I had a great question from a friend who is also a franchise consultant. He asked how we know when something is worth adding to the services or products sold. Up until he asked the question, I had mentally worked the ROI and figured out if adding another product or service was a profitable move or not. As a consultant, I need to have data to show whether something is worth the cost. That is where we need to work some math into the equation.
Often, the question comes in a bigger form such as when I get referenced as some to answer whether or not to buy a business, not specifically whether or not to add a product to an existing business. Working backwards from the cost of time & effort back to the actual cost of the business is a fun way to gauge if a person is serious about being an owner. Owning a restaurant is the number one business type that I am asked about. I get the “I love the food, so it will be fun to work there” kind of answer. I let them know that pizza, for example, can provide a good return on your investment, but cleaning the dumpster area behind the restaurant every week gets old fast. Or, that working with hourly employees who see the job as a means to a paycheck and nothing else can be a challenge. Hourly employees can work hourly at most any restaurant.
The best part of determining the real cost of buying restaurant is when you tell them that you a tied to the business 7 days a week. If the manager quits or you are short staffed, you fill in. There is no other way to make it work. You can’t over staff or you lose profits and you can’t run the restaurant with too few employees because they are not going to put up with working harder. Remember, they want a paycheck, not to make you proud of them for their dedication. There’s a look in a person’s eyes when they realize the “sunshine and rainbows” story the sales guy told them isn’t reality.
Now, let’s talk about adding a product.
The data of the situation is what really matters. If a product is good it needs to have three things working in its favor.
- It needs to have a built-in customer base.
- It needs to fit in with what you are already known for selling.
- It needs to sell fast and not take up too much space in the process.
These three points all come back around and need to have a positive answer to all three. Only meeting one or two of these points means you will lose money.
I have watched a lot (and I mean far too many) independent and franchise owners add a product to their sales floor in the pursuit of adding dollars to their bottom line when they end up losing money by not having a customer base to buy it. Or, customers want the product, but they don’t know you sell it. Or, they can find you and the product, but you lose because it takes up space from products that are you are know for and sits there longer than needed to turn a profit. You need to be known for having the product, have customers ready to buy it, and sell it fast without losing ground on the products that you know sell well.
I am not a risk taker. I will add a product when it meets the needs and passes my simple test. Before then, you are risking losing more than money. You lose your brand image when customers can’t tell what you are selling any more and they find another retailer to meet their needs.
The math comes down to the cost of the item plus the cost of the square footage needed to display the item times the time needed to make the sale.
Worth = (product cost + dollar cost to display in space square footage) * time needed to sell
If the product costs $100 and needs 1 square foot to display at a cost of $32 a square foot that equals $132 (in nice round numbers). The time needed to sell it is the kicker. For every month it takes for you to sell it, you need to add another $32. Leasing space is a drain on profits even for online businesses. Somewhere in the world there is warehouse of products that need space to sit before selling. If it sells faster than one month, cut the square footage cost by dividing it by the number of days in the month.
I like simple math. I am sure I am going to get comments about how the costs are a product of other factors. You are right. Employee costs, utilities, maintenance fees, and more all add to the cost structure. If you want a spreadsheet to add all those things in, we can work it into the equation. For a simple cost basis, we are limiting it to the basics needed to know if this product can replace space on a shelf or do we keep what we have there.
You can use this same “worthiness structure” for anything in your business. I often use it when I talk to micromanaging owners who can’t seem to get out of their stores. For them, the worth of their time inside the store versus finding a manager to replace them and getting out to find new customers looks like this:
Worth of bringing in one new customer = (average sale * the number of additional purchases over a year)
New manager payroll costs + training costs + time needed to get them up to speed / (the number of new customers brought in * worth of a new customer)
I could spend a lot of time doing math or I can take the pulse of the business and move on it. Use the quick math and enjoy the increase in profits. It’s worth your time!
Founder and CEO