One Night Spend: Why Group Discounts Are Bad For Business
Tempted to try a LivingSocial, Groupon, Scoopon or other group discounting offer to boost business at your restaurant? Beware: as tempting as the offer may seem, group discounting can lead you down a precarious path of brand devaluation. Not only that, it often acts as a beacon to alert consumers that your business is going broke.
It’s no coincidence that, as hospitality business consultants, we are faced with a steady stream of venues appealing for help after suffering from a group buying scheme-gone-sour. We regularly hear from restaurant owners who are desperate to rescue their flailing revenue figures – and the lucrative promises of a group buying agent may seem like just the answer to getting people back through the doors. But don’t be fooled. These companies are frequently accused of ‘churning and burning’ businesses on their last legs – taking advantage of those who will try anything to get back on top, and pushing them into unprofitable deals that do nothing to benefit the restaurant.
Still think that you can benefit from a group buying or discount offer? Here’s a few reasons why you should reconsider.
Not all customers are good ones
We all want a busy restaurant. But having more customers is not always a good thing – especially when y
You’re losing money on them. Take a guy like Ben for example.
Ben’s a bargain hunter. He bloody loves good value, Ben does. What a top Aussie bloke.
Ben just spent another night on the couch with a Menulog order he’d gotten for free after complaining that the delivery was cold. Or that the order was wrong. Or that it didn’t show up. Even if he had paid for the order, those four curries + free naan would have only set him back $12, due to the stacked discount codes he found on OzBargain.
Now Ben is scrolling through a group buying site – beard dipping lazily into his vindaloo – looking for another bargain. 95% off something. Anything. He’s done 2–4–1 teppanyaki though four times already this year (always at different venues), and All You Can Eat pancakes at that weird coffee shop underneath the train station. The one that also sells Jim Beam and Coke at 9am.
Would Ben consider revisiting one of the restaurants he’s purchased a daily deal from in the past? Sure. But only if they’ve got a 50% discount offer going, otherwise they’re bloody dreaming.
Beneath the glow of his Kogan phone, a colourful splash of cocktails and sashimi meets Ben’s glare. 70% off dinner with matched booze? Can do, Ben thinks to himself. He doesn’t care exactly where the venue is nor does he bother to read the fine print (incidentally, the offer is available only for Tuesday dinner from 5pm to 6pm, for *selected menu items, and the cocktail is more a glass of urine than an actual alcoholic beverage). But, you know, price talks and money walks.
On the night Ben visits the sushi joint with his Tinder date Traci, things don’t exactly go to plan.
Ben and Traci stuff California rolls into their mouths to curb their mounting sexual tension. Traci finishes her cocktail and heads unsteadily to the bathroom, where she powders her nose with a touch of coke in preparation for a cheeky romp between the sheets back at his. Ben’s excited, and mouth still half full of seaweed salad, he calls a waiter over and smugly hands him a crumpled printout of his voucher.
As he stands to leave, the waiter returns with an uncomfortable frown. The voucher is only valid Monday to Wednesday. He points to the T&Cs, and hands Ben the bill without a second thought. Ben and Traci owe the restaurant $200 in stale sushi and sashimi.
A trickle of sweat runs down Ben’s neck as he battles the rising sense of injustice at paying full price. Traci sways quietly. The waiter goes to get the EFTPOS machine and Ben briefly contemplates running out the door before he remembers this won’t get him laid. Other customers are starting to watch as he mumbles ‘can we split this?’ to Traci. This, it turns out, doesn’t get Ben laid either. He Uber pools home to his lonely bed (Ergopedic, 70% off).
The next day Ben writes scathing reviews of the restaurant on Zomato, Google and TripAdvisor. He’s pretty outraged at this point, so he sets up second accounts on each platform and writes further reviews using anonymous aliases. The food was bad, the service rude, the ambience non-existent. Then he hops on the phone and calls the restaurant to demand a refund. He claims that their T&Cs were not expressed clearly to him at the time of purchase; the bookings process was a nightmare; that when he contacted the customer service email listed on his voucher, he never got a response.
