Customer Response to Restaurant Daily Deals

Abstract

Over the past year, restaurant operators have been inundated with sales pitches to run daily deals for their customers from companies such as Groupon, Living Social, OpenTable and Restaurant.com. On the plus side, daily deals can help restaurants fill unused capacity. Given that the only significant variable cost for restaurants is that of their food (typically about 25 -30%), such promotions may offer an effective revenue management strategy to restaurant operators.

However, on the negative side, if operators cannot control when daily deal users patronize the restaurant, full-paying regulars may get displaced during busy periods, leading to lost profits in the short run and the attrition of a stable customer base over the longer-term. Or, if a significant number of regular customers purchase and redeem daily deal offers, such cannibalization could dilute the restaurant’s prices. In addition, the possible negative effects on service (from increased volume) and employee morale (based on the perception that daily deal customers are ‘cheap’ and will tip less) must also be considered.

We examined consumer perceptions of restaurant daily deal promotions. In a survey-based study conducted with a diverse sample of 931 respondents (617 restaurant daily deal users and 314 non-users). People who had purchased a restaurant daily deal tended to be younger, have a higher income and live in urban or suburban areas. We found that 44% of the respondents who had purchased restaurant daily deals in the previous 3 months were frequent customers of the restaurant; 22% were new customers and 34% had been to the restaurant before, but did not go there frequently. Based on our results, it seems that daily deals help generate new customers who are satisfied with their experience, likely to return to the restaurant and likely to recommend it to their friends. We also found that some cannibalization of existing customers may be occurring, that daily deal users were not necessarily ‘cheap’, were likely to tip on the full amount of the bill and were no less likely to be loyal than non-users.

Psychologically, heavier daily deal users had a similar value consciousness to non-users, were more likely to enjoy recommending products to friends, were more likely to use coupons and were less likely to purchase things impulsively.

Non-users indicate not using daily deals primarily because of awareness and access issues, and given that only 31% of our panel’s population has used daily deals before, there is significant opportunity for growth of restaurant daily deals on the consumer side. In assessing different sites, Groupon has the highest levels of awareness, use, and heart share among daily deal users, whereas Restaurants.com, LivingSocial, eversave, Travelzoo, and OpenTable score significantly lower on these metrics.

Keywords: Daily Deals, Restaurants, Revenue Management, Groupon, Restaurants.com, OpenTable