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Research: Operators reveal pros and cons of daily deals

A new study finds restaurant operators have mixed feeling about daily deal internet sites.

Restaurateurs who offered Internet “daily deal” discounts were evenly split about whether or not they would run such promotions again and confirmed that the offers can cannibalize sales, according to researchers from Cornell University and Rice University.

“Operators reported that about 40 percent of the deal purchasers were new customers, meaning that there was substantial cannibalization of existing customers,” said the researchers, who conducted an online survey of restaurateurs in late 2011 and summarized their findings in the report, “Restaurant Daily Deals: The Operator Experience.”

On the plus side, the researchers added, “Thirty-fivepercent of the first-time deal customers returned to the restaurant without a further incentive.”

The research was conducted by Joyce Wu,a Cornell School of Hotel Administration student at the time of the survey who is now an analyst for Nomura Group; Sheryl E. Kimes, a professor at the Cornell School of Hotel Administration; and Utpal Dholakia,an associate professor of management at the Jesse H. Jones Graduate School of Business at Rice University.

Completed with research assistance by Nation’s Restaurant News and sister Penton Restaurant Group publication Restaurant Hospitality, the trio’s work was published in the Cornell Hospitality Report for December released Wednesday by the Center for Hospitality Research at Cornell University.

The survey of subscribers to Nation’s Restaurant News and Restaurant Hospitality netted 273 completed responses and found that 49.4 percent of the respondents had offered a daily deal through social couponing sites, including Groupon.com, LivingSocial.com and Restaurant.com, which handled 55 percent, 22 percent and 10 percent of those operators’ deals, respectively. 

Among other offers, such websites let consumers buy at steep discount a credit for a dollar amount of purchases at participating restaurants. Restaurateurs share a portion of the proceeds with the website operator – a split that, in the case of the operators surveyed by Cornell and Rice, averaged 40 percent of the deal price.

About 81 percent of the operators offering deals said they boosted sales by up to 20 percent, with another 11 percent saying the promotions bumped sales between 20 percent and 40 percent. The remainder of dealmakers indicated that their sales grew from 40 percent to 80 percent, the researchers said.

In terms of profits from daily deals, 39 percent of the dealmakers said they lost money, 38 percent said they made money and 23 percent reported “breaking even.”

The researchers noted that 36 percent of operators that offered deals indicated they were likely to do so again, while 36 percent said that they were unlikely todo so and 28 percent were undecided.

Along with worries about their potential harm to profitability, some operators are wary of daily deals because of concerns deal users will tip based on the net amount of their bill after discount, thereby shorting restaurant employees on gratuities. Some 51.3 percent of the operators surveyed confirmed that deal users tipped on the net amount, versus 42.3 percent who said they tipped on the full amount.

Making daily deals work

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Wu, Kimes and Dholakia also surveyed the restaurateurs about their views of deal users and then compared the findings with earlier research involving consumers who use deals. They said that while the surveys were not matched, as they were done at different times with different samples, their comparison still can provide insight into whether restaurateurs understand daily deal users well enough to create and manage such promotions as effectively as possible.

The comparison revealed that restaurateurs underestimated the loyalty of daily deal customers, underestimated the likelihood that deal users would recommend their restaurant to others, and, in general, underestimated the value consciousness of customers. The researchers said operators also overestimated the need for deal users to receive special treatment and missed noting a key characteristic of deal buyers: their desire to be opinion leaders or “market mavens.”

“Given the consumers’ attitudes, the best strategy to bring back deal buyers is to offer them a first-class experience so that they can see a restaurant’s full value proposition,” the researchers concluded.

Saying, “We see no reason that this type of promotion will disappear in the near future,” Wu, Kimes and Dholakia offer the following suggestions to operators who use daily deals or are considering using them:

- Try to devise a way to limit the deal to new users.

- Structure deals to maximize overage, or customer spending above the amount of the offer, to net higher sales and better cover costs. For example, they said, if a restaurant’s per-person average is $40, a promotion selling $20 in credit for $10 is likely to yield more overage and total revenue to the operator, including coupon-sale-price share, than a promotion offering a $40 credit for $20. 

- Consider bounce-back offers to further prime the pump and encourage repeat patronage among daily deal users.

- Encourage daily deal users to post reviews or blogs about their dining experience and talk up your establishment to others.

- Remind employees to treat all guests well, including deal users, as earlier research by Dholakia suggested that properly trained staff is a key driver of a successful daily deal.

RELATED:

- A look at restaurant online ordering trends [7]
- Q&A: Sheryl E. Kimes, Cornell University [8]
- Research: Deal users may go for lower discounts [9]

The full report is available at the Cornell School of Hotel Administration's website [10].