At Tom Vignali CPA, Inc., we like to share stories and examples that we believe our clients will find useful and relevant to their business. Following is one such story about selling and pricing in the restaurant business.
Does the New Meal Price Add Up?
Sam usually stopped by the drive-thru of a local restaurant that sold chicken meals. His favorite item was a large cup that contained three pieces of chicken accompanied by a side of large fried potatoes; together, they sold for $2.99. One day, when he ordered this Cup, he was told that it had been discontinued and replaced with a new Mini-Meal, which sold for $4.99. The Mini-Meal offered the same three pieces of chicken, the same side of large fried potatoes, but also included a choice of a side of mashed potatoes with gravy or cole slaw or corn, a heated biscuit with butter, and a 12-ounce cup of soda. Sam was curious how the restaurant could afford to offer all of these additional products (including the containers and papers goods required) for a mere $2.00 more.
In the most simplistic view (and in this instance, we are counting the three pieces of chicken as one item), two items for $2.99 versus six items for $4.99 might make one question how the restaurant can make money by selling more product for not a significant increase in price – a pretty simple observation and conclusion if one only compares the Cup item to the Mini-Meal. A broader view of the restaurant’s business, however, provides interesting revelations.
What’s the Actual Cost?
This restaurant sold a variety of items with chicken as the main item. Various side dishes and drinks were provided to make the menu choices more appealing. The sales of the Cup was a way to move the basic main item (chicken) as well as one side dish. It sold very well. But at the end of the day, many of the other side dishes did not sell as well, and the restaurant ended up trashing various side dishes that could not be preserved to be sold on another day. The food waste factor became extremely noticeable, and despite the success of the Cup, lots of inventory went into the trash each day because those items weren’t being sold. The waste factor increased the resulting Cost of Goods Sold and reduced the resulting Gross Profit Margin. All of the side dishes were necessary since they were items that people wanted when they ordered larger meals, and even with attempts to limit the pre-production of these side dishes, the waste factor still remained problematic.
So, by increasing the number of products sold in the Mini-Meal, the restaurant was able to increase the sales of all of the other side dishes and ultimately reduce its food waste. In this instance, it was the reduction in waste factor costs that made the Mini-Meal cost effective, even though one might have calculated that the product costs for the Mini-Meal should have been more than the $4.99 being charged. By reducing the waste factor, the Cost of Goods Sold was reduced and the Gross Profit Margin was increased.
See the Big Picture
Sometimes, the “bigger picture” gives you a better idea of what your actual costs are. If one were just to compare the product costs between the $2.99 Cup and the $4.99 Mini-Meal, one might miss all of the other issues that impact total product costs. The initial cost comparison provided no accountability for product waste for all products over the cost of a day, week, month, or year.
Sometimes, selling more, even at what appears to be a reduced price, saves you money by reducing overall waste, which results in potentially higher profits. Sometimes, selling more saves you more!
At Tom Vignali CPA, Inc., we assist our clients with issues such as this to identify cost-saving methods and accurate pricing models. If you would like to further discuss this process, don’t hesitate to contact us at Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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