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Thursday, March 18, 2010

You can't make money by losing money. And if you're losing money despite charging a lot more than your competitors charge, you're doing something very wrong.




Years ago on the I Love Lucy TV show, Lucy Ricardo and Ethel Mertz frequently got involved in harebrained schemes to make money. In one 1954 episode they started a mail-order salad dressing business. When Lucy's husband Ricky asked her about the profitability of selling  Aunt Martha's Old Fashioned Salad Dressing, Lucy explained that they lose money on each bottle of dressing, but they "make it up in volume."

Bob Young is the founder and CEO of pay-to-publish company Lulu.com. Maybe he should have watched the Lucy episode. He might have learned that Lucy's formula is flawed and he shouldn't use it in his own business.

Lulu says it "has more than 300,000 recently published titles and more than 15,000 new creators from 80 different countries joining each week." Despite those impressive numbers, it loses money each year, and now wants to sell about $50 million in stock to erase the red ink.

  • Bob seems to be like his starry-eyed customers who spend a lot of money to become profitless "published authors." Bob has used millions of dollars from his personal fortune to become a profitless publisher. Is Bob the ultimate vanity publisher, publishing for fame but not for fortune?
According to Publishers Weekly, Lulu "has lost money every year since its inception, including $1.9 million in 2009 on sales of $31.5 million. ... it has increased the number of people who use its services with 1.1 million registered creators as of the end of 2009. The number of units sold rose to 2.6 million in 2009, up from 2.3 million in 2008 and 1.7 million in 2007. Lulu does not have much money left, listing cash and cash equivalents of $2.5 million and has far more liabilities ($38.5 million) than assets ($11.5 million)."

  • That sounds like a recipe for bankruptcy -- not a good way to impress Wall Street.
The negative balance sheet is particularly noteworthy in view of Lulu's large sales volume, and prices that are much higher than competitors. For example, Lulu charges its customers $7.06 to print a 128-page 6-by-9-inch paperback book. Competitor CreateSpace charges just $2.50 and LightningSource charges $2.97.

If Lulu is losing its shirt despite charging several times as much as other print-on-demand companies, and has a huge sales volume, something is very wrong. Bob Young was ranked as a "Top Entrepreneur for 2006" by Silicon.com and was nominated as one of Business Week 's "Top Entrepreneurs" in 1999. Apparently he's a smart guy. He should be able to figure out why Lulu is in trouble.

  • Maybe its cost of doing business is too high.
  • Maybe its employees are overpaid idiots.
  • Maybe it's because its wholesale and retail prices are too high. 
  • Maybe it's because its website has a terrible search engine which makes it hard for people to buy books.
  • Maybe it's because the company has a silly-sounding name.
  • Maybe it's because its quality control is terrible. (It sent me a book printed on wrinkled paper.)
  • Maybe it's because Lulu published one of the worst-looking, worst-written, worst-titled books.
  • Maybe it's because customer support is terrible and customers get pissed off and leave.
  • Maybe it's because customers realize that Lulu lies by saying it is “the only publisher that offers you all that it does for free.” Their publishing is free only if you don’t want any paper books to be printed or eBooks to be distributed! Lulu gets paid for every book they publish. That's not free. Lulu's notion of free publishing is like "free" car ownership where there is no charge to view your beautiful new vehicle in the dealer's lot. But if you want to actually drive it home and put it in your garage, you have to pay $54,327.
  • Maybe it's because Lulu lies when it claims to rank #1 among self-publishing websites. If you use Lulu you may not be self-publishing because a big part of Lulu is vanity publishing.
  • Maybe it's all of the above.
Bob told Publishers Weekly, "We publish a huge number of really bad books” and revealed that the average Lulu print run is for fewer than two copies.

  • With many small print runs of bad books, it's easy to lose millions of dollars.
Bob also said, “A publishing house dreams of having 10 authors selling a million books each. Lulu wants a million authors selling 100 books each.”

  • Maybe most of his authors are selling only six books each. And an infusion of $50 million won't help to increase the sales of crappy books.
I will not be buying any shares of Lulu. If Lulu loses money despite charging much more than its competitors do, I can't imagine why anyone would risk money with them.

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3 comments:

  1. Why should investors bail-out a money losing publisher?

    Lulu is hardly a national necessity that's too big to fail, like Fannie Mae, Freddie Mac or Bear Stearns

    Bob Young can keep operating Lulu as a hobby for as long as he likes. If he can find a way to become profitable, only then should people buy his stock.

    Investors tolerated years of losses for Amazon.com, because it was a unique business that seemed to have a promising future. That does not describe Lulu.

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  2. By next year, Lulu may merely be the latest former competitor to get gobbled up by Author Solutions.

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  3. According to Bob, he says everything is just fine financially. Either Publisher Weekly is lying or Bob must have a different definition of success than the rest of us!

    Do note that while I linked to the thread, Lulu has a habit of deleting threads that defy their warped sense of reality, so I can't guarantee it will stay there long. But here is what he said to a poster who linked to your blog asking about it:


    Yes we monitor these forums and add to the answers other users (thanks Valerie!) contribute. I'll get someone to respond to your specific coupon question.

    Just one tip on using the forums - please use subject lines associated with your question such as: "question about UK coupons"

    And we are doing very well both in terms of our growing customer base of happy customers and in terms of financial performance. (sorry Ken.)

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