Tuesday, November 22, 2011

Groupon Allows Companies To Reinvent Ways To Fail

I have no sympathy for this company. A company working through Groupon didn't think of the consequences of offering a too-good-to-be true deal; the deal wiped out the bakery's profits for the year because they couldn't do basic math.
Brown's Need a Cake bakery, which employs eight staff in Reading, U.K., had to bring in temporary workers through an employment agency to fulfil the orders, at a cost of $19,500 (£12,500) — wiping out her profits for the year.

She also lost between $2.90 (£2.50) and $4.70 (£3) on each batch she sold, the BBC reported.

"Without doubt, it was my worst ever business decision," she told the BBC. "We had thousands of orders pouring in that really we hadn't expected to have. A much larger company would have difficulty coping."
It works out great for the consumer, but it sucked royally for the bakery.

Let's do the math:
Rachel Brown offered a 75% discount on 12 cupcakes, which normally cost $40 (£26), the BBC reported.

However, Brown under-estimated the popularity of the deal and was unable to cope when 8,500 people signed up for the $10 (£6.50) bargain.

Had she limited the numbers sold to several hundred people (which is quite common on these deals), or reduced the discount to say 50% (again quite common), they wouldn't have gotten into the financial pickle and may have picked up new customers for the long haul. If she had kept her underlying costs in mind when making the deal, she would have realized that each batch would need to be sold at no less than £13 to maintain her profit margin and stay ahead of her costs. In reality, she could have sold the coupons through Groupon for £15, which was still £11 less than their normal price. That's a 42% discount. Not shabby at all, but one that allows the company to still make money (or at least not completely eat up the year's profits.

The flipside is that consumers become accustomed to these kinds of deals and wont buy unless they get comparable discounts.

So, this bakery has figured out that it can't offer discounts that it can't afford. Will someone tell that to the auto industry?

That's one of the problems that continues to hamper car sales; consumers get used to major rebates, deals, cash allowances, and other enticements and if the car company doesn't come up with them, the consumers sit on the sidelines. Few car models, let alone brands, are able to pull off auto sales without an incessant barrage of incentives. Consumers get addicted to the deals and are more likely to buy a car when the cars go on sale with the incentives than when there are no incentives for the same make/model.

But all those deals hit the bottom line for the automakers even if it moves the car off the lot. The inability to move cars helped lay low the auto industry and brought GM and Chrysler into bankruptcy (though it wasn't helped by legacy worker costs, health care costs, pensions, and lackluster product lines).

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