Travelzoo points to a Local Deal it sold in May at an Asian fusion restaurant in San Francisco as a return on investment success story, but the restaurant's general manager says she's crossing her fingers "that we don't lose money."
"It isn't a horrible experience by any means," says Amanda Bowman, the general manager at E&O Trading Co. in San Francisco, three months after 2,243 vouchers were sold for a four-course dinner for two at the restaurant. "I don't know if we'll make any money from it. It's too soon to tell."
So far, at least, Travelzoo and the restaurant are offering divergent perspectives about the economics of this particular Local Deal.
The E&O Trading deal, which ran for about a week and sold out May 23 with 2,243 vouchers purchased, offered a four-course dinner for two with two cocktails for $59, a 53% discount off the usual $126 price.
The voucher sales generated $132,337 in gross revenue in seven days and E&O Trading negotiated a 55% split or $72,785.
Travelzoo says E&O Trading projects that it will generate $80,000 in profit from the promotion.
"This calculation takes into account all costs, customer up-sell, existing customer usage, revenue share and breakage/float and new customer acquisition," Travelzoo says.
Travelzoo adds: "E&O confirms that it will realize a minimum 37% profit per redeemed voucher."
If all of these numbers sound just a little too fantastic, Bowman of E&O Trading brings them back to earth.
Bowman says the restaurant received $32.50 for every $59 voucher sold, which isn't bad because the restaurant's "costs are so good," in the "low $20s" for the food and beverage covered by the voucher.
"But we loaded it up too much," Bowman says. "We didn't leave ourselves enough room for upselling," adding, however, that customers so far have purchased about $10,000 more than the voucher amount.
On the other hand, Bowman says, as of Aug. 8 "we have comped [i.e. provided for free] food and beverage worth a retail value of $106,000."
Bowman estimates that more than half the customers coming into the restaurant with vouchers are new customers. "How many will be back, I don't know," she says.
If more than half are new customers, it should be pointed out that many customers coming in with vouchers are existing customers who are paying a steep discount for a dinner and drinks that they might have paid the full retail price for previously.
A substantial part of the profit from local offers comes from breakage -- when people buy vouchers but never show up to redeem them.
The rule of thumb is that the longer the redemption period, the more breakage occurs. People who purchased the E&O Trading Co. vouchers in May must redeem them by Oct. 31, a little more than five months after the deal closed.
"It was fun to watch all the people in the restaurant on the first day and selling more than 2,200 vouchers was impressive," Bowman says. "We think we'll see the most breakage in August. That's what we are counting on."
She adds: "I don't think we are losing money, but I wouldn't bet that we are making money, either."
And, Bowman talks about another impact that might not appear evident at first to outsiders. A lot of customers may tip on the voucher amount and not on the much-higher retail value.
"The servers' tips suffer a little bit and that has affected morale," Bowman says.
Bowman says she gets two or three phone calls a day from companies offering to set up the restaurant with another voucher sale, and she's not so ready to do another one.
In fact, E&O Trading is declining to do a second voucher deal with Travelzoo for the time being, Bowman says.
With the all-important breakage expected to be at around 20%, Bowman says she views doing a second deal with Travelzoo as potentially reducing the breakage on the current deal because it would essentially provide a reminder to deal purchasers that they hadn't redeemed their vouchers.
So while it's clear that Local Deals are great for Travelzoo and consumers, judging from E&O Trading's experience, the jury may still be out on how restaurants, spas and other suppliers make out.
Of course, Travelzoo just marked a milestone -- it has sold more than one million Local Deals in less than a year since the program kicked off.
And, you can't judge the ROI of one million deals based on one restaurant's yet-to-be-completed voucher experience with Travelzoo, but there have been enough stories from disgruntled establishments using other vendors, such as Groupon, to provide some caution for suppliers about the business model.
Other establishments may very well provide a totally different assessment about how their ROI worked out.
Asked whether the numbers Travelzoo provided for its case study on E&O Trading might be a tad optimistic, Michael Stitt, general manager of Travelzoo Local, said the numbers "work" because establishments such as E&O Trading "are careful about their food costs and focus on delivering an incredible experience."
And, Stitt and other Travelzoo officials emphasize that Travelzoo Local Deals are differentiated from Groupon-like deals because they offer an "experience" and not merely a commodity.
Travelzoo says part of its success lies in the demographics of its subscriber base: 81% of subscribers are older than 35 and 40% earn more than $100,000 annually, the company says.
Says Stitt: "When you roll out the red carpet for these customers, you're not filling an empty table, but you're creating a story for the user to tell his/her friends and a reason to visit again."