OK, sports fans. Here's a small business marketing tip that can save your business. Groupon has grown really big because they find you new customers.
But their promotions can be very risky.
That's a hard lesson the owner of Need A Cake in London just learned.
Groupon's business model is simple: deeply discount your wares, Groupon will promote your products to its multi-million person database and bingo!
You get a huge increase in sales over night.
There's just one catch -- you have to pay Groupon a percentage of those discounted revenues whether or not you make money.
Witness Rachel Brown, the owner of Need A Cake. Her goal for Need A Cake was to find new customers and to generate revenues.
So she signs up with Groupon to discount a dozen cupcakes. She normally sells them for $40.
The Groupon discount is 75% so the Groupon sale price is $10 for a dozen delicious cupcakes. Who wouldn't want that? She was practically giving them away.
Be careful what you wish for. Customers came out of the woodwork.
Eight thousand people got excited about the discount and placed their orders.
She got orders for over 102,000 cupcakes, over eight thousand dozen cupcakes or 102,000 cupcakes. I'm exhausted just thinking about it.
Guess what? She had to deliver and she lost twelve thousand pounds or $18,868 US.
Need A Cake's gross margins weren't high enough to absorb the 75% price discount.
She had to hire more staff to deal with this crush of orders. That increased her costs. They had to work until 3AM, which increased costs even more due to over time.
Higher costs, deep discounts. Need A Cake needed gross margin!
They worked 24/7 to get the cupcakes made. Her variable and fixed expenses skyrocketed to fill these orders.
Guess what? She lost money. SHE LOST MONEY.
She lost $18,868 after all that!
Here are twelve small business tips with small businesses promoting through Groupon:
Small Business Tip #1: With Groupon, there is no purchase limit. As many people as possible can take advantage of your discount. That means your costs are open-ended. This is very bad.
Small Business Tip #2: Groupon usually requires deep discounts of at least 50% to get people's attention. This is also a problem with low gross margin products.
Small Business Tip #3: If you have gross margins of 80-90%, you can survive. If not, Groupon is not for your small business. Unless you have gross margins of at least 80%, you'll lose money with Groupon, just like this baker in London did. Guaranteed.
Small Business Tip #4: Groupon makes its commission even if the supplier loses money.
Small Business Tip #5: Groupon's commission structure put this baker in a deeper hole while Groupon cavorts around finding the next desperate small business looking for customers.
Small Business Tip #6: The people who are attracted to a 75% discount are big price shoppers who are not brand loyal. After the discount is over, most will not come back when you would normally have an opportunity to sell them something at full price. This is also a big problem.
Small Business Tip #7: You don't make money with any customer until they buy from you at least three times. These shoppers are just looking for the next deal. The cost of your promotion becomes a sunk cost, dead weight with no benefit.
Small Business Tip #8: You'll rarely get a return on investment since your buyers will not convert to repeat buyers at full price.
Small Business Tip #9: You would be better off using that money to take a holiday in Brazil.
Small Business Tip #10: Compete on price and you'll lose money. Add value, mark up, and you'll protect your business. Our training videos tell you exactly how to do this.
Small Business Tip #11: The opportunity cost goes beyond just the $18,868 cash she lost in this horrible deal. The true loss to the business was probably double or triple the cash loss. This is a horrendous price to pay.
Small Business Tip #12: The best thing about this promotion is it ended up on the front page of the Drudge report, which is how we found out about this.
Watch our small business training videos and we'll show you how to compete on value and make a whole lot of money.
Our small business training videos show you how to increase price AND sell more units. We've done it in the real world and proven that it's possible.
Everything that happened to this baker, who entered into this Groupon agreement in good faith, was predictable.
We'll show you exactly WHY she lost so much money in our next post.
We'll also show you why you need to think VERY carefully before you partner with a Groupon or any other discount promoter.
You may sell a whole lot and still be left with empty pockets. We know a jewelery designer who went bankrupt with this strategy.
If you're taking all the risk as a small business owner, you deserve to get paid for it.
Don't let a deep discounter hoodwink you into giving away your treasure.
It's better to have a smaller patch of land and tend it profitably.
In our next article, we'll run the numbers on this promotion so you can see why things went south.
Meanwhile, if you're in London, stop by Need A Cake.
Buy one of their wonderful cupcakes.
Let's send a message to Rachel Brown that we appreciate her integrity and delicious goodies.
In fact, I'm going to order a dozen cupcakes to send to some ex-pat friends living in London celebrating the holidays.
Keep going, Ms. Brown. We love the work you do. It's amazing.
We can tell, even from across the pond.
Here's what we would recommend to Ms. Brown the next time she would like to promote her beautiful cakes.
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If you're not completely thrilled with what you learn, we'll refund your money. You have nothing to lose!