What do you focus on when it’s time to improve profitability?
Sometimes barely twisting a knob can make all the difference.
This 8 minute and 30 second running stride analysis video might be a little dry if you’re not a runner, but the focus on small improvements and 300FPS video to break down opportunities to improve performance inspired me not only to re-examine my stride but to consider it in the context of your business.
Even if you don’t run, the method used to break down the runner’s performance and focus on what would make a radical improvement in his running is worth the viewing time.
You might consider the same type of approach with your pricing, particularly before you offer a discount, BOGO or raise a price.
Small price increase, big impact
Let’s say that you charge $8.99 for a meal at your restaurant. Out of that $8.99, you have to pay our food costs (33%, or $2.97) and your overhead (33%, another $2.97). That leaves a gross profit of 33.92%, or $3.05.
What happens if you raise the price by a dollar?
Your food cost and overhead don’t change. They’re still $2.97 + $2.97 = $5.94.Â Your gross profit obviously increases by only a dollar, to $4.05. The gross profit percentage increases to 40.5%
Coupon coup…for who?
Now let’s look at what happens if you discount that meal by a dollar like you might do with a coupon.
That cuts the meal price to $7.99. Your food and overhead costs are still the same, $5.94.Â That dollar discount comes right off the top, reducing your profit to $2.05, or 25.6%
Now what happens if instead of a coupon, you offer a “buy-one, get one” (BOGO) free deal? People love those, right?
Your food cost and overhead double to $11.88, since two meals are involved.Â Thanks to your buy one get one free deal, your revenue is still $8.99. Profit has gone from $3.05 (33.92%) to a loss of $2.89 (32.1%).
If we change that to “buy one, get one at half price”, your food cost and overhead are still $11.88, but your revenue rises to $13.49. In this case, gross profit is $1.61, or 17.9%. Not a lot, but better than a 32% loss.
Is a one-time drop in profit from $3.05 to $1.61 worth getting those two people in the door? You’d better know based on what these customers will do (as a group) over time.
A plan, not a guess
As we talked about last time, coupons/discounts have to be used strategically. Fail to run the numbers and they can sink you.
Losing money on a BOGO isn’t ideal unless you know your numbers very well and know that over time, that offer will bring you a new, loyal customer who has a lifetime customer value that fits your business model.