You've no doubt run across a restaurant or bar advertising online with an almost irresistible offer, such as get $50 worth of food and drinks for $25. For the consumer who buys this offer, it sure looks like a no brainer and a must buy.

But how about for the business owner? Does it make sense financially for the bar owner to sell product at very low margins to gain a large uptick in immediate customer traffic and a chance to gain new customers?

There are many different deep discount websites that allow bars to promote their offers. Some of the more popular ones are Groupon, Restaurant.com, Living Social, Deals for Deeds, and WTD. The number of these sites is growing at a fast pace, as they are extremely profitable ventures for the discount sites.

In this article we are going to focus on one of the largest ones, a website called Groupon.com.

What is Groupon?

Groupon is a website that allows businesses in cities across the nation to offer a "deal of the day" to members of Groupon's list. As of March 2011 Groupon's email list numbered 60 million subscribers.

If the subscriber likes Groupon's deal of the day, they purchase it on Groupon's website. To build urgency, each deal comes with a minimum number of users who have to purchase the deal in order for it to be active. This promotes "group" buying behavior and gets subscribers to act immediately.

Groupon features one "deal" each day in each city. In order to attract their list to check out their website daily and read their daily updates of the latest deal, they try to only have an irresistible deal. The deals are from diverse businesses, such as bars, restaurants, picture framers, nail salons, tanning salons, photography studios, and many other businesses.

Groupon selects the type of deal they wish to offer. Since there is only one deal of the day, this creates competition among businesses, resulting in the ones with the best discounts to be chosen, which are usually 50% to 60% off.

A typical deal would be "$25 for $50 worth of Food and Drink at XYZ Bar and Grill.

Because Groupon's list is composed of bargain seekers, the response to a strong deal depending on the city is often sales in the range of 300 to 500 customers. There are not many other forms of marketing that can deliver that many customers in one day once the promotion goes live.

Groupon promotes heavily on social networking sites. As you would expect, their demographics skew younger - 68% ages 18-34, 18% ages 35-44. One number that really stands out is that 77% of their users are female.

This is the ideal demographic that most bars try to attract. Is Groupon too good to be true? Read on and we'll try not to rain on the parade too much.

How Groupon Works

For example sake, let's assume your bar decides to run a promotion with Groupon. In order to get your deal chosen by Groupon as the deal of the day, you go with $25 for $50 worth of Food and Drink at your bar.

Groupon sells 300 of your deal of the day. On first glance you would get very excited - 300 x $25 =$7500.

Next, you have to factor in Groupon's cut. They typically charge 50% of the sale price as their fee. So, right off the top, with no risk, Groupon takes $3750, leaving your bar with a payment due of $3750.

So, to recap, that means you have sold $15,000 worth of food and drink for $3,750. When you factor in your cost of food, drink, labor, operating costs, you are losing money big time on this proposition.

Then let's look at payment. Groupon collects the money from their subscribers. They in turn pay you in three installments - some within days of the promotion running, some 30 days later, and the last payment 60 days later.

Most Groupon purchasers redeem the coupon they have purchased within days of purchase. So, you will need to serve the food and drink you have sold immediately and not get paid for most of it for until 30 and 60 days later.

Yet, many bars and restaurants run Groupon offers. Why?

Why Some Bars and Restaurants Do Groupon

The primary sales pitch Groupon uses to businesses is that they will expose your business to new customers of a particular demographic who were not previously aware or interested in your bar, in large numbers, in a short period of time.

Initially, the bar loses money on the deal. On most offers your margins are not sufficient to offer a 50% discount and pay 50% of the sale price for Groupon's fee to make any profit initially.

There is the hope that that the Groupon coupon purchaser, who is socially connected with others of her same age, will arrive in your bar with other non-Groupon users and you'll have an opportunity to sell her friends full price items. Perhaps, but it's much more likely that she's hanging out with other Groupon coupon purchasers.

The other hope is that once exposed to your bar, a large number of these first-time customers return in the future and purchase non-discounted items. So your profit on the initial sale is delayed until they spend enough on future business to where you can break even, and eventually make a profit on their patronage.

As you can see, the payoff for the bar financially is the hope of future business.

