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Shifting Margins

October 31, 2012

I love to watch movies in the theater! And no movie is ever complete without a great friend, popcorn, and a drink. If you go to the Mega-plex you’ll likely pay $30 for the tickets, and another $7-10 for refreshments. A $40 investment to enjoy watching what took $40 Million to make – what a great bargain!

The real magic of the movies isn’t on the screen; it’s in the concession stand! The concession stand is where theaters make the vast majority of their profit. Popcorn is extremely easy to make and likely costs less than $0.15 for a bag they charge $4.50 (includes the bag, melted butter, and extra seasonings of your choice). Since popcorn also makes you thirsty, you are inclined to complete the experience with a 32oz drink for $3.50 (including cup, ice, lid, straw, product and labor to pour it, likely costs less than $0.10).

Years ago, Gillette took a similar approach when introducing their Mach3 series of razors. They would send their latest razor to you for absolutely nothing; and make their margin on the replacement blades over the years. The going rate for a 4-pack of Mach3 blades is enough that virtually every retailer has them under lock and key.

A few years ago; my parents bought a new computer and got a printer for free – a value of $250! They have likely paid that much already in refill ink.

Whether it is soft drinks, popcorn, razor blades, or ink refills; the big companies understand how to shift margins and package their products in ways that you are comfortable buying and they are comfortable profiting.

I guide many clients through a simple exercise of creating a simple spreadsheet by listing each product and/or service they offer in one column. Next column is the regular sale price. Followed by a listing of your costs (raw material, labor/production, shipping, etc. Account for it all before you attempt to simplify! The last two columns are for profit – one as a percent, the other as cash. Sometimes, even when the margin is high (500% or more) it might only bring less than $1.00, and other times a 3-5% margin sounds low until it profits $10,000.

With this information at hand it will become easier to see what things you can give away for free, or sell very low margin, because there are other natural add-ons that will make up the profits many times over as you build a relationship with your customers.

 

 

Copyright © David R Frick/SuccessVentures LLC 2012 All Rights Reserved. No part of this document may be reproduced without written consent from the author.

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