restaurant reporter.  For more restaurant news, check out the Monitor’s website.

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