Cut price cup cake deal goes wrong......

This is classic business studies news article, packed full with learning for students!

‘Need a Cake’ is a small business in Reading owned by Rachel Brown, who has been in the baking business for 25 years and simply loves making and decorating cakes. Her website says “I can never remember a time, even as a child, when I did not enjoy creating innovative cakes.” The business employs eight people, and normal production is around 100 cakes a month. Mrs Brown thought she would like to try expanding a little, and decided to offer online vouchers for a discount deal in order to drum up some new customers - with disastrous results.

Need a Cake offered a deal of 12 cupcakes with a choice of flavours and designs for £6.50, which would normally cost £26 - a discount of 75%. The offer was posted via Groupon - a US based group-buying website. The Groupon offer is a ‘deal-a-day’ subscription website used by companies that offer deals in the hope of gaining new customers, or using the offer as a loss leader to attract customers who will then spend more on other goods during their visit. It offers discount coupons to subscribers which give discount deals on anything from restaurant meals to spa treatments. It uses collective buying power to achieve lower prices and the deals it offers are available only if a minimum number of people sign up.

Mrs Brown’s offer on the website invited customers to ‘construct their ideal cupcake, choosing from sponge flavour, icing and decoration options’. It proved far more tempting than she imagined - with 8,500 orders for a total of 102,000 cakes.

The company had to bring in less skilled agency staff to try to meet the upsurge in demand, and for a business which takes pride in making cakes of exceptional quality that caused real worries about maintaining the usual standards. Potentially worse though, was the effect on the finances: after spending an extra £12,500 on staff and distribution, Mrs Brown made a loss of £2.50 per order. She had not calculated the effect of the discount on her breakeven level of output, and had no idea that the effect of the discount offer would wipe out her profit for the year. She has not gone bust, but says “Without doubt, it was my worst ever business decision.”

Some help from an enthusiastic Business Studies student would have helped here - application of the formulae for Price Elasticity of Demand and Breakeven level of Output could have been added to some awareness of the risks for small businesses using open offers on the internet and might have helped to analyse the decision for her.