Why Groupon Can Actually Hurt Business

So I punched out some quick math today regarding Groupon and saw some pretty enlightening stuff. You may have noticed that Groupon has things such as $40 for $20 as promotional offers for restaurants and services. However, from the restaurant industry standpoint the increased volume doesn't necessarily equal a profitable endeavor.

Take a restaurant for example that has a profit margin of 10%, average for the industry. A sale of $40 would yield a profit of about $4 ($40 x 10%), meaning $36 of that $40 sale is going to pay for cost of food, rent, and all other costs associated with the restaurant's operations. If we suddenly drop that sale price to $20, each sale is now actually costing the restaurant $16 ($36-$20) instead of making them $4 in profit,  so we now have a cost per coupon of $16. Wow, very expensive!

Now we need to factor in the change in volume, for example, how much does it cost to feed 160 versus 80, because it isn't simply 80 x $36 or 160 x $36. There are economies of scale at work here. How much does it actually cost? I don't know, that would be on a case by case basis. However, I can imagine that the incremental change in volume needed in order to actually turn a profit on such an offer starting at a $16/coupon disadvantage would need to be tremendous.

Instead of looking at Groupon as a money making endeavor, it's probably best viewed as a marketing expense. At a cost of $16/coupon used, the restaurant exposes itself to new clientele that otherwise may not have come in the first place, in the hope that they can convert the discounted sale into a full priced sale sometime in the future. The present value of that future sale? Again on a case by case basis, but assuming the 10% profit margin, the sale would need to be higher than $160 (present value) on a group of the same size just to break even on the marketing investment.

But then again if Groupon is just a marketing expense now, why not use a service such as OpenTable that has a network marketing aspect, costs significantly less per cover, and actually contributes to the bottom line?