What Bloggers Can Learn From This Groupon Mistake

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

lush 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.

Creative Commons License photo credit: ms.Tea

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

Am I next?
Creative Commons License photo credit: scatteredView

From what I can understand, Rachel has no strategy to build loyalty from these customers.

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?

Creative Commons License photo credit: clevercupcakes

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About

Allan lives in Adelaide, South Australia with his wife and two boys. He is the founder of Blogger Business Plan and loves helping bloggers learn how to transform their blogs from hobbies into sustainable businesses.
When he's not blogging or working in his financial planning business, you'll find Allan playing guitar, reading or coaching his son's soccer team.

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8 Responses to What Bloggers Can Learn From This Groupon Mistake
  1. Peter Cook
    November 24, 2011 | 6:46 am

    Great article. You should check out Datasentiment for a much better alternative to groupon at http://www.datasentiment.com

  2. Jase Bell
    November 24, 2011 | 10:03 am

    <>

    One of the great Groupon myths, repeat custom. There’s a few metrics that you need to think about with the new 8,500 leads.

    i) How many are outside a 10 mile radius of the store?
    ii) How many are brand jumpers of no intention of purchasing from that retailer again?

    It’s fairly common knowledege that customers are usually in a 10 mile radius of the store. Groupon customers will travel further (anything for a bargain!) but will then be rarely seen again.

    Bargain hunters hunt for the next bargain and it won’t be with that retailer, not unless they want to go through the same pain again in six months time.

    It’s been a while since we had a good old Groupon horror story. I think the peak is over and the decline has started.
    Jase Bell recently posted..Groupon: Who knew that so many people liked cupcakes?My Profile

    • Allan Ward
      November 24, 2011 | 9:12 pm

      Hi Jase,

      Thanks for leaving a comment. You make some great points that most small businesses wouldn’t even think about.

      The interesting thing in this case is that her store appears to be mainly focussed on the online customer. If this is the case, then it shouldn’t matter how far away the people are if they’re happy to wait a few days to get their cupcakes. She’s got 8,500 email addresses – now’s her chance to follow up on them and convert some of them into loyal customers.

      I also share your scepticism about the loyalty factor. The people I know who shop with Groupon only do it to get a bargain. And you’re right – there are so many horror stories out there about businesses who badly underestimate the spike in customers they’ll get.

  3. Leon Noone
    November 24, 2011 | 2:48 pm

    G’Day Allan,
    I think that Rachel should have worked out her total marketing strategy before she started the Groupon exercise. If she has a sound follow up tactic in place, the exercise could well prove worthwhile.

    But Rachel should know that “buy one, get one free” outperforms discounts and other offers such as “two for the price of one” by about four to one.

    Had she started with a “buy six, get six free” offer, she’d have covered her costs and probably made some money too.
    I doubt that she would’ve attracted 8500 buyers but those who bought would have been genuine customers.

    The questions that haven’t been asked are how can she follow up the 8500 direct, how much will it cost and how many of them are merely discount chasers?

    Whatever happens, it’s an interesting case. I’d like to know what happens.

    Best Wishes
    Leon
    Leon Noone recently posted..The Kid’s Carrot Cake Secret to On Job TrainingMy Profile

    • Allan Ward
      November 24, 2011 | 9:18 pm

      G’Day Leon,

      Always nice to have a fellow Aussie comment on my blog!

      You make some great comments. A little research wouldn’t have gone astray. It’s interesting because Groupon claim to provide marketing assistance – surely they’d be able to track campaigns and provide some sound direction. I’m staggered that she willingly set a price where she wouldn’t be making any profit – what was she thinking?

      I’m with you – I’d prefer a smaller number of customers who had the potential to turn into loyal customers over 8,500 bargain hunters.

      The interesting thing about this is how she’s got a lot of publicity in the past few days. You couldn’t buy the publicity she’s received. Imagine how many hits she’s had on her website! If I were her, I’d put a big banner up on her site for an ‘I Made A Groupon Mistake Cake Sale’ or something similar. Make a joke about it, but try and get new business.

      Hopefully there’s some follow up so we can see what she does.

      Have a great day, regards to Julie.

      Allan

  4. Jan Roos
    December 22, 2011 | 9:36 am

    What a nightmare Groupon can be for a business! Sure it’s great to get your phone ringing off the hook but at a loss? I don’t think so!

    I agree 100% with lifetime value and follow up!

  5. Nima
    January 29, 2012 | 12:09 pm

    Wow! What a Groupon disaster. The strategy you outlined via email is probably the best idea that Rachel could have followed.
    Nima recently posted..iPad 2 Case | Distressed Brown Leather CaseMy Profile

  6. Sheyi
    March 30, 2012 | 1:03 am

    I love this part of the post “You must have a strategic plan in your business that details how you will make money.”. Even though it is not publi, but you must know it and always work towards that.

    As for me, its to create an e-book, course work and sometimes in the near future a membership course too.

    Sheyi

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