5 guys walk into a bar. (This is not a bar joke)
Each orders a sandwich — best sandwich they ever had. Bar tab comes up and they are surprised to see the cost of each sandwich was $8.00. Whoa! Since when are you trying to rip us off with these prices…? Bartender says – “I use only the best meat and my sandwiches are prepared with my special recipe which no one else has, and I prepare each one myself. Isn’t this the best sandwich you’ve ever had?” Yeah…. they all grumble at first. 4 of them talk later about how good those sandwiches were and get to thinking they will go there every week at least once and have a great sandwich. The other guy says it is too expensive for his taste, and there are a lot of other sandwich pubs around.
10 other guys walk into a different bar.
They like this place – reasonably priced, food is decent. Each orders a sandwich. They all think it is a pretty darn good sandwich. It’s tasty and does the job — like a lot of other sandwiches in town. Bar bill comes and each sandwich was $5.00. Everyone is happy; you get a decent product at a decent price. Half of them come back now and again, since this place is pretty much like some other decent places in town.
Which pub owner has the better business model and a more successful business?
You might guess owner #2. His prices are competitive and he, initially, attracts more folks and keeps more of them than #1 as regulars. Let’s add one more piece of information – the ‘cost’ of the sandwich itself is $2.00 for first guy, $1.50 for the second.
Let’s look at the numbers to see why Pub owner #1 makes almost 30% more profit over one year.
|
Pub
|
Profit per sandwich
|
Initial custo- mer
|
Initial profit
|
Repeat Transactions
|
Repeat profits
|
Total Customer Value
|
|
1
|
$6.00
|
5
|
$30
|
4 people * 52 weeks = 208 sandwiches
|
$1,248
|
$1,278
|
|
2
|
$3.50
|
10
|
$35
|
5 people * 52 weeks = 260 sandwiches
|
$910
|
$945
|
2 things to consider for a business model:
- Repeat over the life of a customer
- Profit margins on that repeat
