Early in my career in accounting I had a successful local restauranteur as a client. I have always been curious about what works, so one of the first things I wanted to know from him was what he did to make his restaurant work when others that looked similar failed. He had previously bought failed restaurants, turned them around and resold them, only to see them fail again. He was good at his business.
He had a simple answer. Don’t be greedy.
In the restaurant business, there are formulas that everyone uses to decide the selling price of a meal. Multiply the cost of the food on the plate by 3.3 and you won’t be far from the selling price.
George had another formula.
Step 1. Create a meal that you think is desirable, salable and competitively priced. Let’s say a hot roast beef sandwich for $8.95. The food cost will be about $2.70 and the meal will look and cost pretty much the same as every other hot beef sandwich in town. No big edge there.
Step 2. Suppose though, George spends $3.50 for ingredients instead of $2.70. He should sell for $11.75 according to the formula, but instead he says, the dollar-markup of $6.25 on the first meal was fair, so why should I increase that. Instead of $11.75, I just want to recover my actual additional cost. He sells the new meal for $9.75. $0.80 more.
Why not $11.75?
The overhead is no different for the better quality meal. Same dishes, same server, same chef, same furniture, same rent.
From a finance standpoint he makes no more money selling at $9.75 than $8.95 and much less than he would at $11.75, , but from a customer centric standpoint, he gives the customer almost 30% more food value for only a 9% increase in the price.
A very good deal for the customer. As the operator, he could do it by putting 30% more food on the plate or by markedly improving the food quality, or a combination. In any case he would not be competing on price.
Remember the profit you keep is in dollars not in percent. Better to have 10 meals sell at $6.25 markup than to have 5 meals sell at $8.25 markup. Margin times volume equals profit. Markup is a guideline not a guarantee.
A simple thing that makes a difference. Business success is about finding a way to differentiate your services or goods.
Mindlessly following a formula mark-up or competing on price doesn’t work. You want people to feel they get better value when they deal with you. People don’t want “match price, match quality.” People want much more value for the same or slightly larger price. People will eagerly pay more when they get a return much bigger than their increased cost.
Changing the meaning of the formula is one way to overcome that. Think margin dollars not percents. You cannot spend percents.
Some time ago, I brought up this idea with a car company executive. At that time they had a “base vehicle” that was the essence of their pricing formula. Cost of $8,000, retail at $17,000 add all extras on top.
$9,000 margin plus extras. The base vehicle was very basic. No radio even and it would take an act of parliament to get them to change that base vehicle in any way.
I had just spent a good deal of money to fix a broken part that was cheap and I believed should not have worn out. It was difficult and time consuming to get to so the labor was expensive. I thought buying better quality parts for the base vehicle, say another $1,000, and then increasing the base price to $18,000 would be a good idea. Same $9,000 markup, better value. I get 12.5% more quality for a 6% price increase. Probably only 3% or 4% more if I consider the final vehicle price with the add ons.
His view was that the vehicle would be so much better it would not wear out quickly enough. His words, “If we did that, we could not sell you another one.”
My response, “You can’t sell me another one now.”
When evaluating your services, establish a fair margin and then look for ways to add customer value dollar for dollar. It won’t make more money on the people you already deal with, but it will make getting new ones and keeping old ones much easier.
The biggest, positive client response is when they get a more than they expected for the price they pay. The “Wow” factor. Work on it. What do you do now that you could change and charge a little more while giving the client much more value?
Or maybe you need to look at over-promising as the exactly negative opposite of the extra value approach. Might be a good idea to quit that.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. [email protected]