Large Groupon Discounts Can Lead To Losses

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How would you like to be a business owner offering a discount on Groupon only to lose $20,000 on the deal? It happens a whole lot more than you think. :eek:

A London baker learned that the hard way, when she was forced to bake 102,000 cupcakes, after offering a 75-percent cupcake discount on Groupon. The discount obviously sounded too good to Grouponers, 8,500 of which signed up to buy 12 cupcakes for £6.50 ($10), down from the standard £26 ($40) price. Rachel Brown, which operates the Need a Cake bakery in London, had no choice but to hire extra workers and try to bake the cupcakes to satisfy the swarming customers.
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Valve discovered this first hand. Why would it be different for cupcakes?

Discounting games does not only increase unit sales--it increases actual revenues. During the 16-day sale window over the holidays, third-parties were given a choice as to how severely they would discount their games. Those that discounted their games by 10 percent saw a 35% uptick in sales--that's dollars, not units. A 25 percent discount meant a 245 percent increase in sales. Dropping the price by 50 percent meant a sales increase of 320 percent. And a 75 percent decrease in the price point generated a 1,470 percent increase in sales.

source
 
Dumbass business owner for selling units below cost without a "first XXX orders, while quantities last" clause.

Stupid people regularly pay a stupid tax; this is nothing new.
 
maybe these people that unwittingly screw themselves with promotions should have set lower limits.. it can't really be that hard to calculate your loss ahead of time and adjust your deal accordingly. the idea is exposure, start small see how it works out. repeat the deal if it's popular and you get what you wanted out of it, more customers.
 
Wow....at $40 a dozen for regular price I hope those are 6" giant cupcakes....who the f*ck would pay $40 for a dozen????
 
Ducman69 said:
Dumbass business owner for selling units below cost without a "first XXX orders, while quantities last" clause.

Stupid people regularly pay a stupid tax; this is nothing new.
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Yeah, and it's not like this could be used as a loss leader like someplace like Walmart could, since if your already getting a dozen cupcakes, that you probably wouldn't have bought anyways, what's the chances of you buying something else in the bakery?

fps4ever said:
Wow....at $40 a dozen for regular price I hope those are 6" giant cupcakes....who the f*ck would pay $40 for a dozen????
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Yeah, that was my first thought as well.

Also, how the hell do you charge $10 for a dozen cupcakes and loose money?
 
While it's a huge loss at the moment, 8500 new potential customers is worth quite a bit!
 
BS911 said:
While it's a huge loss at the moment, 8500 new potential customers is worth quite a bit!
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More like 0 potential customers. I sure as hell wouldn't pay $40 for a dozen cupcakes.
 
$40.00 a dozen? Maybe she should lower her expectations of how large her empire is.
 
l00segravel said:
Valve discovered this first hand. Why would it be different for cupcakes?

Discounting games does not only increase unit sales--it increases actual revenues. During the 16-day sale window over the holidays, third-parties were given a choice as to how severely they would discount their games. Those that discounted their games by 10 percent saw a 35% uptick in sales--that's dollars, not units. A 25 percent discount meant a 245 percent increase in sales. Dropping the price by 50 percent meant a sales increase of 320 percent. And a 75 percent decrease in the price point generated a 1,470 percent increase in sales.

source
Click to expand...

The difference is that there is a near zero cost for additional software downloads, however the cupcakes have fixed ingredient costs and increased labor cost to produce more in a short amount of time...

The owner really should have set a limit.
 
WTF, $40 for a 12 pack of...

cupcakes?


And losing $20,000 for a "sale" price of $10 on a 12 pack of...

cupcakes?


So Miss Rachel had to produce 102,000 cupcakes. Let's see, figure (and probaby very very high) at $0.25 per cupcake for materials, labor, etc. That's a production cost of $25,500. Sell a dozen cupcakes at $10. That's a total profit of $59,500. How the HELL does this equate to a LOSS of $20K?

Get a computer and some decent small business software already!
 
Losing money at $10.00 a dozen shows a shitty run business. If you need $40.00 a dozen to stay operating it's time to go home.
 
This doesn't take into account future revenue from customers who tried your product for the first time and have been converted into multiple order customers. If I were to do a deal like this, I would work it out to 105% of cost and be ready to sell a bunch. It's good advertising.
 
