Groupon isn't much of a deal - well, for some merchants anyway

Many years ago I was clued into something called "The Entertainment Book," which cost $25 or so and contained hundreds of coupons for theme parks, movie theaters, hotels, restaurants - a wide variety of local businesses. My wife and I are not coupon people, but we were surprised by the number of legitimate deals that could be found at a few pleasant restaurants in our neighborhood. After a while, however, we noticed that the better places were gradually disappearing from the book (many of the remaining entries were for fast food chains). I asked one of the restaurant owners what happened and he told me that the coupons were a losing proposition. He was still stuck with the fixed cost of running the place - labor, rent, food, etc. - except with a lower gross. Why would anyone do that? The Atlantic's Megan McArdle's post about Groupon had me thinking of "The Entertainment Book" and the questionable strategy of restaurant discounts.

Take a typical $20-for-$40 worth of food restaurant deal. As I understand it, the restaurant splits that $20 equally with Groupon, which means that they're now providing $40 worth of food for $10. Sure, we might order drinks and dessert, adding $40 to that $10 you already got. But keep in mind that even though this isn't a classic price discrimination strategy, a significant number of your customers are going to be price constrained--the sort of people who can't really afford to go to your restaurant unless they get a coupon. Those people are going to nurse one drink and skip dessert, giving you a net loss. Unless your restaurant has some abnormally fat margins, or your average Groupon buyer is a raging alcoholic, you're not likely to make very much money off such a deal, even if you're just filling surplus seats. One study found that 32% of Groupon merchants lost money (with restaurants faring worst) and 40% said they wouldn't do it again; even people who made money had staff problems due to high volume and, er, cheap tippers.

It's not just the Groupon cheapskates that make it a bad deal. If I have to serve an additional number of diners - many of them at a loss - I am putting additional strain on my kitchen and causing longer waits for my regular customers who are paying my regular prices. And those customers will be coming back - the Groupon people will not, unless I give them another discount and take another loss.

I completely see the logic with something like hotel rooms or booze cruise seats, where you've essentially got a wasting asset: filling it at almost any price is better than not selling it. But that doesn't describe businesses like restaurants, which do have significant marginal cost. And in fact we've already seen businesses complaining that the Groupons didn't make them money, or that Groupon sales people suggested they raise their prices substantially just before the Groupon "discount."