By Jim D’Amico, President

I ran across a newspaper ad in my hometown promoting a local hamburger chain of restaurants.  For those familiar with Rochester, NY, it’s the restaurant that claims to serve the “World’s Greatest Cheeseburger.”  They are good.

The ad was a full page on the back of a weekend entertainment section in the local paper with the lead line “½ Price Milkshakes 2:30 – 4:30 Daily.”

Now, I absolutely love chocolate milkshakes, but my lactose intolerance keeps me from grabbing a shake and saving some money too.

But the ad got me thinking about cutting prices to lure customers.  How it can work well in one industry, but maybe not so well in another.  It also made me think that promotions should be well thought out before being implemented.

Now a half price milkshake offered at slower hours at a restaurant can be a good marketing ploy.  Chances are that anyone stopping by for a milkshake just might buy a burger or an order of fries.  Being social creatures that hate to eat alone, a person going for the milkshake may just bring a friend along who might buy an ice cream cone.  Remember too, any additional food products are sold at full price.  And the restaurant would have to serve a whole lot of milkshakes in the two-hours hours each day to kill the daily profit.  The milkshake promo is like “happy hour” promotions that many bar owners run before their busy hours each day to bring people in the door.

But do promotions like a “½ Price Milkshake” special cross over into the service trades?  Maybe, maybe not.

About ten years ago a local HVAC contractor ran a year-long special to celebrate their 50th anniversary in business.  They lowered their service call fee from the normal (at the time) $59 to $19.57.  The special service call rate matched the year they were founded, 1957.

I saw the promotion in a print ad.  I had an opportunity to discuss the promotion with the business owner and he told me they were doing really well with it.  “The customers love it!” he said.  I thought, “Of course they love it, they just saved $39.43.”  But I didn’t say that.  I asked if the special brought in new business.  He said, “Absolutely.”  But he didn’t offer any numbers or percentages to back up his remark.

Based on the number of service techs he employed, I quickly calculated in my head that his company ran 100 service calls per week or 5,000 calls per year.  Rounding his discount to $40 and multiplying by 5,000 calls, the company had to find another way to come up with $200,000.00 that he left on the table.  Wow!  What an expensive promotion!  I’m not sure he looked at it that way.  He saw it as a way to bring in new business.  What he failed to calculate is what the promotion cost him with his existing customers that would have paid the full-service call fee anyway.

Considering the milkshake promotion, the burger joint has to make up only $2.58 on milkshakes sold for only 2 of their normal 11 hours of operation at each location.  The restaurant owner also had the opportunity for the impulse food purchase from the patron.  The last I checked there is no such thing as an impulse buyer when it comes to heating and air conditioning equipment.  If the milkshake promotion prompted 5 milkshakes sold between those promo hours at each of the 13 restaurant locations that is 65 milkshakes at a total cost of $167.77 per day, or $60,372 per year.  Only 30% of the dollars the HVAC business gave away in his promotion ten years ago.

Now there may have been many different anniversary promotions the HVAC company could have run.  Reversing the numbers, a less-costly promotion for the HVAC business would have been to give a $19.57 discount on each service call.  Using the same 5,000 calls for the year, the cost would have been $97,850, a savings of $100,000.00 and still a good deal for the customer.

I’m NOT saying to never have a promotion.  Promotions work, especially if they can bring in new business.  But before one decides on a discount or giveaway, the financial impact on the business should be determined by the cost weighed against the added revenue.

For more on discounts, check out 4 Side Effects of Discounts.


 

 

 

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