Old Man said:
Losing money at $10.00 a dozen shows a shitty run business. If you need $40.00 a dozen to stay operating it's time to go home.
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I think it's pretty clear these are not your run-of-the mill grocery store cupcakes. I would assume superior ingredients (not just sugar/flower..but fruits and what not) and significantly more craft in the icing than just throwing some on with a pastry bag.
 
I wouldn't complain about the 8500 new addicts...

Wait, we're not selling drugs?

Well, maybe some *special* cupcakes would work better.

Also, don't they call them "fairy cakes" over there?

In-line thinking: fairy cakes with fairy dust... think about it. ;)
 
your claim is the exact opposite of the conclusion of the article. Also, valves products have 0 marginal cost, which makes them substantially different than cupcakes.

l00segravel said:
Valve discovered this first hand. Why would it be different for cupcakes?

Discounting games does not only increase unit sales--it increases actual revenues. During the 16-day sale window over the holidays, third-parties were given a choice as to how severely they would discount their games. Those that discounted their games by 10 percent saw a 35% uptick in sales--that's dollars, not units. A 25 percent discount meant a 245 percent increase in sales. Dropping the price by 50 percent meant a sales increase of 320 percent. And a 75 percent decrease in the price point generated a 1,470 percent increase in sales.

source
Click to expand...
 
the conversion rate for groupon customers is abysmal. Unless you can get them to buy other things when they come in to redeem the groupon, it is likely you'll never see them again, except for maybe another groupon.

Oldie said:
This doesn't take into account future revenue from customers who tried your product for the first time and have been converted into multiple order customers. If I were to do a deal like this, I would work it out to 105% of cost and be ready to sell a bunch. It's good advertising.
Click to expand...
 
Oldie said:
I think it's pretty clear these are not your run-of-the mill grocery store cupcakes. I would assume superior ingredients (not just sugar/flower..but fruits and what not) and significantly more craft in the icing than just throwing some on with a pastry bag.
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Maybe. Still, it's a high markup.
 
I'd say if you were already maxed out in production capacity to begin with or close to it then offering a deep discount on your products would generally equate to needing to expand that capacity; kind of common sense?

They could look at it another way too, $20k spent for marketing.

I agree when they say "The lesson is clear: Groupon is a business tool like any other, it's not for everyone, and its use requires careful planning - too large a discount, for example, can have unwanted consequences."

Uncertainty and proper planning for each scenario should have played a part in the original decision...
 
I don't think a small cupcake shop has a $20k marketing budget.

But don't worry about no profit margin, you'll just make it up in volume!
 
LMAO at this thread serious who pays 40.00 for 12 fuck*n cupcakes lol :D:p
 
Lazybones said:
The difference is that there is a near zero cost for additional software downloads, however the cupcakes have fixed ingredient costs and increased labor cost to produce more in a short amount of time...

The owner really should have set a limit.
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Again, who pays $10 for cupcakes, let alone $40? Maybe their special cupcakes, but I think the mistake was a big boost to her business.

#1 She probably make a profit due to shear volume.
#2 She hired workers to meet demands, which boosted the economy in her area.
#3 She gained recognition. Something advertisers pay millions for. Hey, bunch of nerds on HardOCP are even talking about her.

Something I really wish companies would look at more often. For a lot of products I know companies can afford to drop the price, and can still make a bigger profit through volume. HP went through this with their tablets. Big mistake, but look people will buy it for $100.
 
See small businesses can legally get away with calling it a "loss" when they really don't lose any money. Simply because they bring in less than they normally do its a "loss". Shoe companies like Nike does this all the time when they donate 10,000 shoes, net cost to them probably about $5000 if that, however since they sell each pair for $150, they are legally allowed to say they donated $1.5M in goods, or if I fire burned the warehouse they were at it's a "loss" of $1.5M + property.

102k cupcakes that means 8500 dozen, so she sold 8500 dozen cupcakes for $85000, cost of materials, goods, extra workers I doubt cost anywhere fucking close to that amount.

But yeah these fucking "specialty" cupcakes companies are just another fad that will die out soon. Paying over $3 for a cupcake should be a criminal offense.
 
sfsuphysics said:
But yeah these fucking "specialty" cupcakes companies are just another fad that will die out soon.

Paying over $3 for a cupcake should be a criminal offense.
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Agreed.

