Sales vs Profitable Sales - Part 2

Posted by fshsfhsfh on Tuesday, March 22, 2011

I got a few queries around this concept of "Profitable Sales". I will try and explain this a little better below using an example.

Let's say you open a specialty sandwich restaurant and start selling sandwiches. Now as far as a customer is concerned, he will have a price range in mind for a sandwich - Rs. 20 at a kiosk (like a Juice Junction in Bangalore), Rs. 50-60 in a coffee shop (Cafe Coffee Day). Now you start selling sandwiches (exact similar ones that Coffee Day sells), at Rs. 40-50 in a Coffee Day like setting, you will get customers. The trouble is you will probably be offering customers a product that costs much more for you to make than what is does for Coffee Day - The cost of the ingredients will be more for you (you don't have the volumes to justify discounted prices), wastage will be much higher for you (especially when you start as you will have a tough time forecasting the number of customers and the last thing you want is to say "Not Available" to customers). So let's say the cost of the sandwich for Coffee day is Rs. 20 and for you is just 4 bucks more - Rs. 24. Now to keep the food cost at 33%, Coffee Day will sell the sandwich at Rs. 60. You will have to sell the same sandwich at Rs. 72. So why would customers come to your place? To make it attractive to customers, you offer your sandwiches with french fries and a cole-slaw salad. Now the cost of these 2 additions would be about Rs. 8-10 for you. So now, your price will need to Rs. 100 (for you to keep the food cost at 33%). What practically will happen is that you will price the sandwich at Rs. 60 (same as coffee day) and offer these extra items to make it attractive for customers and get them to come in. Now your food cost is Rs. 32 and your selling price is Rs. 60. So your food cost is 53%. Your numbers go for a toss. So even if you start getting a lot of customers, your business metrics go for a toss. Even with large volumes, negotiated rates with suppliers etc., your food costs will not come down below 50% (simply because you are offering too much for too little). So now you will end up with a business that gets a lot of customers, generates revenues, but may actually be making an operating loss. So it is like running in a treadmill - you work hard and put in a lot of effort and energy to run, but you end up staying at the same place. After some time, you get tired and give up and get off the tread-mill. So you will end up shutting shop.

I am not sure if I made it clearer for folks to understand, but essentially unless your product design and pricing are carefully done to ensure that your business will be profitable, the effort will not be worthwhile.

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