Maybe They’ll Make It Up In Volume

One of my favorite episodes of I Love Lucy is The Million Dollar Idea, in which Lucy and Ethel start manufacturing and selling salad dressing from their apartment.

It all starts well, and includes most of the basic nuts and bolts that any start-up must consider. Of course, the only problem is that they did not consider them fully. Like having a solid understanding of cost structure. Lucy, ever the optimistic airhead, figured that there was no way they could not get rich by selling jars of dressing at 40 cents a quart. The duo go on television, and suddenly find themselves bombarded with mail orders.

Ricky takes them to task and demands to know how much it is costing them to produce and ship each jar. He finds out in short order that Lucy and Ethel are losing on each jar sold. Looking at the mail bags full of orders, Lucy cries back, “But we’ll make it up in volume.”

Uh-huh. Kind of like the folks at Need A Cake Bakery in the UK, who nearly suffocated under the weight of 102,000 cupcakes purchased through a Groupon offer. They offered a dozen cupcakes, normally a $40 purchase, for $10. Worse yet, rather than limit their Groupon to a small area, they went nationwide with it. They had to hire temporary help and work through the night to make good on the offers.

In the process, they figure they lost thousands of dollars…both on a per dozen basis and for hiring the temp workers.

And therein lies the danger of making hasty business decisions, especially ones that involve viral programs like Groupon. There is no recovering via volume. In fact, there is always the possibility of no recovering at all.

The purpose of Groupon is to try to introduce new customers to one’s products and services, with hopes they will return as full-fare customers later. There is a huge risk, though, of attracting deal-prone consumers not so much interested in trying new products as much as they are in getting a steal. And how many of the 85,000 buyers do you think are going to return for more cupcakes next week? Next month? Ever?

Right. Most of them will be buying whatever Groupon is offering then.

Lucy and Ethel had to suck it up and exit the business gracefully, but sitcoms have the added benefit of it all being a fiction. The folks at Need A Cake, though, do not have that luxury. There are sunk costs. Rents. Wages. Materials. Depression. Taxes.

All for want of selling a few cupcakes.

Groupon has changed the way promos are offered these days. Living Social, their biggest competitor, is just as prominent in bringing deals to people, and helping them go viral. Add in all the local knee-jerk efforts created lately by local media outlets, and you have a marketplace filled with more offers than we could ever begin to exploit.

Yes, this is all well and good for consumers, I suppose. Everyone can use a bargain. But if this continues to turn into an idiocracy of sales promotions, we’re going to see businesses going out of business. By definition, sales promotions are to be a short-term phenomenon, an inducement to get people to act now…but return later as regular paying customers. With so many promos being spread via email and social media, customer loyalty is something few may ever hope to attain. If I know that someone, somewhere is going to be blowing cupcakes (pastries, entrees, gym memberships…you name it) every day from now through the visible future, what’s the point in settling in?

Groupon, I may like the deals I get from you, but at the end of the day, I know it is building and reinforcing bad consumer habits. I should know, for I am doing it myself. I have been slowly having some of my favorite ohotographs printed on canvas, and then adorning my office walls with my handiwork. Would I ever pay $130 for a 24X20-inch print? Heck no. I wait until I receive a Groupon offering them at 60% off. I have six stockpiled right now in pre-purchased credits. All I have to do is sort through about 20,000 images to make my picks.

Although I could probably be persuaded to buy some cheap local cupcakes.

Dr “Make Mine Chocolate” Gerlich