Unfortunately, stupid isn't illegal... :(
 
sfsuphysics said:
See small businesses can legally get away with calling it a "loss" when they really don't lose any money. Simply because they bring in less than they normally do its a "loss". Shoe companies like Nike does this all the time when they donate 10,000 shoes, net cost to them probably about $5000 if that, however since they sell each pair for $150, they are legally allowed to say they donated $1.5M in goods, or if I fire burned the warehouse they were at it's a "loss" of $1.5M + property.

102k cupcakes that means 8500 dozen, so she sold 8500 dozen cupcakes for $85000, cost of materials, goods, extra workers I doubt cost anywhere fucking close to that amount.

But yeah these fucking "specialty" cupcakes companies are just another fad that will die out soon. Paying over $3 for a cupcake should be a criminal offense.
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I just chalk up these retarded fads to stupid shit white people like.
 
Maybe these were weed cupcakes? It'd explain a few things (her inability to calculate ahead of time, and the high cost).
 
Maybe that's what happened to Nutty Guys! Found out about them in a groupon promotion, and went back repeatedly afterwards, cause they had good nuts!! ;)
But then they went out of business.
 
we need to realize the price difference between the USA and there in which case that might not be that horrible for a dozen cupcakes.

Like somebody pointed out these aren't going to be the small ones that you normally make or see (at least I would hope not). There is a place by my work that we ordered some from last year for a office party. Want to say about $2 per cupcake, couldn't figure out why they were so much but they went ahead and ordered them. They were about 5 times the size of a normal cupcake, about 1/2 in of iceing on top. Now that is only $24 in USD, however given the amount of cake and icing I didn't think that too bad when compared to the cost of a sheet cake. Now we are looking at the price of those cupcakes in the article based on USD, look at it from the £, that is only £2.16 per cupcake which would be on par with the cost for the ones near me when looking at $1 = £1.

So to answer the question of who buys 12 cupcakes for $40, a person spending £26 for 12 extra large cupcakes. The same reason you pay around 183.313 INR for that gallon of gas that you buy or pay about 6,946.20 KRW for that value. It only sounds crazy when you look at it from a certain point of view.
 
DejaWiz said:
WTF, $40 for a 12 pack of...

cupcakes?


And losing $20,000 for a "sale" price of $10 on a 12 pack of...

cupcakes?


So Miss Rachel had to produce 102,000 cupcakes. Let's see, figure (and probaby very very high) at $0.25 per cupcake for materials, labor, etc. That's a production cost of $25,500. Sell a dozen cupcakes at $10. That's a total profit of $59,500. How the HELL does this equate to a LOSS of $20K?

Get a computer and some decent small business software already!
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They were selling at $10/dozen but the store only got $5/dozen. Groupon gets 50% of the coupon cost.
 
Profit margins for restaurants are razor thin.

Those groupon and living social deals are usually used by failing restaurants to get someone, anyone, to come to the restaurant. They'll take a temporary hit in profits to get people to actually come to the restaurant.

My wife buys a lot of those living social deals and every restaurant we've gone to looked like it was about to go out of business.
 
uh, i think groupon collects the entire 25% that was left over. The cupcake maker gets nothing. It is a form of advertising. Some people love it for how cheap and effective it is. others hate it and say it was expensive and brought them no business.
 
Zepher said:
They were selling at $10/dozen but the store only got $5/dozen. Groupon gets 50% of the coupon cost.
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Still $28,250 from what I calculated for profit. If she seriously took a loss of $20K, then it's still her own dawm fault for not putting a limit and agreeing to pay Groupon an absurd fifty fucking percent per their terms and conditions.
 
sfsuphysics said:
See small businesses can legally get away with calling it a "loss" when they really don't lose any money. Simply because they bring in less than they normally do its a "loss". Shoe companies like Nike does this all the time when they donate 10,000 shoes, net cost to them probably about $5000 if that, however since they sell each pair for $150, they are legally allowed to say they donated $1.5M in goods, or if I fire burned the warehouse they were at it's a "loss" of $1.5M + property.

102k cupcakes that means 8500 dozen, so she sold 8500 dozen cupcakes for $85000, cost of materials, goods, extra workers I doubt cost anywhere fucking close to that amount.

But yeah these fucking "specialty" cupcakes companies are just another fad that will die out soon. Paying over $3 for a cupcake should be a criminal offense.
Click to expand...

Yeah, the government calls it baseline budgeting. It's how they can "cut" billions from the budget and yet spend far more each year then the year.
 
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