Where’s your profit?

At a time when flat is the new up, knowing where your business is making it’s profits (or minimizing it’s losses) seems like an obvious thing to know but business schools classrooms are littered with countless examples of companies that thought they knew where they were making their money but ended up failing anyway.

Follow the Money

Follow the Money

Understanding your business cost structure for your products seems like a reasonable thing,  but it’s surprising the number of businesses that really haven’t looked at how much it costs to provide a product or service. I personally worked for a bar as a waiter/bartender/bouncer/keg boy that used to have a 10-cent wing night from 5-8PM. The wings were fairly cheap and the bar was packed every Wednesday so the owner thought he was making up the losses from the wings with increased alcohol sales.

As a waiter and designated keg boy I can attest to how popular those wing nights were. Every seat would be full, and so many new faces were enjoying our finest ales on tap that I would be called upon to change out the kegs at least 3 or 4 times in just a few hours. As full as the bar was after a while we noticed that none of the regular faces came in on Wednesdays but the owner didn’t take into account those missed sales opportunities from regulars avoiding wing night.  Only after declining year-over-year monthly revenues did he figure out that the 10-cents wings not only weren’t making him any money but they weren’t even an effective loss leader. 

Of course if he had asked his staff, we could’ve told him that after just a few weeks. The wait staff quickly figured out that these new customers weren’t tipping well and were there just to gorge on the cheap Sysco protein. In fact Wednesdays quickly became least desired shift of the week because the staff knew they wouldn’t make much if any money and the customers were not the bar’s usual demographic. And while extending your brand and appealing to a broader audience is normally a good thing, but when it clashes with and drives away your bread-n-butter, it’s time to rethink those efforts.

The owner was a smart guy who runs a great bar so once he identified the problem, he  raised the price of the wings to $.25 cents clearing out the one-night-a-week bargain-chasers bringing the back the regulars who bought $8 appetizers to go with their scotch and sodas all the while giving generous tips. The bar wasn’t as packed and we sold a lot fewer wings but we all made more money and began enjoying Wednesdays again. 

There’s a good interview with former Thompson Reuter’s CEO Dick Harrington who grew Thompson Reuters cash flow 4X. He also talks about understanding your business model  and in another interview discusses some of the lessons entrepreneurs and small-business owners can learn from big business.

So what lessons have you learned about your business? -t

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