Is It Possible to Save Your Way to Bankruptcy?

I realized a couple of months ago that I have a discounting problem. I don't think I had ever used a coupon up until a year ago and now I can't go out to eat without looking for a buy one get one free offer. I sort through my Valpaks, I clip coupons on Sundays and I am signed up for three different daily deal sites. I am not cheap, I am fiscally conservative... and apparently I am not the only one, based on the recent valuation of Groupon!

This is all well and good, but there are some hidden traps for both the consumers and the businesses engaging in these deals. For the consumer, don't save your way to bankruptcy. For the business, don't deal away all of your profit.

Okay, so what does "don't save your way to bankruptcy" mean? It means that getting a good deal is not saving you money unless you are getting a good deal on an item you were going to purchase already. For example: You are not planning on buying a coat. You find a $200 coat for $50. You may think you saved yourself $150, but in fact, you just spent an extra $50 out of your budget. How many $150 savings can you afford before your weekly or monthly budget is shot? An easy way to spend much more than you planned is in the grocery store; buying items because you have a coupon that you otherwise never would have purchased.

I started buying Groupon's like they were going to stop offering them when I first created my account. Then I started buying them from Eversave and Living Social as well. Next thing you know I have saved myself $1,000 and spent $750. Not only did I spend too much, but how was I going to golf 10 times, go out to eat 20 times, watch 5 movies, go on a kayak tour, go bowling, take a gun training course... all before my great deals start to expire?

I have fortunately figured out that they are going to send me another deal tomorrow so I have started pacing myself a little better. I only buy restaurant deals when I have used the previous one, only 3 rounds of golf at a time (unless the deal is just too good to be passed up), and only 5 deals total at any given time. I'm sure everyone will have different rules, but everyone should have some rules.

With all of the sales these sites are bringing, how can this be bad for business? Sales are good, but profit margin is also important. The businesses that are offering these deals are typically receiving 25% of their normal sales price or less. Depending on the type of business and their profit margins this may be a very bad idea financially.

Let's look at a restaurant since that is very popular offering. I believe a normal restaurant food cost runs about 1/3 of sales so I will use that ratio for this example. That means that for a $30 bill the restaurant spent $10 on food and the other $20 goes towards other restaurant costs and hopefully profit. When offering a daily deal, a restaurant will be required to offer a 50% discount and then 50% of the revenue will be taken by the daily deal site. That means that the $30 meal will now be $15 for the consumer (great deal) and the daily deal site will take $7.50 of the remaining $15. That leaves the restaurant with $7.50, which does not even cover the $10 in food costs, much less any other costs.

Now, my example is simplified and the restaurant can add rules that allow the financials to tip at least a little more in their favor. That being said, any business running these deals should be very aware of the financial impact a large amount of these sales can have on their business. Either positive or negative.

There are also certain businesses that have a great fit for this type of daily deal. A golf course is an easy example. If tee times are empty that is wasted revenue and there is not a "product" cost associated with those tee times like there is for a restaurant. In this case, a golf course is better off bringing in 25% of the normal tee time revenue in order to fill those slots up. In most cases you will be bringing in extra revenue in terms of food, beverages, supplies... as well. For this type of company it always makes sense to bring in more traffic if you are not filling up. You can also tailor the deals so they are only good at certain times or day of the week to target time slots that are the weakest.

All in all, I think there are some great uses from the both the consumer and business perspective when utilized appropriately with a well thought out plan. Now get out there and start saving... or making money!