Understand Your Promotion Objectives

As with any promotion, you must know what you are trying to accomplish. In this case, your objective is repeat business of sufficient degree that you will not only recoup the initial drastic discount you provided, but make a profit on the customer in the future.

Of course the bar can help future business occur by providing a fun environment, good service, interesting drinks and food, etc. But even if you do this there is no guarantee that the Groupon coupon user will return.

Running a Groupon Promotion: Is It Bad for Your Bar?

It's almost impossible in the bar business to discount your way to profitability. Spending the energy to attract negative margin customers is not the best use of your time.

Using the above example, wouldn't it make more sense to spend $3750 to attract 300 full margin customers instead of spending $11,250 to attract 300 deep discount seeking customers?

We recommend you focus on low-cost marketing strategies rather than engage in deep discount website marketing such as Groupon.

However, if you do decide to try Groupon, you need to be aware of the following items so that your staff is prepared and you reduce your risks.

Other Groupon Issues and Concerns

Beyond the financial aspects of running a Groupon promotion, there are other issues that go along with running a Groupon promotion.

A Discount Promotion Like Groupon May Be Illegal in Your State
Recently the state of Massachusetts ruled that promotions involving discounted alcohol sales using sites like Groupon violate the state's happy hour law. In addition, since Groupon collects the money for the sale, the bar's liquor license is in effect transfered to Groupon, which violates the terms of the liquor license. See no alcohol deals in some states for more information.


Displacing Your Full Margin Customers
Your number one business goal is to maximize profits. You cannot afford to fill up your establishment will negative margin customers that displace your full margin customers. Groupon promotions need to be structured to be redeemed during your slower times where you need the business the most. Consider placing blackout dates and times for redemption on your offer.


Price Driven
Groupon customers are on Groupon's list because they are looking for great deals. They are more loyal to the next great Groupon deal than they are to coming back to your bar in the future. A price driven customer is loyal to price first.

Unless you engage in frequent discounting or have established your bar as a go-to place that customers need to frequent regardless of price, you will lose the price driven customer.


Staffing Levels
Many Groupon coupon users like to redeem their coupons within days of the promotion. Based on the number of coupons sold, you will need to staff up accordingly to handle the increase demand. You're spending too much on a Groupon promotion to not have sufficient staffing in place.


Tipping
Many Groupon users like to tip on the discounted amount of their coupon. While Groupon does advise their coupon users to tip on the non-discounted amount, this does carry through all the time in practice.

You will have a challenge where your staff will treat your Groupon customers with less than friendly service once they realize they are serving a low tipper. As you know, the only way to make a profit on the Groupon user is on future business. Unless you can find a way to motivate your staff to be okay will lower tips, you will lose out on the future business from the Groupon coupon users you need to return.


Build Your List
The whole objective with a Groupon promotion is to get repeat customers. You need to convert these new customers to repeat customers. Make sure you have a data collection strategy in place so that you capture the Facebook page and email address of the Groupon customer, and sign up the new customer to your text messaging marketing.

Present the data collection as a way to be notified for upcoming specials to improve opt-in numbers. Since this customer is deal driven, you should encounter less resistance this way.


Limit The Number Sold
Groupon is very effective at targeting the deal seeker. There are cases where some restaurants sell over 2000 deals in a day. You need to place a limit to the number of deals you are willing to sell so that you can cope with the demand and balance these customers with your full margin ones.

Selling too many customers at a loss at one time will kill your cash flow and likely drive you out of business.


Negotiate a Better Deal
Groupon knows they get a better response with higher discounted offers. They encourage businesses to offer a 50% or higher offer to be considered for a deal. You need to run the numbers for your bar and negotiate a deal that you can live with. If it's 40% off, then so be it. Only run a deal that works financially for your bar.


Attracting Female Customers
Groupon has an ideal demographic for bars - mostly under 30 females (77%). Pack your bar with women, and the men will follow.

If you charge a cover, see if you can structure your deal to include the cover charge plus drinks limited to high margin drinks. Unless you have a band that gets a cut of the cover, your cover charge is pure profit and can help defray the cost of the Groupon promotion.


Don't Advertise Your Groupon Offer on Your Bar's Facebook Page
Remember, the point of a Groupon offer is to attract new customers. Don't alert your existing customers about the Groupon offer so that you don't discount to customers that you don't need to.

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