I read this great article today called ‘Cupcake Calamity‘ about a baker in the UK who had an offer in Groupon that worked a little too well!
Rachel Brown runs a business called Need A Cake that makes great looking cakes for all occasions. She wanted to grow her business, so decided to publish an offer on Groupon. This is where the trouble begins.
She offered a 75% discount on a box of her cupcakes – selling them for £6.50 instead of the usual price of £26. Here’s the problem – she was making a loss on every box she sold at the discounted price. The article I read said she was losing £2.50 per order.
As you can guess, she was swamped with orders and had to stop the Groupon deal once 8,500 orders were received. If you’re making a loss of £2.50 per order, that’s a lot of money you’ve just lost.
In addition, she had trouble keeping up with the demand and had to hire 25 extra staff to work around the clock making the cakes.
So, what can we learn from this story, and how does it apply to bloggers?
Lesson 1 – Understand your profit margins
Rachel seems to have understood that she was selling these boxes of cupcakes at a loss. I’ll cover the pros and cons of selling at a loss in the next point, but the important take-away here is that she knew what it cost her to produce her product.
The process of working out the true cost of a product can be a bit easier in a manufacturing environment like baking, where you’re very aware of the cost of the ingredients and the labour. It’s more difficult in blogging, where the cost is more time-based.
Whatever you do, make sure you’re aware of the importance of making a profit and understanding the true cost of your product.
Lesson 2 – Loss leaders are okay, but you need a strategy to make money
My local supermarket frequently has specials where it sells products at a loss. Why does it do this? To get people in the shop!
That’s the carrot they’re dangling in front of you to get you in their store. Once you’re in the store, you may buy the item that’s being sold at a loss, but you’ll probably buy more things that they’re making a nice profit on.
So, they’re happy to make a loss on one item because they know they offset that loss from the profits they make from other products.
They have a strategy to make money!
I have no idea why Rachel decided to sell her cupcakes at such a deep discount. I’m sure a 75% discount sounds great, but surely a 50% discount would also have been attractive, albeit to a smaller number of people.
What concerns me is that there appears to be no strategy in place to sell more products to these people at a profit.
You must have a strategic plan in your business that details how you will make money.
Lesson 3 – Build loyalty and repeat business
The way I see it, she’s spent money to acquire these new customers, and at the moment she’s spent more than the profit she’s made from them. But that can change.
If you take a view of the lifetime value of a client, you’ll begin to understand that sometimes it’s ok to make an initial loss if that’s made up over the lifetime of a customer.
Rachel’s business has a great looking website and I understand these orders were lodged over the internet. The article says she sold 8,500 boxes of cupcakes, so now she has 8,500 email addresses from people who have bought once from her.
If I were her, I’d send an email up now saying thanks for your order. I’d then offer a follow up offer of 50% off the price of their next order. I’d be making a profit from this. The email costs nothing, unlike advertising through Groupon. The email is sent to hot prospects – people who’ve just made a purchase from you.
I’d then look to develop some sort of loyalty program – perhaps a discount after a certain number of purchases. Maybe she could use a Facebook page and feature pictures of her creations. What about a regular email newsletter that highlights her cakes and special offers?
The way I see it, she’s spent a significant amount of money on acquiring some new customers. Whilst she’s made a loss, she has the opportunity to increase the loyalty of these customers and make them into very profitable customers.
Lessons for Bloggers
You know that I’m passionate about helping bloggers turn their blogs from hobbies into businesses. To do that you need to think like a business.
- What are you currently doing that you’re making a loss on? For me, it’s writing articles like this that are free.
- Is there a strategy to make money? How will you make money from people attracted to ‘free’?
- If you make a mistake, how can you leverage it?
I’m interested in your feedback on this story. What other ways do you think Rachel can leverage this opportunity and begin to make money from it?
- None Found