The restaurant is equally distressed. After being pressured into offering a heavy discount by the persuasive rep who signed them up for a daily deal, they’ve been flat out. That’s great news, right? They’ve been booked out for most of the week…with customers using a voucher redemption.
Meanwhile, full-paying customers haven’t been able to get a reservation. Furthermore, the company hosting the deal has given sushi restaurant zero control over how the offer would be marketed online, failed to publish the T&Cs that the restaurant had specified, oversold vouchers and double-booked seats. Not only that, but as the company took bookings via its own website (rather than allowing the restaurant to do so themselves), they were able to directly intercept all customer information and store it for their own database, which they would use for promoting other restaurants via email marketing in future.
Now the restaurant’s got irate customers, angry Zomato reviews and a stream of bookings coming through that’s losing them money – but that they’re obliged to honour. What a nightmare.
Seems like nobody’s happy in this situation. Well, nobody except the daily deals company itself, who have made a tidy profit over the whole ordeal, and are already signing up another eight sushi restaurants for tomorrow’s discount offers.
Get the picture? Now let’s drill down a little further, to understand exactly how restaurants fare so poorly when they enter into a group buying agreement.
Deal-hunting customers will love you and leave you
Group deal merchants claim to provide a lucrative marketing tool for businesses. They argue that signing up for an offer will bring your business more customers and more exposure over time.
Looking at the evidence, nothing could be further from the truth. Studies suggest that ‘discount buyers’ are the most disloyal customers of all. In fact, it’s reported that less than 20% come back and paid full price on subsequent visits. The types of consumers who are attracted to group buying platforms, coupons and discounting apps are the equivalent of swinging voters – they’ll go wherever the deal is.
For these consumers, quality is not as much of a concern as price is.
They’re getting you customers though, sure. With Groupon’s five million-strong Australian customer base, a deal on their website is exposing your business to an overwhelming amount of potential customers. Those bargain-hunting go-getters just like Ben.
That’s your target audience, right?
At the end of the day, data speaks. Only around 35.9% of restaurants and bars that sign up for a coupon offer intend to run another deal after their first experience. If that satisfaction rate doesn’t outline what a losing proposition the deals are for the hospitality industry, we suggest it’s time you get out of the game entirely.
The deep cut of commission
Group buying schemes work on a commission basis, by taking a cut on every sale you make. So if you’re doing a 50% discount on a meal that normally costs $100, and the group buying company takes a further 50% commission, you’re effectively earning $25 per cover.
With overheads, staff costs, food and beverage costs and administrative costs on top of that – how could you possibly be better off, even if it brought in more customers? You’d most likely be working twice as hard for less money.
Some might argue that you’ll make your money back on vouchers that are purchased but never redeemed. But we’re not so sure about that. After all, in 2013, Scoopon was fined $1 million by the Australian Competition and Consumer Commission (ACCC) for misleading businesses using that very argument. The Federal Court found Scoopon guilty of telling businesses that there was no cost or risk involved in running a deal, and leading them to believe that around 30% of vouchers sold would never even be redeemed – a claim for which there was absolutely no reasonable basis.
Cannibalising your customer-base
As one Reddit user so eloquently put in their since-deleted post, “the right way to use Groupon is to look for discounts on services that you already use”. So much for attracting new customers.
Why would your loyal customers pay full price when they find that you’ve slashed them in half with a discount offer? A major problem with deal structure is that, while temporarily bringing more customers into your venue with the lure of a discount, the promotion is not targeted. It’s publicly out there for anyone to grab – including your existing customers, who probably would have come in anyway and paid full price. This effectively cannibalises your existing customer-base.
Still insist on using a discount in order to get bums on seats? Consider a targeted promotion Facebook instead. This allows you to exclude people who already like your Page, and filter them by age, location, education, income and interests. It’s extremely low cost, you retain your customers’ data and Facebook takes zero commission on those who redeem your offer.
Being overly available is a turn-off
There’s this very simple economic concept called demand and supply. We all intuitively know it: when price drops, demand increases. Generally speaking.
To some extent, you can stimulate demand by offering a discount on the service you provide. In the case of a restaurant, we’d expect to see a short-term boost in the number of people dining at your venue if it’s cheaper. But remember – this is only a short term fix. Soon enough, a new equilibrium is reached – one in which consumers now expect the discounted price to be the norm.
