I HAVE TOLD YOU SO ONE MILLION TIMES!!

I have written many, many times about how mathematically Groupon and other companies with the same type of deals cannot sustain the momentum.  In fact, I would venture to guess I was the first person two years ago to point how this type of Ponzi pyramid scheme will eventually implode.  People scoffed at me until the true financials were revealed for Groupon and it was shown how they are hundreds of millions of dollars in the red.  Now finally a restaurant has admitted that they have closed their doors because of being inundated by these types of coupons.

In the past, I have shown mathematically how companies cannot possibly fiscally survive by offering these deals.  Because these daily deals only give the company back 25 cents on the dollar, every person who redeems a coupon has to come back many times, paying full price, just for the company to hit the break even point.

I will explain one more time very simply how it works:

$10 deal is offered is for $5.00

Restaurant gets $2.50 of the purchase price and deal company gets $2.50.

(1) Coupon customer walks in and buys $10 worth of food.

Restaurant is negative $7.50

(2)  Full paying customer walks in and buys $10 worth of food.

Typically a restaurant profits 10%, so it pockets $1 profit.

            

(3)  Do you now see how the restaurant needs almost 8 full paying customers to make up for the loss on just one deal?

Drew Baker, owner of Drew’s Eatery, in the Lincoln Square neighborhood of Chicago, closed his restaurant last week saying his business was destroyed by daily deals like Groupon and Living Social.

A Sun-Times story,quoted Baker as saying, “The deals bring a lot of promise of bringing in new customers.  It seems like it’s where marketing money should be spent.”

The story continued with,” The biggest hurdle to making money from the daily deals was persuading coupon customers to come back and spend full price,” said Baker.  Proof that he never read my blog is his statement, “If I had figured out the math, I would never have signed the paperwork.”

Baker had already spent $40,000 of his own money on his vegan hot-dog eatery, and decided he couldn’t continue to go further into the hole.

I feel sorry for Drew’s Eatery and every other company that signs up for these deals.  They are great for consumers yet impossible to fulfill successfully by the company.  Just do the math.