How a Groupon type Deal Nearly Bankrupted a Boutique

sad dogI subscribe to several “Deal of the Day” email lists, and last week, I was surprised to see a fancy pet boutique in my upscale Chicago neighborhood being featured in a city-wide email blast.

The shop is tiny.  1,500 square feet seven steps below the sidewalk on a side street.  It’s the kind of place that you would only frequent if you knew where you were going.

It’s been open for a year, and I’ve been in a few times when walking The Bishop, our little Maltese.  I’m not mentioning the shop by name because the owner was very forthcoming with the marketing nightmare that nearly crushed the little shop.

The shop sells custom bedding, organic treats, and if there is such a thing as chopsticks for Chihuahuas, this is the boutique that would sell them.

That’s why I was surprised to see a Groupon-type email deal offering a $50 gift certificate for $25.  I thought that the shop was too obscure for a mailing covering Chicagoland.

I asked John, one of the owners how the offer worked for the shop.  Man, did I strike a nerve.

He said that it was a terrible mistake, and that he was fortunate that the deal did not put the store completely out of business.

Nearly 100 people purchased the $50 coupon for $25.

The company mailing the offer kept 40% of the $25, or $10.

That meant for every $50 of merchandise the boutique “sold”, they got to pocket $15.

The boutique received a payment from the coupon mailer for $1,500 (100 coupons x $15 each)

Nearly all of the coupons were redeemed in the first week, meaning that the boutique dispersed $5,000 of merchandise ($50 x 100 coupons).

The boutique paid $3,000 for the $5,000 of merchandise.  So after they net out the payment from the coupon company, they lost $1,500 on the deal.

But wait, didn’t the coupon holders spend more than the $50 as the salesman promised?

“Not a chance”, says John, the boutique owner.  “Not a single one spent more than the $50, and they were trying to work it down to the last penny, and then negotiate to have me throw more freebies in.”

But didn’t the store benefit by having nearly 100 new customers come through the door?

It’s possible, says John, but I don’t think so.  We attracted every cheapskate in Chicago, and I wouldn’t bet a nickel that we’ll see any of them ever pay full price for anything we sell.

It’s a critical lesson for a retailer targeting upscale clients and selling products that have hard costs.

I see these email coupons working really well for nail salons and chiropractors that are time based, but traditional retailers simply can’t afford to lose money to attract a penny-pinching clientele.

So what’s the future of the discount mailers?

They’ll drive traffic, and spur  activity, but the deals will be focused on “soft” purchases where there is low incremental cost, and high margins.

  1. Mike StewartJuly 26,10

    not surprised…. people are cheap. One reason why group buying doesn't always work for retailers!

  2. Joede BrownSeptember 20,10

    I was going to try something like this for the holiday season. Thank you for letting me see another side to the story!

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