Should a Restaurant Partner with Groupon?

A restaurant is deciding whether to partner with a daily-deals platform such as Groupon. You are asked to work through the unit economics and make a recommendation. The restaurant's current business is: - **20 tables served per day** - **Average spend:** $30 per table - **Variable cost:** $0.40 per $1.00 of customer spend (i.e. 40% of spend) - **Fixed cost:** $100 per day A Groupon-style offer is proposed: - A customer pays **$15** for a voucher worth **$30** of menu value. - Groupon keeps **40%** of the $15 payment and remits the remaining **60%** to the restaurant. - If the customer spends more than $30, the excess is paid directly to the restaurant at face value. - Assume every Groupon customer spends **at least $30**. This is a mini-case: work the arithmetic, but the interviewer is really probing whether you reason about **incremental vs. cannibalized** demand rather than top-line traffic. ### Constraints & Assumptions - Variable cost is always 40% of the customer's **actual** menu spend (not of the price they paid). - Fixed cost of $100/day is sunk with respect to per-table decisions in the short run. - The $30 voucher value is recognized as $30 of menu consumption; the restaurant's cash receipt on that first $30 is only the 60%-of-$15 remittance. - "Profit" means daily operating profit = total contribution − fixed cost. - Treat each table as one party; "average spend per table" and "average check" are interchangeable here. ### Clarifying Questions to Ask - What is the restaurant's current **capacity utilization**? Are tables sitting empty (especially off-peak), or is it usually near full? - What fraction of Groupon redeemers are expected to be **genuinely new** customers vs. existing regulars trading down to a discount? - Is the goal short-run profit, customer acquisition, or steady-state profitability after a launch period? - Are there redemption controls available (off-peak only, new-customers-only, daily voucher caps, minimum spend)? - What is the typical **repeat rate** of a Groupon customer at full price afterward, and over what horizon should we evaluate it? ### Part 1 — Factors to consider Before any math, what factors should the restaurant consider before partnering with Groupon? Frame the decision, not just a list. ```hint Where to start Separate **gross demand generation** (more covers, bigger checks) from **profitable demand generation** (net contribution per table). They can move in opposite directions. ``` ```hint Dimensions to surface Think about capacity utilization, incrementality vs. cannibalization, contribution margin under the deal, customer lifetime value / repeat behavior, operational strain on service, and brand/positioning effects. ``` #### What This Part Should Cover - Capacity utilization and whether discounted diners would displace full-price ones. - Incrementality vs. cannibalization of existing demand. - Per-table contribution under the deal (not gross sales) and downstream LTV/repeat behavior. - Operational and brand consequences of deep discounting plus deal-structure levers (commission, caps, restrictions). ### Part 2 — Baseline profit and incremental break-even **(a)** What is the restaurant's current **daily profit** without Groupon? **(b)** For a Groupon customer, what **average spend per table** is required for the restaurant to break even on a **purely incremental** basis (i.e. a customer who otherwise would not have come)? ```hint Contribution margin With variable cost at 40% of spend, every $1 of menu spend yields $0.60 of contribution before the Groupon cut. ``` ```hint Model the Groupon cash receipt On the first $30 of value the restaurant does **not** receive $30. The customer paid $15; Groupon keeps 40% of $15. Work out the restaurant's cash on that first $30, then add the excess $(x-30)$ at face value to get total revenue as a function of spend $x$. ``` ```hint Set up break-even Write contribution as (restaurant revenue) − (0.4 × actual spend), then solve for the spend $x$ that makes a single incremental Groupon table's contribution equal to **zero**. ``` #### What This Part Should Cover - Correct baseline profit using contribution margin and the fixed-cost subtraction. - A correct revenue model for a Groupon table: the discounted receipt on the first $30 plus face-value excess. - A clean break-even equation and the interpretation of the resulting threshold spend. ### Part 3 — Recommendation: incremental vs. cannibalized Based on the break-even result, would you recommend partnering with Groupon? Explain the difference