Dishwater for CHF 1.00 – How margins decrease
“Cheap, cheaper, the cheapest?” In this article, we describe the potential consequences of this attitude and show you how CiRRUS can help you make better decisions.
The following is a well-known line from a song: “You race past everything, even the jam on the A2 and the dishwater from the fuel station tastes like coffee from Hawaii.”
Isn’t that weird? Coffee and hot drinks contribute on average 2% to sales and generate around 80% average margins, income shares of 10%, and without the “tobacco” group of goods even more than 15%. In other words, you can earn a fortune with coffee.
There are reasons to sell dishwater
But let’s first think about coffee drinkers. In very simplified terms, there are two types of coffee: ones that deserve to be called “dishwater” and ones that deserve to be called “coffee”. However, customers do not know if they will be given good or bad coffee before drinking it. They only discover if they have bought dishwater or coffee when they take the first sip.
A quick calculation: Let’s assume that your customers assess quality according to a probability of “50/50 expectation”.
Let’s further assume that “dishwater” is sold for at least CHF 1.00, but good coffee for at least CHF 2.00 Your customers are also willing to pay CHF 3.00 for good coffee and CHF 1.50 for dishwater. Were your customers able to clearly distinguish the quality in advance, both offers would have their buyers: good coffee at an average price of CHF 2.50 to CHF 4.00 and dishwater at CHF 1.00 and CHF 1.50.
Now back to reality: As in the real world quality cannot be discerned before every purchase, customers will make their own assessment. Each rational buyer who assumes a “50/50 probability”, is only willing to pay no more than the “expectation value”, in other words a computed CHF 2.25.
However, the problem is that providers of good coffee are unwilling to sell at this price as they have to make at least CHF 2.50. The offer is therefore withdrawn. As a result, the alleged reasons for selling “dishwater” increase. The market price will head toward CHF 1.00 due to competitive pressure.
Selling poor quality at increasingly cheaper prices will cost you growth
But the point is: the more competitors are able to sell cheaper and cheaper dishwater, the more the margin will decrease for providers. Because providers of poor quality are generally willing to sell cheap. Consequently, increasingly poor quality standards are sold for increasingly cheap prices until everyone needs a doctor: that’s what stinginess gets you!
And soon you’ll be in a precarious situation: You’ll either sell coffee as discount prices with increasing margin pressure, which you have to compensate with increasing sales volumes. Or you invest in shiny items such as flashy coffee machines coupled with colorful marketing campaigns to brew nothing but the finest brands at high prices in the future, always with the fair value of the profit margin to be generated breathing down your neck. Last but not least, you can be satisfied with your faithfully returning customers, but at the cost of established prices for a limit number of buyers. In between all those things falls your customers’ calculable willingness to pay, flanked by volatile price attacks launched by your competitors.
However, innovation and growth work differently! Even if you experience “breathers”, “grow or die!” applies. Traditionalists routinely invest in strategic business field development, preferably in high-quality technologies (key word: “shiny coffee machine”) or cost-intensive marketing campaigns (key word: “colorful world of brands”). But let’s remember Henry Ford: “I know that half of my advertising is money wasted. I just don’t know which half.”
Optimal cost and income diversification
But how would it feel if you could determine and announce the optimal market prices for each and every one of your locations at any time of day, in all weathers and for every stream of customers? Mobile retailers have been doing this for hundreds of years! What if you could read the percentual effect of each percentual price change increment on changing sales in real time on your POS?
We aim to facilitate exactly this with CiRRUS. We want you to be able to monitor the effects live and in color, separately for each branch, and including specific weather conditions as well as current streams of customers, on your sales interface! This gives you a basis for “permanent sales campaigns” together with finely tunes “dynamized” prices.
Now you can get an overview of the development of your pricing policy in real time and also calmly and actively lead your branch onto an optimal cost and income path instead of chasing scheduled specifications that reach you with a delay.
In other words, CiRRUS is entirely “audio-visual”: you always have an eye on your customer trends and the ringing of your till in your ears!