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Monday, July 15, 2013

Dangers in Discounting

Pictures by Will Ennis of Summerland, BC

Marketing your restaurant is challenging during the best of times, during slow economic downturns it can become a nightmare.  Many restaurants are cash flow slow, have mounting bills, lower customer counts, sky rocketing cost, they begin to question the long term goals and scrap the plans that they have formulated to provide growth.  How are they to market their restaurant during stressful times without adding to it?

Newspapers and radio advertising often prove ineffectual, television is not within the budget of an average restaurant, so how about a coupon program? Wagjag, Goupon, Direct Mail or Entertainment Books, programs that seemingly look to be an effective way to get your message out and customers in the door, but at what cost? Are two for one promotions really going to achieve the desired result you are seeking?

While coupons "may" have a place in retail they are not a good product for the restaurant or the hospitality industry, so let's take a look at why. Some believe that the coupons are a quick, effective way to market the establishment, however, they also can quickly become the entire marketing plan, thus limiting the type of clients patronizing your restaurant to those who will only shop with a coupon. No matter how great your product may be, once you discount it you are telling the customer it really wasn't worth the original menu price after all. The non coupon customers will begin to feel that they have been taken, or, at least taken advantage of, many will not return, creating yet a slower establishment and less cash flow within the restaurant.

All coupons of course have guidelines or rules that the customer is to comply with, yet seldom do, present the coupon upon arrival, they wait until the bill is presented, only one per table, yet a table of four insists on using two, not to be combined with other offers, they want to present two coupons from different media, no cash value yet they insist the coupon should give them change. The management of the use of coupons alone can be time consuming adding to the labor costs, staff frustrations, and the degrading of the established reputations. 

Let us look at the cost of a typical promotion. "Get an $80.00 dinner for just $40.00." First we must pay to coupon company for the promotion, costs range between $10.00 and $15.00 dollars let’s go in the middle, using the $12.50, that leaves us with $27.50 from the $40.00. Now we must factor the food cost on the $80.00 dollars, which is $24.00 using a 30% ratio (which few restaurants actually maintain) we are now left with $3.50 to pay for the labor of servers, busing people, dishwashers, cooks and the chef, a labor cost of 27% would equal $21.60, our promotion now has a negative result of -$18.10. Now many of these coupons have an average of 300 customer usage, our loss on the promotion is-$5430.00, are you prepared for such a loss? What if the sale of the coupons is higher, the loss therefore is higher.

True the cunning marketer will attempt to sell this as advertising for the business. Yet advertising costs should never exceed 4% of revenue, which would be $960.00 of the $80.00 x 300 customers, except your revenue (before expenses) was only $27.50 thus the ad revenue should be 330.00, a far cry from the $5400.00 losses. Remember, too, that, we still haven't accounted for rent or mortgage, fuel, power, water and all other fixed costs generally represented as an additional 17% of revenue, or another $4080 on this promotion, bringing the promotional loss to -$9510. How is that going to help your cash flow?

In addition to the discounting customer, we must of course consider the full paying customer,  are we willing to forgo the customer who will pay the $80.00 for those who will only pay the $40.00, are we even going to have the seats to accommodate the full paying customer? If not, does our loss now continue to climb? This loss is yet greater, as the disappointed "full paying" customer are put off with the degradation of service and may not return? You must keep in mind that discounting (couponing) customers also will not return until the next coupon is offered. Each week they pick up and use whatever discount is offered, seldom if ever, become good steady "full price" paying customers. Coupon books like "Entertainment" offer hundreds of "two for one" restaurant discounts, so the mission of the book is to have the consumer use as many as possible before they expire, practically a guarantee in not building a new customer base. Groupon markets daily and new restaurant in your area, the discounting customer will choose to purchase todays featured establishment it means not paying the full menu price.

Our course this action also risks offending a regular customer, who may question why a strange new customer is offered a better deal than he or she, who have been a faithful partner with the restaurant.  Some full price paying regulars actually will believe they have been "had,"  why are you acquiring large sums of their money at regular menu price, while you court a relationship with those being “gifted” with a large discount, their lack of understanding your situation is not what is important to them, just the fact they are required to pay more than the diner at the next table is generally enough to drive them off. Regardless of their feelings or how you try to explain your action they become offended and never return. Would it not be better to give the regular a discount from time to time and insure their faithful partnership?

Staffing for the coupon is also a challenge, staff simply do not want them, why? As  the discount customer is a frugal person (and I am being kind) they carry that attitude on with the server, generally demanding a high level of service, yet tipping at less than what the normal rate would and should be. For example, a tip on an $80.00 dinner at 15% would be $12.00, so 300 x 80 x15% = $3600 to split as the restaurant policy dictates. If 10 people split, then each receives 360. However, the discounting customer only pays 40.00 for the $80.00 meal (statics show they tip less than 10% of the bill) which rarely meets the coupon rules. So the tip is now 4.00 the servers loss is outstanding 66% of what should have been, carried over 40.00 x 300 x 10% = $1200 divided by our 10 employees it becomes $120. Are we going to retain the server who makes $360 normally but has to give it up for $120? No. So new staff are required, we then incur a new expense in training.

There will be plenty of arguments as to why coupons  are good for your business, I say let the numbers do the talking, can you afford it? Is the risk to regulars worth it? Is the staffing cost worth it? Then proceed as you may, we great caution.

Look for other ways to market your restaurant without the discount: Be involved, keep local, get to know what is happening in the community and be part of it and let the community know you are there for them. Local cooking competition, chili cook offs,  cooking classes, dining events, place chef writings in the local paper instead of ad's (people read articles and ignore ad's), partner with local charities and churches, create a VIP Club.

Giveaway 2 OZ bottles of a special sauce or mustard (a new one once a month, they must come in to get it) 250 bottles gets 500 people per month.  If no special events are taking place, create one.

Make use of media, email, Facebook, Twitter, Google, create a YouTube channel. Be sure to track sites like Yelp, Urbanspoon and Trip Advisor comment on the negative and praise the positive comments.

Have a special evening menu "with a special menu for that night" while the regular menu at regular price is also available. Some establishments create a dining menu that is costed correctly and that is what is offered at the “discounted price” while all other menu items are sold at listed price.

Finally, practice the 3 G's of the restaurant business: Great Food, Great Service and a Great Experience at a fair price.

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