For brands, Groupons can mean bad reviews

I've been curious about how restaurants perform after they run a promotion with one of the daily-deal sites.  Groupon, BigDeal, All Deals Asia, Deal.com.sg, and so on--these are just a few of the countless daily deal sites here in Singapore.

And the chicken-and-egg scenario popped up--which came first, the Groupon or the poor review? Which one led to the other?

In Singapore, the main food review Web site (similar to Yelp) is Hungrygowhere.  I looked at the reviews posted from Jun. 24, 2012, to Jul. 7, 2012, and pulled out the ones that mentioned usage of a daily deal as the reason to go to the restaurant.  Below was the data I got:

Totoal: 17 Reviews - 11 Negative, 6 Positive.

There have been four waves of the daily deal madness when it comes to restaurants:

Wave 1: What is GroupOn? This sounds cool!
Early-adopter restaurants test Groupon and realize it is a new, powerful marketing channel. There are tough lessons (too much demand, cannibalization of existing customers, and so on), but overall it's a new way to attract customers quickly.  Because it's so new, there aren't many restaurants participating, so the Groupon user and merchant are having a shared novel experience.

Wave 2: Hype drives action.
More restaurants sign up for Groupon, spurred into action by the media hype about how it's a revolutionary customer acquisition channel. Copycat sites spring up, people get inundated with daily deal offerings.

Wave 3: People become daily deal addicts.  
Many don't believe in paying fair price anymore and only chase the lowest-priced deal. The restaurants realize they are not earning anything from this crowd. The withdrawal of legitimate restaurants begin.

Wave 4: Inexperienced restaurants and ones that cheat dominate the listings. 
Restaurants become smart about knowing how to profit off a daily deal and they give up their legitimate customers to make a cheap buck. Customer satisfaction dies.

Wave 5: Death or rebirth? To be determined.
We're currently in Wave 4, where it seems the cheating restaurants rule and tarnish any legitimate daily-deal using restaurant by association.

The daily-deal sites all have the same selling points to the restaurants:

1.  Introduce you to a lot of customers you wouldn't reach previously.

• This one is accurate.  The daily deal sites do have a large database of users. Whether they're your target demographic is debatable.

2.  Daily-deal users will return as loyal customers.

• Doubtful. The daily-deal customer tends to be price-sensitive and the fact that they're dining at half-price usually means they won't return to pay full-price.

3.  Customers will spend more in addition to what they have paid for the daily deal, so you can make money on the upsell.

• From my experience (from December 2010) the overwhelming majority ate only what was redeemable by the voucher.

4.  You make money from customers that don't redeem their coupon.

• Overwhelming majority do redeem and if they don't, they try to come in past the deadline, get angry when declined, and trash the restaurant online.

5.  It doesn't cost you anything to participate.

• It costs brand reputation; it also frequently costs money as creating an attractive offer at such discounted rates means you're selling for less than what you paid for it.  (50 percent of regular price is what the customer is paying; 35 percent to 50 percent of that selling price is going to the daily-deal site...so you might sell something regularly priced at $100 but now you're basically selling it for $25).

6.  Increase business during periods the restaurant is underutilized.

• If you're trying to fill your slow period (say, during dinner hours in the business district) and restrict the voucher to only be used for dinner, people will ignore that and come during the peak lunch rush and ask what's the big deal about being able to use the voucher during the lunchtime instead. If you don't let them in, they bash the restaurant reputation online.  If you do then you're replacing a customer paying full-price with a customer paying 25 percent of the price.

So why do restaurants still participate with these daily-deal sites?  They're either naïve or cheating.

Here are what restaurants do to make a profit while still offering a daily deal:

• Inflate their regular prices or outright lie about prices so that the customer isn't really getting a discount.  One popular thing to do is create a special set menu only for daily deal purchasers and then say it is valued at a bazillion dollars.

For instance, check out this review posted on Hungrygowhere:
"We had streetdeal $13.90 vouchers, supposedly worth $27.90, and that included a choice of pasta/pizza, coffee/tea/juice and a desert. The most expensive pasta you can choose from is $12.90, dessert - $4, a drink maybe $3. How does it add up to 27.90?"

And this one also on the site:
"Perhaps one of the worst set menus I've tried to date...should have listened to my friends and not purchase the Groupon promo. They mixed their not so popular (and rather cheap) dishes with their regular ones. So basically, you don't really get the "promotion". The promo does not include the tea! So that extra as well!"

• Tack on service charge, GST (tax), and other "additional" charges that were not included as part of the daily deal voucher.

Check out this review:
"Value--We bought 2 Groupons for for $12 each for steamboat dinner on weekdays (originally value purportedly $24 each). The Groupon for weekend was $15. We went there on the weekend with the understanding that the topup was just $3 each, given the difference between the weekend and weekday groupon price. When we got there, we were told that the topup required was $6 each, as the topup has to be based on the original value ($30-$24) instead of voucher value ($15-$12). Fine, we were already there, so we have no qualms paying. We were also aware that the Groupon does not cover service charge or GST. But the shocker came when we got our bill, they were charging GST and service charge on all original values (not the voucher value)  including the peanuts, tap water and napkin. That means 17% on ($60+ value of drinks+ value of peanuts + towels). We had to top up another $30+ . So the total cost for this meal came up to almost $60 ($24+ $30+). Ridiculous! I could have paid less than $20 person in any of the buffet steamboat outlets around town and I would have gotten a lot more value."

• State that daily deal customers can only utilize their voucher by making a reservation.  Then don't offer enough reservation slots, thus, ensuring many vouchers remain unused.

Read this review:
"This is my first try of Malacca Celup and is certainly going to be the last. I purchased 6 Groupon vouchers for adult buffet for my family hoping to have an enjoyable event and it turns out to be the worst experience ever! The poor service started even before we stepped into the shop for the food. I tried calling the restaurant for table reservation and no one picked up my call at the restaurant on my 1st day of trying. On the 2nd day, still no one picks up the call at the shop. After finally finding the website, I dropped an SMS to the mobile number stated to make a reservation and no reply until the next day."

This review from "cow mad" sums it up:
"You ate the meal, you don't feel the satisfaction. It was just a very unpleasant experience. You felt the restaurant teamed up with Groupon and the entire experience was laced with fraud. This is just our opinion.  For a location that is so out of the way, it's not worth the effort. I have to agree with the reviewers who used Groupon that the deal was way overpriced. I would never go back again. And I secretly hope the restaurant (and Groupon) will close down."

Daily deals--the fastest way to kill your brand, anger your customers, and screw up the market.