2012 February: Who Needs Groupon?

Last year, San Francisco Bay-area chain Patxi’s Chicago Pizza pulled off one of the most popular Groupon deals ever, selling nearly 7,000 “$20 of food for $10” coupons.

But despite the promotion’s overwhelming success, Patxi’s isn’t sold on daily deals sites. “I don’t think we’ll ever do it again,” says Blaine Whitney, Patxi’s vice-president.

Patxi’s sales spiked immediately after the Groupon’s sale, and again when the coupon was set to expire, but the store didn’t see any lasting impact from the promotion. Whitney believes that such sites don’t provide merchants with the metrics to understand whether customers are new or returning, and he thinks that Patxi’s new customer acquisition was minimal. “It felt like a huge giveaway to our existing customers,” he says. Statistics back Whitney up.

The research firm ForeSee conducted a survey of 2,200 daily deal buyers that determined that 38 percent of the purchasers were already frequent customers of the business in question. Just 31 percent were brand new customers.

The daily deals industry — which includes big players such as Groupon and LivingSocial, and hundreds of smaller regional operators — is incredibly profitable: Groupon alone reported $760 million in revenue for 2010. But the deal isn’t always quite as good for merchants. In addition to providing a substantial discount to customers, you’ll also need to split the coupon sales revenue with the daily deals company. That can leave you with minimal — or non-existent — profit margins.

“At first you have an influx of customers, but your expenses keep going up because the vouchers cut into your profit margins,” says Carolyn Brundage, a partner at Indiana-based Smashmouth Pizza, who’s sold deals on both Groupon and LivingSocial. “It’s not a good long-term marketing plan.”

Instead, consider these alternative strategies for increasing sales volume without sacrificing your profits to a third party.

Craig Agranoff, owner of Boca Raton, Florida-based specialty marketing firm The Pizza Experts, recommends sending vouchers containing restaurant credit to potential customers within your local zip code. “It’s the same as a coupon, but psychologically, consumers feel like it’s a gift card, so they’re more likely to come in and use it,” says Agranoff. He claims that his clients who’ve taken this approach have seen redemption rates around five percent. “People spend well above the amount on the card,” he adds.

There’s no need to rely on outside services like Groupon to create a group-buying deal. Pizzerias can create their own promotions using white-labeled daily deal platforms, such as Deal Co-op. Agranoff recommends encouraging e-mail newsletter subscriptions by giving away free slices of pizza to passersby who sign up, and promoting your deal offer on social media services such as Facebook and Twitter. When creating your deal, you can set your own “tipping point” to ensure that enough people will purchase the deal to make the promotion worth your while.

Collaboration can increase your marketing power even more. Rachel Rogers, who represents Nacoochee Village Tavern and Pizza in Helen, Georgia, combined forces with other local business owners to create vacation packages for customers from outside of the local area.

“Our coupon will?include something like a two-night stay, a dinner at our pizzeria and an attraction for a discounted price,” she says. “We send this out to our e-mail contacts and hopefully get some bites, bringing in customers?locally, but also providing enticing circumstances for consumers outside?of the local region to visit our pizzeria as well.”

Many pizzerias have found success by using mobile marketing services such as Foursquare and GoWalla, which allow you to advertise special deals for people who “check in” at your establishment at no cost to you. Offering free drinks when 10 people check in at the same time, for instance, can promote group sales; and providing free pizza to the person who checks in most frequently (dubbed “the mayor” in Foursquare) will inspire customer loyalty and a friendly competition to claim or keep the top spot. “We like Foursquare because when customers check in, it means they’re endorsing your business to their friends,” says Brundage.

You can also take advantage of mobile location-based services that send coupons to customers and issue “push” notifications to remind them of the coupons when they’re in the vicinity of your establishment. “It helps you get access to people who don’t even realize you’re there,” says Agranoff.

Also important is promoting yourself to the local community. Whitney says that Patxi’s Chicago Pizza has done well by marketing group discounts to local companies such as LinkedIn. “They’ll buy 100 pizzas at a time,” he says, and employees will often come back with their friends and family to purchase pizza on their own.

Sponsoring a local kids’ sports team is a winning strategy as well, says Agranoff. “When you get 20 seven-year-olds into your establishment for a pizza party at the end of the season, they’ll all be begging their parents to bring them back to your restaurant.”

How to Tell Whether a Marketing Technique Is Paying Off

When you’re trying out a new marketing technique, it can be difficult to judge the return on investment. Ask yourself these questions to determine whether your promotion is worth the effort:

1. Is it bringing in new customers?
Groupon and its ilk are notorious for sending you customers who already frequent your establishment. Pass out a survey card asking customers how they found you and whether this is their first visit to see whether a given strategy is attracting new visitors.

2. Are new customers coming back?
Getting new customers in the door isn’t enough. You want them to return. Issue customer loyalty cards so that you can tell how many of your visitors are recurring customers.

3. What’s the return on investment?
Consider how much you’ve spent on advertising or how much a discount is cutting into your profit margin, and calculate how much you’ve made in sales as a result of that promotion. If you’re in the negative, it may be time to rethink your strategy.

Kathryn Hawkins is a Maine-based freelance writer, editor and social media strategist.