Friday, 2 March 2012

Groupon doesn't always take a 50% cut - the economics of suit tailoring

So I picked up my first tailor-made suit today. Normally I wouldn't splash out on something like that, working in technology where I almost never have to actually wear a suit. But I got it last year via Groupon and the temptation of getting one for £495 down from £1200 was too high.

So the shop owner and I got talking about Groupon and he told me that in his case, he didn't have to hand over a 50% cut as usual. For bigger-ticket items, Groupon tends to take a smaller cut. He didn't share how big it actually was. But he said that he made sure to make a small profit on every suit.
That got me thinking about a tailor's profit margins.

Apparently, Groupon admit that they sometimes take cuts "slightly more or less than 50%". Given that this is a small tailor shop, it's quite improbable to believe that he managed to negotiate them down to less than 40%. In this case, Groupon would have taken £198, leaving the tailor with £297.
If at £297, the tailor is still turning a small profit and normally sells the suits for £1200, then his gross profit margin is at LEAST 75%.
And even if he managed to get Groupon down to 30% (unlikely), his usual gross profit margin would still be at least 71%.
Of course, it could well be that the original £1200 price was inflated (as per the rumours that Groupon buttered up original prices), but he repeated the price in front of me in person in another context and they also mention the price on their website.

What a massively profitable business to be in!

Note to self for the next time I go and get a bespoke suit done (it won't be via Groupon as I stopped my subscription): ALWAYS ask for a discount.

And by the way, the suit is gorgeous!


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