Take a look at this offer:
This is a typical offer a restuarant might use on a deal site like Groupon.
As you can see from the number of purchases, the offer is working well. It’s brought in over 1,000 customers.
But how much money is the restaurant making from this offer?
We don’t know for sure. But we can estimate.
It’s easy to calculate how much revenue the offer is generating:
1,000 purchases at a price of $12.50 = $12,500.
But there’s a catch of course:
If I’m informed correctly, Groupon is going to take a 50% cut of that revenue for themselves (!).
$12,500 revenue – 50% Groupon’s Cut = $6,250.
Now we have to subtract the costs of preparing that food for the customer.
We don’t know exactly what this restaurant’s margins are. But, according to Restaurant Report, food and labor costs typically consume 50% – 75% of the sales in a profitable restaurant.
We’ll be generous and give this restaurant a 50% margin.
$12,500 revenue – 50% costs ($6,250) = $6,250 profit.
But remember that Groupon has already taken half that revenue. So the real equation is:
$6,250 revenue – $6,250 costs = $0 profit
On paper at least, this is not looking good.
Granted, a percentage of the customers will buy additional food or beverages or will become a regular customer.
But also remember that we’re giving this restaurant a generous assumption of a 50% margin. Often times the costs of food and labor will eat up close to 75% of the sales.
And, this restaurant is offering a 38% discount. I’ve seen restaurants discount their food up to 50% or more just to get the attention of new customers.
So maybe this will prove to be profitable in the long-run.
But it’s certainly starts out as a losing proposition. This owner has to dig himself out of a hole rather than be profitable from the start.
How to Escape the Discount Trap
Let’s look at an alternative scenario.
What if this restaurant was able to get just half the number of customers on their own list?
Maybe it’s people coming in to redeem the Groupon promotion. Maybe it’s other customers that come in regularly.
But let’s say this restaurant acquired their own list of just 500 customers that they could text and email offers whenever they wanted.
Now, let’s say this restaurant decides to send the exact same offer to their own list of customers.
They get a 10% response rate (a conservative estimate when text and email are combined.)
500 customers x 10% redemption rate = 50 purchases
50 purchases x $12.50 = $625
With me so far?
But hey, it’s a good offer. Might as well send it out twice a month 🙂
The second time, they’ll either get new people to respond (because the timing is better for them) or maybe some of the same people will redeem the offer again!
So each time they blast the offer they bring in $625.
And guess what?
They get to keep 100% of the profit for themselves. No need to split the revenue with a deal platform.
But it gets even better.
Because when you have your own list, something wonderful happens:
You eliminate your competition.
No competition means no need for 30-50%+ discounts.
On the next page, I’ll show you how you can finally charge what your food is really worth.