GROUP CASE ANALYSIS $1$GROUP CASE ANALYhicago, was

puzzled by the choices put before him by the Groupon sales representative. He could offer a

daily deal at Groupon $($a $$60$ coupon for $$30)$ that would be seen by hundreds of thousands

of Groupon subscribers in the Chicago region, or he could offer a more tailored discount at

Savored, a restaurant reservation site also owned by Groupon. The business had been slow

lately, especially during weeknights, and Mr$.$ Chang wanted to spur demand. He wanted to

make sure, however, that he did so in a way that actually increased profits. He estimated

that demand on weeknights was normally distributed, with a mean of $50$ and a standard

deviation of $30.$ Given a capacity of $100$ and only a single seating per table per night, there

were empty tables on many nights.

Groupon and the Daily Deal

Launched in $2008,$ Groupon expanded rapidly on the basis of its daily deals. The daily deal

amounted to a $50$ to $70$ discount coupon for a product or service offered by a local business.

Groupon broadcasted the deal to its subscribers; if the number of buyers exceeded a

threshold, the deal was finalized, and the company shared about half the revenues with the

local business while keeping the rest as its commission. The local business thus received

about $20$ to $25$ cents on the dollar of retail value. Customers who purchased a coupon using

the daily deal then contacted the local business for their product or service. At restaurants

like Enter the Dragon, Groupon buyers tended to get their reservations as soon as they

purchased their coupon, which was well before customers tried to get their reservations.

The popularity of the daily deal among subscribers led to rapid growth at Groupon. After

rejecting a $$6$ billion offer from Google, the company went public in $2011.$ Its stock has had

a turbulent journey since then. After opening at $$25,$ the stock hit a low of $$4$ by the end of

$2012$ before recovering to $$10$ by early $2014.$ The price drop could be partly attributed to

the higher marketing costs and negative publicity from some retailers who had used the

daily deal. Some complained that $$the financials just can$$t work,$$ whereas others called

Groupon the $$worst marketing ever.$$ Retailers complained that while Groupon brought in

new customers, the margins were terrible because the $20$ to $25$ cents on the dollar

recovered from a Groupon deal was much lower than the revenue the new customers

provided.

A viral blog post by Jay Goltz on the New York Times site offered retailers a way to evaluate

the benefit of the daily deal. He suggested that retailers think of Groupon as advertising.

Instead of writing a check to the advertising agency, retailers using the daily deal chose to

lose money on sales. Thus, the only calculation that mattered was the cost per new

customer acquired from a daily deal. The blog post suggested the following eight key

metrics to decide whether the daily deal was cost$-$effective advertising:

$2$

$1.$ Incremental cost of sales

$2.$ Size of the average sale

$3.$ Percentage of coupons redeemed

$4.$ Percentage of coupons purchased by current customers

$5.$ Number of coupons purchased per customer

$6.$ Percentage of new coupon customers who become regular customers

$7.$ Value of all Groupon subscribers seeing the daily deal

$8.$ Current cost to acquire new customers through advertising

The value of the daily deal depended on these numbers. In an example described on the

blog, Mr$.$ Goltz focused on a restaurant that sold $3,000$ coupons with a face value of $$75$ for

$$35($the restaurant received only $$17\mathrm{.}50,$ with Groupon keeping the rest as commission$).$ He

assumed that the restaurant spent $40$ percent $($of normal revenue, not discounted revenue$)$

in incremental cost; customers spent, on average, $$85($$$10$ more than the coupon$)$; only $85$

percent of the coupons were redeemed; $40$ percent of the coupons were purchased by

current customers; two coupons were purchased per customer; and about $10$ percent of the

new customers came back to the restaurant.

In this case, the restaurant received a check of $$52,500(=3,000\backslash$times $17\mathrm{.}50)$ from Groupon and

additional revenues of $$25,500(=3,000\backslash$times $0\mathrm{.}85\backslash$times $10)$ because the customers who came to

the restaurant spent $$10$ more than the face value of the coupon. The incremental cost of

serving these customers was $$86,700(=3,000\backslash$times $0\mathrm{.}85\backslash$times $85\backslash$times $0\mathrm{.}40).$ The restaurant thus lost

$$8,700$ on this deal. If viewed as an advertising expense, it was necessary to evaluate the

number of new repeat customers that the deal brought in$.$ Given that $2,550(=3,000\backslash$times $0\mathrm{.}85)$

coupons were redeemed and each customer bought two coupons, the deal was used by a

total of $1,275$ customers. Given that $60$ percent of these were new customers, the deal

brought $765(=1,275\backslash$times $0\mathrm{.}6)$ new customers to the restaurant. If $10$ percent of them would

return, the deal effectively brought in $76$ new