The Downside of Discounts

Several months ago, I had seen on "Nightline" a story about a restaurant that started offering "Pay What You Can" specials. The owners had noticed a drop-off in business, and they attributed it to the economy. To keep their tables filled, they started letting customers pay what they could for the day's blue plate special. It was a really neat idea, but after reading this Independent Street post, I wonder if it was a very good one.
Today's WSJ small business blog examines a growing trend among restaurateurs—offering free or reduced meals just to get people in the doors—and the downside of it.
"A few months ago, Potager Natural Cafe in Arlington, Texas, opened its doors as a pay-what-you-want cafe, with an ever-changing menu that features such items as Guinness-glazed organic chicken or a Guinness chocolate cake with Baileys vanilla frosting. Trouble is, it’s not breaking even. Customers are leaving an average of about $7 per person; Potager’s food costs are running about $8 per person."
Yikes.
Desperate times call for desperate measures, but you still need to break even.
I interviewed an NFIB member a couple of months ago for an article on listening to customers. Toward the end of the interview, the conversation naturally turned to the economy and what effect it was having on his business—a restaurant in Boise, Idaho. One of the incentives he was using to draw customers in despite the downturn was offering free lunch every Tuesday—but just to one table. The prospect of winning free lunch was enough to encourage customers to come, and the generous gesture hardly put a dent in his bottom line.