The Groupon of Doom

If you're a regular diner, you probably already know about Groupon or one of its many similar competitors. Much beloved by bargain hunters, Groupon deals give steep discounts (typically 50 percent) on gift certificates to restaurants and other businesses.

For customers, the advantage is clear: A $100 gift certificate to a chic eatery for $50 is a no-brainer. For restaurants, the logic is more tortured. A flood of new customers—some great, some penny-pinching, some nontipping cheapskates—coming through the door. At best, restaurants struggle to break even on the deal in purely financial terms, but it can be a seriously money-losing prospect, particularly since Groupon has no interest in limiting the number of coupons sold. (Quite the opposite, in fact.)

The owner of a restaurant called Posies Cafe in Portland, Oregon, has penned what may be a watershed blog post about the dark side of Groupon. The business owner writes:

"After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month."

The challenge comes in the sheer volume of the things that can sell: If you're running a small business, a commitment to honor 1,500 half-off Groupons can spell financial doom.

Does this make Groupon an evil company? Well, no, although local restaurateurs often curse it with real fury. Businesspeople are in business to make money and should be able to calculate the risk and return before signing on (it often makes more sense for service companies, which lose time rather than product to Groupon customers). That said, the temptation to break out to a whole new clientele has to be irresistible.

There are, of course, other ways to go about it. A neighborhood pizzeria, known for its quality of ingredients and serious gelato, hosts church dinners and often just prints up $500 worth of $20 gift cards and has employees and friends hand them out to people who haven't been to the restaurant recently or ever. The risk is limited, and the return—happy new customers coming in with small but tangible amounts of free money in their hands—seems to be pretty good.

Image source: Flickr member iwona_kellie under Creative Commons
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