between evaluating an **incremental customer** (who would not have come otherwise) versus a **cannibalized existing full-price customer** (who would have come and paid full price). Make the comparison quantitative. ```hint The right benchmark For an incremental customer the bar is contribution ≥ 0. For a cannibalized customer the bar is the contribution the restaurant **gave up** by discounting that table. Solve for the Groupon spend at which the discounted table matches a normal full-price table, and contrast the two thresholds. ``` #### What This Part Should Cover - A clear statement that the recommendation hinges on the incremental share of Groupon customers. - The contrast between the incremental break-even bar and the (higher) cannibalization break-even bar, with numbers. - A capacity-conditioned recommendation (idle tables → more favorable; capacity-constrained → unfavorable). ### Part 4 — New scenario and diagnosis **(a)** Now suppose the restaurant serves **25 tables per day**, the **average spend is $36 per table**, fixed cost remains **$100 per day**, variable cost remains **40% of spend**, and **10 of the 25 tables use Groupon** (the other 15 pay full price). What is the new daily profit? **(b)** Why might profit be lower than in the original $260 scenario even though **both** table count and average spend increased? ```hint Split the tables Compute contribution per regular table and per Groupon table separately at the $36 check, multiply by counts, then subtract fixed cost. The Groupon table's revenue still loses the ~$21 deal gap on the first $30. ``` ```hint Diagnose the drop Compare per-table contribution: a $36 regular table vs. a $36 Groupon table. The gap explains why more covers and a bigger average check can still reduce profit — top-line up, net contribution down. ``` #### What This Part Should Cover - A correct split calculation (regular vs. Groupon tables) yielding the new profit. - The insight that gross sales ≠ profit: the per-table contribution gap on Groupon tables drives the decline. - Naming this as a metric-selection lesson (optimizing covers/gross spend can hurt net contribution). ### Part 5 — Strategy: when to do it anyway, and how to improve it **(a)** Under what business conditions would you still consider Groupon despite lower short-term profit? **(b)** If the restaurant does partner with Groupon, how could it improve profitability? Be specific about levers. ```hint Conditions Idle capacity (high fixed / low marginal cost), genuine new-customer acquisition with repeat potential, launch/marketing exposure, and tight targeting to off-peak windows where seats would otherwise be empty. ``` ```hint Levers Group them: improve deal economics (commission, voucher generosity such as $20-for-$30, minimum spend, daily caps), reduce cannibalization (new-customers-only, off-peak-only), raise average order value (upsell/bundle), and grow LTV (capture contacts, bounce-back full-price coupon). ``` #### What This Part Should Cover - Conditions tied to unused capacity, incrementality, and marketing/launch value, with a measurement caveat (selection bias; pilot/holdout design). - A structured set of profitability levers across deal terms, cannibalization control, AOV, and repeat-value capture. ### What a Strong Answer Covers Across all parts, a strong answer keeps the arithmetic correct while consistently reasoning at the level of **net contribution and incrementality**, not gross traffic: - Correct, reproducible numbers ($260 baseline; $35 incremental break-even; $230 new scenario) with the Groupon cash mechanics modeled correctly. - A sharp incremental-vs-cannibalized distinction, made quantitative, and conditioned on capacity. - A diagnosis of why bigger top-line metrics coincided with lower profit. - Business judgment on when to proceed anyway and concrete levers to fix the unit economics, plus an awareness of measurement pitfalls (selection bias, need for a holdout/pilot). ### Follow-up Questions - If you could run an experiment to measure Groupon's true incremental value, how would you design it (holdout, time/location windows, what you would measure, and over what horizon)? - How does the recommendation change if average Groupon spend is $50 instead of $36? At what spend does a Groupon table beat a $30 full-price table? - How would seasonality or day-of-week capacity differences change which redemption restrictions you'd negotiate? - Suppose 30% of Groupon redeemers return at full price within 90 days. How would you fold repeat value into the per-table economics, and would it change the decision?