Cupcake Calamity

 

Every now and again we dip into the wealth of knowledge and information locked away in the Entrepreneur’s Circle archive. This month we revisit a lead article from the December 2011 Circular that focuses on getting your offers right and most importantly knowing your numbers…  cupcakes

You probably read about the story of Rachel Brown in the papers in November. Rachel’s business, Need A Cake employs eight staff producing personalised birthday cakes, wedding cakes, etc. They also do a nice line in cupcakes.

Rachel was then approached by a salesperson from Groupon who persuaded her to run an offer on her deluxe cupcakes – offering them for £6.50 a dozen instead of the usual £26.

Groupon did their job really well. Too well. Rather than producing a few hundred cupcakes a month as per normal, Mrs Brown received orders, through Groupon, for 102,000 cupcakes in just 3 weeks.

This was a complete disaster for her business. She made a loss on every single order and her entire profits for the whole year have been wiped out by this catastrophe.

And therein lies a salutary lesson for every one of us who owns and runs a business in the UK.

You see, it’s all about the numbers. 

Everyone in business has heard the old adage that, “Turnover is vanity, profit is sanity” but so many people seem to forget it. The press coverage included one or two very illuminating comments from Mrs Brown. For instance, she said she knew that selling the cupcakes at £6.50 would make a loss on every order… but that she only expected to get a few hundred orders in. (The final outcome was over 8,500 orders). However, why would you even agree to an offer that ran at a loss on a few hundred orders?

Even 90 seconds of clear thinking would tell you that the people who are going to buy cupcakes at this price are unlikely to be in Rachel’s target market for her core business – it’s not as if she was taking a hit on profit in order to acquire a new customer because, the likelihood of repeat business was always going to be small.

This is part of my real bugbear with Groupon. I do fear that, in more cases than they would ever admit, they are in fact helping to put businesses out of business. They are very good at driving a compelling offer out of the business – they need really enticing offers to keep their subscribers loyal.

But they are less than effective, in my experience, at helping those businesses to:-

a) Understand the very real commercial implications of some of these offers (as in Mrs Brown’s example). Don’t forget that normally half of the money paid by the customer goes to Groupon…

b) The importance of the business owner capturing the contact details of the customers that come in to redeem their offers so they at least have a database of customers whom they can contact and entice back in the future – on much stronger commercial terms.

My own experience at using Groupon offers is that, so far, not a single business that I have been into has asked me for any information whatsoever. This includes restaurants, sports shops and eight separate beauticians that Sue has been to with friends over the last twelve months. Not one. Bonkers.

These businesses are, if not actually committing suicide, then certainly self-harming and Groupon is fuelling the fire.

It gets even more sinister once you understand that although Groupon’s customers pay up front for the offer, the business concerned only gets their 50% of the money when the offer is redeemed. This means that Groupon is making significant profits by having taken the cash from people who never then utilise the offer. At one level it’s brilliant but, given the scale of the operation now, this surely has to be hurting businesses.

So how can you ensure that you don’t suffer any damage in this way? Well dear reader, I have a couple of nuggets for you to ponder on:-

1. I am not saying that Groupon is a bad idea. On the contrary, used properly with the right offer (which makes commercial sense for you – not just Groupon) it can be a great way to acquire lots of new customers quickly but, you have to think things through…

2. You must be completely systemised in your collection of data from everybody who utilises the Groupon offer – and indeed all your other customers and prospects as well. This is critical to the initiative having long term positive impacts on your business.

3. Over and above both of these however is the importance of you knowing your numbers.

What numbers you say? 

Well here’s some key ones for starters:

What is your real cost of delivery of your product /service? (No, not your p&p – the cost to you of providing whatever it is that you do)

What level of ‘contribution’ would you accept to take on a new customer? (if you don’t know what ‘contribution’ is then you need to talk to your accountant. Fast.)

What is your gross margin on your core products?

What about your net margin?

What’s your average spend per customer per year?

Who are your top 10 customers, by both profit and spend, over the last twelve months?

How much could you afford to pay to acquire a new customer?

If you can’t answer pretty much all these questions then you are almost certainly flying your plane with some broken dials. And, that’s dangerous because there are mountains ahead.

I’m serious. In challenging economic times like these we all have to be really on our mettle in order to succeed and part of that comes from knowing EXACTLY what the situation is in our business.

I could regale you with several tales from the last twelve months of members of the Circle who, following a conversation with me, have gone away, found out what their numbers really are and, as a result, have made drastic changes to their business.

There will never be a better opportunity for you to dig deep into your numbers and make sure you have an accurate understanding of where you are really at.

Trust me on this, ignorance is definitely not bliss. You are much better off in the know.