livingsocialescapes
1006 days ago
 

Number crunching the Coupon Craze – Evil or benign?

From the outset I have always challenged the notion of the Groupon – aka Coupon Craze – model.

The current process of 50% off and sharing the residual revenue between establishment and coupon company doesn’t make sense to me.

However, there is some evidence to indicate that I am not entirely correct and that there may be some value to the Coupon Craze model.

livingsocialescapes

eMarketer recently published an article comparing the different coupon sites and their effectiveness. The article looks at a number of the Coupon sites such as Travelzoo, Groupon, LivingSocial, OpenTable and Buywithme.

Reading the conclusions of a study by Brown University, it sounds positive.

But within the study there is inconsistency around the data. One big reason is that the methodology of the testing results from people’s perceptions of their behavior rather than their actual behavior.

Anecdotal evidence of companies going under is hard to prove, while the number of unhappy restaurants is legion.

If we run the back-of-the-envelope maths on the study, there is still not quite enough money to compensate the seller for the direct loss of revenue he may or may not get, as a direct result of the individual coupon. There is also the issue of wastage and how much of the customer’s cash ends up unused.

In the first study, the results would show the seller making a loss. The 38% existing customer using a coupon would not be compensated by the 31% new customers.

In the second study the residual return to the site would only be 20% on average (Brown University). However the amount of additional revenue from the consumer add spend would not cover the incremental cost of the services in my view.

Bottom line here folks is that some conclusions can now be drawn.

Coupon Craze sites do stimulate additional traffic. But there is not nearly enough empirical evidence of performance to draw the necessary conclusions that these sites are long term sustainable as value to a vendor.

I don’t think we can assume that this is sustainable for these sites, otherwise we would have heard plenty of successful and happy sellers’s stories and, as such, the local businesses clamouring for the new found revenue stream.

The reality is that there is a high possibility that the model will reach a point of diminishing marginal returns.

But worst of all, long term loyalty at full price is not going to sustain the vendor. Thus further eroding long term loyalty to a local brand.

 
 
Timothy O'Neil-Dunne

About the Writer :: Timothy O'Neil-Dunne

Timothy O'Neil-Dunne is a contributing Node to Tnooz and managing partner at travel consultancy firm, T2Impact. He serves as the lead for the airline, aviation and airport practice. He is also a Co-founder of VaultPAD an accelerator devoted exclusively to travel and travel-related startup businesses.

Timothy was a founding management team member of the Expedia team where he headed the ground transportation and international portfolios, before founding T2Impact in 1998.

He has worked in aviation and travel distribution for more than 30 years, including time with Worldspan as head of technology where he managed international technology services from product to infrastructure.

He is also CTO and deputy CEO of Lute Technologies, a permanent advisor to the World Economic Forum and writes on the T2Impact Blog.

 

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  1. Shane

    The trick for the restaurant is not to include booze in the coupon. If the meal is half price you are going to buy a bottle of wine and there are huge margins for the restaurant in that.

    S

     
  2. Bob Rogers

    I think its interesting that many people here are talking about restaurants primarily when evaluating the value to businesses of these coupon offers. I made the point in a similar article on the subject in Tnooz that this model is much less appropriate for accommodations, which are for obvious reasons not usually ‘local’ businesses to the consumer. I can understand that a local restaurant may be able rationalize the loss of the coupon against the possible future repeat business, but this breaks down in the case of a hotel, because the assumption that the customer will be in the area in the future cannot be made. I think this is bad business for hotels, and I hope more and more hotels will realize this.

     
  3. Andrew Shepp

    I am never loyal to establishments other than my local, but when I use a coupon I always overspend so even if they don’t get my return traffic there’s a good chance they made out well on my one visit.

     
    • Rob Reinhold

      Even if you overspend, I don’t think the restaurant will make a profit on your meal. A really well-run restaurant might make a 5% profit margin on average. So let’s say you went crazy and spent $100 total, more than you usually would have. That cost the restaurant $95 (food cost, overhead, labor, etc), and you have a 50% off coupon, so you’re going to give them about $50 not counting tax and tip and whatnot. The restaurant is going to eat at least $40.

      Usually the deal is something like “$25 for $50 worth of food.” Groupon splits that with the restaurant, so the restaurant gets $13 but has to deliver $50 worth of goods. Say you still spent $100 (overspent), you’re still giving the restaurant $50 plus the $13 from the Groupon, and the restaurant eats $37 for the pleasure of your company. And the more people that buy the Groupon, the more money the restaurant looses. If instead the restaurant had put a 10% off coupon in the paper they’d only have to eat $10 to get you in the door.

      For a restaurant, 50% off just doesn’t make any sense, especially when you have to give half of that to another company. The more traffic you get from it, the worse off you are. It’s not surprising to me that most of the Groupons I see now are for spas and massages and such, where the profit margin can be a lot higher.

       
      • Andrew Shepp

        Actually it was mostly booze where the markup is giant. Maybe I should eat more.

         
  4. Kjesten Winters

    As owner of restaurant I thought OpenTable was too expensive. I am fortunate to have a background in Engineering so designed my own reservation system. It worked out so well, I wrote an iOS Application, which I call Table Touch and now is on iTunes.

    Not sure a competitor with OpenTable, and others, but just trying to help out our industry. I wrote it to solve our problems at our own restaurant. Restaurant owners check it out, and see if it meets your needs. We are all in this together, and sincerely hope you agree it is the most cost effective solution packed with features (I personally love the Owner reports).

     
  5. Heddi

    Too right Timothy! I’ve seen tons of articles about business owners who have hosted a load of promotions and handled these well. So we’re not talking about low IQ people who have no idea what a coupon means. I really think you’re right in that the pitch is so appealing that all logic must go out the window. It’s like the Harrods sale but without the security :)

    I also agree that coupons have their place as a good vehicle but the way they’re promoted & the fine print is absolutely screwing over companies. There was a recent article (can’t remember where), with a very savvy business owner who nearly went bankrupt after 12 years in business because a Groupon went wrong.

    Re the last fool – I think i’m that person. Someone has to be last!

     
  6. Timothy O'Neil-Dunne

    Heddi – one of the funny things is that the way the coupon provider is treated in many cases like an idiot. Having sat through several pitches from these companies – big and small including all the biggies, I am appalled at the way the pitch is made. The current pitch is almost universally that the business will get new traffic. At exactly the same time the ads on radio and in print imply that you can save money especially if you are an existing consumer.

    I think coupons have their place as a tactical vehicle. They always have. But the commission rates of 50% of the residual amount just doesn’t add up to any smart decision. I just cannot see it. If I am wrong – can someone please explain the mathematics and logic of it.

    Perhaps we should put a health warning label on these programs – Caution your brain is not working properly if you pick up this proposal.

    Unfortunately as one friend told me when we discussed this topic, the last fool has not yet been born.

    Cheers

     
  7. Heddi

    There are a good number of recent complaints but extremely competent business owners who used ‘coupon craze’ promotional tactics and were burned badly. As more of these coupon sites grow, they really do need to provide strategic advice to business owners. Not everyone will understand that the customer is not long-term loyal so they need to absolutely grab that user the second the coupon exchanges hands. On the flip side, if any business ever thought getting rich quick was their main objective, they pretty much shot themselves in the foot from the get go. Coupons are about steady build up, ongoing loyalty and development to understand user trends to lead or follow, wherever appropriate. Loyalty with coupons as a one time shot is absolutely not the answer though :( From Heddi (www.mytab.co)

     
 
 

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