Deal or no deal?

Odds are that you’ve heard from them, probably more than once. A call, a pitch, then a decision. Some of you have agreed, some have said “not a chance,” and others still wonder if it’s worth a shot. Though Groupon and Living Social remain to deal-of-the-day (DOTD) websites what Xerox is to copiers, there has been an explosion of similar services recently, from late-to-the-game giants (Google Offers) to regional and local spinoffs (the Chicago Reader’s Real Deal) and niche-market deal sites such as Pizzerias.com. The ubiquity of DOTD sites is probably evidence enough of consumer appeal—after all, what’s not to like about deep discounts in a down economy? But what about the other side of the transaction? Should pizzeria operators participate in deal-of-the-day discounts? If so, when is best to make the offer?

Potential Pitfalls

By now, the details of these deals have spread. Variations abound, but typically the deal runs something like this: The DOTD site sells consumers a voucher for the business at half of the face value; the initial take is split 50-50 between the DOTD site and the business; the consumer has one year to redeem the voucher; and the business must take the vouchers as they come. From there, the fairy-tale version says it’s a win-win-win. The consumer gets a deal, the DOTD site gets its cut, and the business gets exposure and new customers who would have otherwise never come through the door.
But some pizzeria operators tell nightmare versions of the tale, from the relatively tame—grazing flocks of tight-pursed one-timers and post-discount tippers—to the tragic: unexpected hordes of “couponites” that descend upon the restaurant and drown it in red ink.
One doesn’t have to look hard to find dramatic examples of retailers getting burned, and a number of DOTD skeptics have started speaking out. A London bakery recently lost $20,000 on a cupcake deal-of-the-day gone bad when a 75%-off deal triggered an overwhelming influx of orders. Meanwhile, in the United States, a small Portland, Oregon, café went about $8,000 in the hole on an uncapped $6-for-$13 deal.
While reviews from individual owners are mixed, pizzeria operators have expressed their own concerns about the DOTD model. Stories of bad experiences abound on PMQ’s Think Tank, but several common themes emerge. One is the cost: In addition to the basic economic issue of a 50%-of-50% proposition, some owners say they were caught off-guard when one DOTD site charged the credit card processing fees for coupon sales to the business. In fact, Scott Chapman from Great Scott’s Pizza (greatscottspizza.com) in Mount Horeb, Wisconsin, was just about sold on doing a Groupon offer until he found out he’d be taking the hit on fees he saw as “their business expense, not mine.” Another concern relates to the types of customers often drawn in by coupon sites, from one-time visitors who order only the value of the voucher to scammers, bickerers and belligerents trying to use multiple coupons at once or failing to tip waitstaff.
And don’t forget the financial considerations—suddenly hundreds or thousands of little balance-sheet time bombs start ticking, waiting to go off, and there’s no telling exactly when they will. Perhaps most worrisome of all—and often overlooked—is the risk of alienating one’s existing customer base: After a popular DOTD coupon drops, that loyal family of five who orders every Friday night may suddenly find themselves muscled to the back of the line by a bunch of lower-paying newcomers and one-timers, perhaps causing their pizza to taste like it was prepared in too much of a rush.

The Positives

While a review of stories on the PMQ Think Tank could leave you with the impression that pizzeria owners have been, on the whole, underwhelmed by the DOTD phenomenon, others have encouraging experiences to report. Patrick Cuezze, owner of Next Door Pizza & Pub (nextdoorpizza.com) in Lee’s Summit, Missouri, has offered Groupon deals twice and, despite some hiccups, describes the results as “very positive.” In an effort to keep tabs on several common DOTD concerns—that the deals might fail to generate new loyal customers or that DOTD customers wouldn’t order above the coupon price and wouldn’t tip—Cuezze tracked his store’s Groupon data. He found that 60% of those purchasing Groupons were new customers and that those using Groupons spent 14% more on average than other patrons. He also learned that, overall, skimpy tips were not an issue at Groupon tables.
Surprisingly, the Groupon also turned out to be something of a friendly reminder for regular customers, who started coming in more frequently after the offer was launched. Furthermore, not everyone who purchases a Groupon ends up using it, Cuezze found; he estimated his no-show percentage at close to 10%.
In a position echoed by Cuezze, Ryan Roe from Greek’s Pizzeria (greekspizzeria.com) in Indianapolis says that an owner needs to view the costs associated with DOTD offers as advertising dollars. While acknowledging some of its drawbacks, particularly an influx of “bargain shoppers,” Roe describes Groupon as “a useful tool if you use it in the correct manner.” Comparing it to other means of advertising, he says, “While I break even on the food costs and incur a small increase in payroll during the initial Groupon week, that is no different than the costs I incur doing a 10,000-piece mailing and getting a 2% to 3% response rate.”

Weighing Your Options

There is fairly wide consensus that DOTDs are not for everyone, but the question remains: Whom are they right for? A lot of factors come into play, but, in the world of pizzerias and beyond, small businesses that are still growing are often well-positioned to benefit from a DOTD offering. “It allowed us to reach out across the metro area without the up-front and iffy cost of traditional advertising,” notes Cuezze. “I would recommend it to any business that is starting out or trying to grow substantially.” At the same time, Cuezze cautions that the large influx of customers after the deal goes live can seriously impact your cash flow.
“If you’ve got a busy store running at 75% to 80% of your max capacity or even max out on the weekends, why bother?” adds Roe. “But for those that are still growing or are in a slow season and can handle the influx, I say go for it.”

In a blog on its website, Nevada, Iowa-based Burke Corporation shares a post about the pros and cons of social coupon sites for pizzerias. In addition to offering some general advice to pizzeria owners thinking about offering a DOTD coupon (e.g., considering caps and modified redemption windows to manage traffic), the Burke team recommends being prepared not just for the rush of foot traffic, but also for a big jump in website visitors (i.e., alert your Web hosting service ahead of time to make sure you can handle the increased flow). Additionally, the team points out that Groupon won’t share customer emails with its partners and suggests that operators try to get that information from the patron at the time of sale in order to promote future in-store specials. Burke also recommends pushing side items and desserts as a means of offsetting revenue losses associated with the deal.

While there’s no doubt that DOTD programs have their downsides for pizzerias, Groupon, Living Social, Google Offer and other third-party deals can be a useful business tool. Just like a new oven, they will likely be an expensive investment that can scorch you if you’re not using them just right. Ultimately, they may or may not be worth the costs and the hassle—it all depends on your specific needs. However, between the various tweaks available now (such as total coupon caps and day-of-the-week redemption restrictions) and emerging trends (including same-day, softer discount deals from Groupon Now), those DOTDs could pay off for your business. Whatever you decide, one thing is safe to assume: These dealmakers will continue calling.