I promise this is the last time I am going to write about Groupon being a very bad deal financially for businesses, but because so many people have told me that I am wrong about Groupon, I wanted to carefully lay out the numbers with a simple example.
A business has to decide how much money they can spend to capture new customers. Obviously Rolls Royce will spend more per customer than a yogurt shop because their product is more expensive. But what can a restaurant afford to spend?
I am going to explain this so even my friend Linda --who does not understand numbers and whose head spins like Linda Blair’s spitting out pea green soup in the Exorcist-- will understand.
In a Tribune story we were told, “Geja's Cafe has worked with Groupon for the past several years. In March 2010, the restaurant sold about 4,000 vouchers through a daily deal. Of the 3,000 that were redeemed, 1,900 were by new customers. About 300 of the first-time patrons have returned within a year.”
(1) Groupon sold 4,000 vouchers that were worth $30 to the customer. Each Groupon cost the customer $15. Of that $15, Geja’s received $7.50 because Groupon splits the revenue.
INCOME TO GEJA’S- $30,000
(2) Customers redeemed 3,000 Groupons at Geja’s $30 each. So they had a loss per customer of $22.50.
CURRENT EXPENSE TO GEJA’S- $67,500
(3) There are still 1,000 Groupons that Geja’s might have to redeem in the future. So they have another potential loss of $22.50 per customer when those are redeemed.
POTENTIAL FUTURE EXPENSE TO GEJA’S- $22,500.
(4) Because Geja’s needs to keep the un-redeemed Groupons on the “books” as a liability in case they are redeemed, Geja’s actually has a net loss of the $67,500 already redeemed and the potential $22,500.
TOTAL EXPENSE TO GEJA’S- $90,000
(5) Geja’s initially captured 1900 new customers, but since only 300 patrons have come back, they have actually only gotten 300 net new customers. So we divide the number of new customers by the amount it cost to get them.
COST TO CAPTURE EACH NEW CUSTOMER- $300
(6) Restaurants have about a 10% profit on revenues. So how much money would each of those new customers have to spend for Geja’s to break even?
SPENDING BY EACH CUSTOMER FOR GEJA’S TO BREAK EVEN- $3,000!
(7) If the average check at Geja’s is about $75 (I am guessing this number by looking at their menu prices on-line) for a full meal and drinks, each customer would have to return to the restaurant how many times? We would divide the $3,000 it cost to capture the customer by the $75 dinner check.
VISITS PER NEW CUSTOMER FOR GEJA’S TO BREAK EVEN FROM GROUPON DEAL- 40!
One has to be a very loyal customer to visit a restaurant 40 times. Geja’s is a fondue restaurant and more of a destination dining location than a neighborhood spot one visits once a week. Even if a person ate fondue about once a month, it would take Geja’s almost four years to recover from the loss. And all 300 have to come once a month for four years for that to happen. Not!
Hans and Franz used to say on a Saturday Night Live skit, “Hear me now and believe me later.” I say, “Believe me now!”
Kathy,
ReplyDeleteI hate to keep telling you this, but you are wrong here! First of all, Groupon has grown faster than almost any other .com company in the recent history - so just by their growth and popularity, they must be doing something right. And companies keep coming back, so they are getting something out of it.
The first thing you are missing is the food cost vs. sales price. Geja's prices are highly inflated so there is room to move there. So their cost may very well be below the $7.50.
Second thing you are missing are the no-shows. I have bought Groupons and never went. I had every intention to go, but never made it. I am sure there are many more like me.
Thirdly, how much do you think McDonald's spends on marketing? By moving marketing dollars from billboards and other menial medias, they can better spend dollars on people who have an interest in their type of restaurant. Then they you have to remember that the only people get a restaurant's name and message are not the purchasers but also the massive amount of people Groupon sends to. That is extremely valuable in itself.
I could go on and on. Let me count the ways. Sorry but we are going to have to agree to disagree.
Jason- in an earlier blog I pointed out how a restuarant is lucky to make a 10% profit. Wj=hile the gfood cost might be below $7.50, the cost of operations still exisits!
ReplyDeleteI agree that Groupon is a fast growing company and their data base is worth billions, but businesses cannot show a profit form spending these kinds of dollars to capture new customers.
We will agree not to discuss anymore because I know I am right and you are too stubborn to listen.
Good Groupon analysis. I want you on my business team if I ever start my own business:)
ReplyDeleteI feel like I'm back in math class...and starting to panic? Geeez...Is there going to be a test?
ReplyDeleteFor the record--when Groupon announced thier IPO, people got to see their finacials.
ReplyDeleteThe company lost nearly $390 million, excluding acquisition and other costs, in 2010,and another $103 million for the first three months of this year. Last year's total loss was $413.4 million, with its cumulative loss coming to $603.8 million.
Wait the voucher is $30 but the meal costs $75? Meaning two people is $150? Meaning this is the equivalent of a "15% off a romantic dinner for two" deal that thousands of restaurants use all the time since forever?
ReplyDeleteDo you believe that Groupon's IPO will be a bust then?
ReplyDeleteI Saw a few photographers yelling from the roof tops how good groupon was for their business and that the books were full.
ReplyDeleteWhen I went and did a bit of research like you I worked out that for the privilege of getting people through the door you would be at a constant loss, and sure enough once these other photographers had counted the beans they too realised that they too had a substantial loss and little return!
I have seen people try and work ways around it, and I have no doubt in certain circumstances and areas of commercial/industry there is money to be made, but for the latter the only people making money are groupon.