Groupon: Star Tribune wonders if discounts bring loyalty

Groupon: Star Tribune wonders if discounts bring loyalty

The Star Tribune continues to revisit the Groupon story; following up on Kara McGuire's relatively puffy column on the topic around the time Groupon launched in the TC last January, Steve Alexander tries to assess its impact on local restaurants:"Will 'net discounts gain loyal diners?" [ARg!!! I cannot seem to find the article anywhere on the Strib--this link on Steve Alexander's page links the article to the home page, but hopefully the Strib web wonks will fix it soon.]

On one hand, Groupon's blast emails get the restaurant's name out in front of thousands of people and can get many coupon buying diners in the restaurant's doors. The big question is this, though: Do restaurants lose too much money on the free food to offset the marketing costs? Even Groupon's director of merchant services admit that converting first-timers to repeat customers is essential to making the coupons a valuable. "You may barely break even on Groupon customers the first time," he says. "But if you bring them back once or twice, you'll get a terrific return."

From Alexander's column, it still seems too early to tell if Groupon is helping or hurting its customers, as coupon buyers have a year to redeem their certificates so we don't yet have all the necessary data. One critical factor in determining Groupon's usefulness is estimating the "breakage" of the coupons--what percent of buyers will never redeem their cards. The owners of Spill the Wine, a Groupon customer, are estimating 30 percent of the coupons they sold won't be redeemed. That number seems a little high to me (it's high for gift cards, but those are gifts--with Groupons, the user paid for the coupon themselves so are more invested in using it), and if it is really that high then a) wow, diners are wasting a lot of money and b) are restaurateurs knowingly exploiting lazy/forgetful consumers?

Another critical factor is how much Groupon users spend beyond their coupon either in a single or repeat visit. In the Strib article, Lenny Russo of Heartland suggests that even if a Groupon user buys 60% more food/drink beyond the value of the coupon, it won't be enough to make up for the loss on the coupon. Groupon vaguely alludes to "surveys of restaurants and customers" that indicate as many as 90% of Groupon users can converted to "regular" customers, but there's no data offered as far as how many restaurants were surveyed and what "regular" means.

That question depends on consumer loyalty: Will Groupon users return to a restaurant without a coupon, or will they just flit from coupon-offering restaurant to coupon-offering restaurant? Groupon says they won't--all of the other variables I'm still uncertain about, but this one I have to patently disagree. "We present Groupon as a way to find fun stuff, not a way to get cheap stuff," the director of merchant services says. Seriously? Are you kidding? There's a reason Groupon discounts aren't just 10 or 20 percent: nobody would bother to buy them.

One thing that is certain: Groupon is making bank. McGuire's column stated that the company was on track to make $100 million in revenue in 2009 and has been profitable since lat June, which helped it secure lots of VC, to the tune of $35 million, much of which is from Facebook's angel investor.

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