Take rugs as an example. Have you ever seen a rug store that wasn’t having a closing down sale? No. That’s because they’ve screwed themselves with ongoing discount promotions, and now nobody is willing to pay full price anymore.
Consumer psychology also comes into play here. Engaging in a discount offer sends a strong signal that you’re struggling for business. Just take a look at the kinds of promotions that are currently available on the group buying sites in your local area – we dare say that they’re not the highest quality restaurants in the neighbourhood. Do you want to be seen in the same light as them?
People flock to restaurants that are already popular, with long waiting lists or queues down the street to get into. That’s because restricted supply leads to increased demand. But showing people how empty your venue is by offering heinous discounts isn’t going to help your case. Sometimes playing hard to get is a good move.
The fact that everyone thinks group discounts suck
In October 2012, NSW Fair Trading (NSW FT) revealed that complaints against group buying websites were rapidly increasing. It’s no coincidence that a voluntary Australian Group Buying Code of Conduct had been introduced a year earlier, in an attempt to address rising claims against these companies. In fact, group buying websites were second overall in their list of overall consumer gripes that year (following complaints regarding exploding household appliances).
That was six years ago. If you were to Google “why Groupon sucks” today, you’d be faced with a long list of links from businesses as well as consumers, all united in their lack of group-love. So it never fails to surprise us when, in 2018, we still see small businesses fall for this total shite.
We’re not making news headlines here. Everyone from academics to journalists, consumers and businesses owners themselves have been reporting the ill-effects of group buying companies for years now. Here’s just a few:
A Look At The Incredibly Lopsided Groupon Merchant Agreement
Groupon Was “The Single Worst Decision I Have Ever Made As A Business Owner”
Look, we’re not saying that these companies are bad guys. What we are saying is that the group buying system operates on a B2C (Business to Consumer) model. That’s important for restaurant owners to understand, because it means they’re set up to favour the consumer, and create a customer base that’s loyal to their app, but not to the individual merchants featured on it.
That time when it worked
To be fair, we’ve heard of instances where group buying schemes worked for restaurants. But these cases are few and far between, and they require significant strategic planning to pull off. So unless you’ve thought this out like Sun Tzu prepping for battle, we’d suggest you steer clear of these so called ‘marketing opportunities’ altogether.
The truth is that when the Groupon phenomenon began almost 10 years ago, it worked a treat because it was novel and new – and when it comes to marketing, that’s a winning formula. But over the years consumers grew sick of the noise; their email inboxes flooded with opportunities to purchase low-cost Fijian holidays, questionable raw seafood and 2–4–1 Brazilian Wax specials.
The reason why these deal sites used to be so popular was not the discount itself – it was the disruption. That’s the takeaway here: if you want to get people’s attention, stand out from your competition and boost your revenue, do something different. If you can offer something that nobody else does – be it an experience, a feeling, great hospitality or a unique product – there’s no need to discount…and no need to devalue your brand.
As marketers, alarm bells ring when we see that potential clients sign up for discount deals in any format. Sometimes it’s a signal that they desperately need our help. Other times we’ll take one sniff and run in the other direction because, based on experience, it’s a pretty strong sign that they’ll go bankrupt before we ever get paid our marketing invoice.
A few words from the Government regulators
Consumer Affairs Victoria offers the following advice for small businesses considering entering into a group buying agreement.
Consider the potential demand created by advertising services through group buying websites and whether your business can deliver those services on time and in a reasonable manner. For example, you may want to limit the deal offered so it doesn’t restrict your ability to serve regular customers.
Ensure that you can deliver services as advertised and that the terms and conditions of sale are fair and clearly expressed.
Consider obtaining independent financial and/or legal advice about the potential benefits and risks of group buying before you enter into an agreement.
Be aware that new customers taking up the big discount may not come back unless further deals are offered.
This post was written by Veronica Fil (Lume restaurant) and Nikki Berto from Mr Harry’s Marketing Department. Mr Harry’s is a hospitality consultancy for business owners who are fed up with paying lots of money for shit marketing and PR. Follow them on Instagram at @mrharrysmark.
