I cordially disagree with you :)

We are looking at how coupons would affect a business, which usually is a short time experience.

For a restaurant Gross Margin is Revenue less Cost of Goods sold, which is high, usually 60 to 70%.

Certainly a restaurant has a lot of fixed expenses and variable expenses that are technically fixed over certain levels of volume that are included to get to Net Profit.

If running a coupon campaign creates a situation where you have to increase staff and other costs then those costs do need to be included in the analysis.

However the major cost of goods sold is the cost of food. Any addition costs, such as paper and linen costs per table are negligible.

Think of it this way, if a person came into my restaurant what are my variable costs in serving that customer. Typically it is the cost of food. All other expenses stay fixed,

Of course if a business sold 1,000 coupons to be used within a few days the scenario changes and I would argue that they are using coupons in a wrong way.

The best way for a restaurant to use coupons is to design the program to deliver new customers over reasonable periods of time so as not to increase their staff.

Also, restaurant owners do not collect $50 on a $100 tab paid for with a Groupon offer. They only get $25, usually minus any processing charges for Groupon which could be another $1.50 to $2.00. Groupon gets the rest.

Groupons also do not usually produce new customers for restaurants. They produce new customers for Groupon. THAT is the brand being advertised and the brand earning the loyalty. I wish I had a collection of all the feedback I’ve heard from restaurant owners who have done Groupon, Restaurant.com, Livingsocial and the like.

There is a slight problem with your analysis :)

A proper evaluation would be based on Gross Margin, not Profit Margins, and restaurants typically have high Gross Margins.

Quick Example:

Coupon $20 for $60 worth of food

Typical bill for a couple – $100

Gross Margin 70%

Restaurant collects $50 on a $100 meal that cost them $30.00

So that new customer contributed $20 to the fixed overhead.

A business that sold exclusively on Gross Margin will go out of business, however it is possible to price a coupon in such a way as to not cost you anything to gain a new customer.

Offering a coupon is an advertsing strategy and should be evaluated as such.

Peter

What most restaurants find with Groupon is that they do not earn new customers from Groupon. The customers that use Groupon are loyal to Groupon, not the restaurant. After they have used your 50% offer, they move on to the next restaurant offering 50% off. As a general rule, I can usually tell a restaurant is about 2 months from closing when I see them using Groupon.

When Groupon sell a $50 gift certificate to your restaurant for $25, Groupon keeps half of that $25. Your share is $12.50. No restaurant can make money collecting $12.50 on $50 worth of food. Their margins simply aren’t that high.

When Groupon was the only player, almost all of the groupons I purchased were for new places. Since I joined LivingSocial and BuyWithMe, and since the novelty wore off, less than 50% of the deals I purchase are for new places. These levels are scary lo…