Why Discounts Can Be Bad for Business and What To Do Instead

David Scott Peters is founder of Smile Button Enterprises, an independent restaurant coaching and training company. Peters is a restaurant systems expert and he works with hundreds of independent operators every year.

"When I used to be a franchisor I used to hear franchisees talk all the time about how maybe one franchisee went out of business and they were doing $1.5 million in sales. In the concept that I was running, that was on the high side. They ask how that person could have gone bankrupt. Well, I always point out, it doesn't matter how much sales you've got coming in, it's what you do with it," Peters says. "We went out to dinner last night with the grandparents and sat in this restaurant and they said for their town, this place is basically a cash cow. I said, 'You don't know that. Just because they're busy doesn't mean they're making money. They don't go hand in hand.'"

This month, Jim Laube talks to Peters about coupons, what he calls the "cocaine of marketing." Says Peters, "When you put out a promotion, you put out a steep discount and you mail it out to your neighborhood and the money mailer or super co-op or to your own list. You see immediate results that will absolutely drive customers into your door and result in a higher register ring. Not necessarily cash in your bank account or in your register, but higher register rings. All of a sudden you say, "Man, this feels awesome, look at this, we're so busy, we're running around like crazy, we need more product, we need more staff. This is exciting stuff. Look at what my sales are doing ...."

Read on. Peters: The problem with couponing is that as soon as we stop couponing, we turn that promotion dollar off and we don't see the same energy, we don't see the same rings at the register and we start to panic. So what do we do? We say I need a quick fix much like a junkie might sit there and do his first hit of cocaine, which I've never done. You see these people just destroy their lives and go, "OK, I need another hit." Well they get the hit; they put out another coupon and the next thing you know they bring in business again. What they find is every time they do that they've got to make it an even more aggressive, more "wow" kind of coupon or discount to keep people coming in. So it's similar to cocaine in the sense that as soon as you stop that euphoric high, those sales in your door stop. You've got to do it again and again and again, and it becomes a vicious cycle, sometimes killing restaurants, and we'll talk a bit about that.