In our last post on small business marketing tips we introduced you to Rachel Brown who owns "Need A Cake" in London.
She got nailed when she promoted with Groupon and had to deliver 8,500 DOZEN cupcakes at a loss.
It cost her time, energy, and real money to do this.
If you asked her, she'd say the promotion through Groupon was not worth it.
Here's how to predict these things in advance to prevent the losses.
The outcome of this Groupon promotion was 100% predictable. My guess is, most small business owners don't run the numbers first, they're so desperate for sales.
Here is my best guess at Ms. Brown's numbers based on the article details:
- Original Price for 1 Dozen cupcakes was $40 or $3.32 per cupcake.
- Deep discount of 75% price through Groupon was $10 or $.83 per cupcake.
- She lost $18,868 on the 102,000 cupcakes she needed to make to fulfill the promotional demand, which means she lost $.18 per cupcake.
- Her breakeven price would therefore be $1.01 per cupcake.
$1.01 cents is what her direct labor and materials cost her to make one scrumptious cupcake.
When you add together direct labor and direct materials (like flour, sugar, eggs, icing) you get your cost of goods sold.
These costs, however, do not include her insurance costs, utility, rent expenses, cleaning costs, equipment repair, health insurance or web maintenance expenses.
Applying all those fixed costs to one cupcake probably raises the cost well above a dollar per scrumptious little morsel.
The minimum she should be charging for her cupcakes is her total costs plus a 40% premium to cover the risks she's taking.
That means probably selling her cupcakes for no less than $2.50 a piece vs. full price of $3.32.
That's still a 25% percent discount.
It was the 75% discount that killed her profits and practically killed her staff working until the wee hours.
A dozen cupcakes would have been promoted for $30.00 instead of the regular price of $40.00.
She could have kept her head above water at $2.50 per cupcake. She would have been offering great value, even at $30.00 per dozen.
She definitely would not have had as many customers, but she would not have lost any money either.
No doubt, many who value her quality and artistry would have jumped at the chance to taste her cakes. I just placed an order without the discount!
A 25% discount is still a great incentive for new customers. The good news is, she wouldn't be giving away the store at that discount level.
The small business marketing tip to remember is the deep-discount-value- shoppers would not have been interested.
The higher discount price would have weeded the give-it-to-me-for-free crowd.
These are the people who only show up when you're giving stuff away. You can't build businesses with these folks.
You can't sell something for less than it costs you to manufacture it and make it up in volume. All you end up doing is digging a deeper financial hole.
And you can't sell to people who jump at the lowest price all the time.
Many, many small businesses have lost money with Groupon.
Don't be blinded by the bright lights of more customers and sales.
Repeat after me, you don't want more sales. You want profitable sales.
Don't forget, Groupon makes money regardless of whether the small business owner makes money. You pay Groupon a commission based on the sales price, not based on your profits.
Hmmmm, I wonder if we forced their hand to receive commission on PROFITS vs. revenues if they would be so quick to offer such deep discounts?
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