I regularly play ice hockey. Not only do I love the game, but it taught a great lesson this morning on balancing your customers.
A new rink opened near me (much better than the 2.5-3 hour drive each way I used to do). The owner took one look at his numbers – $18/person/hr for public skating on a rink that can easily accommodate 35 people gives an expected revenue of $630/hr, vs $275 for rental to hockey or figure skating groups – and said, “I will make my money on public skating, push the groups out to undesirable very early morning or very late night sessions,” usually before 9am or after 9pm, midnight on weekends.
Early this morning, I come to the rink for a fun game with my kids, and the sign with the hours is painted over, replacing the opening hour of “09:00” with “10:00.” Irrepressibly curious (especially about business), I proceed to ask the manager, who says, “well, we had to accommodate many more groups like yours, and the early morning didn’t have as many skaters as we expected.” (emphasis mine)
Every business wants to maximize its profits (make more money), usually in two ways:
- Maximize the profitability of each sale: The higher price for each item you sell with the same fixed cost, the greater your gross profit.
- Maximize the quantity of sales: The more people you sell to in each hour, the higher your utilization rate, the more contribution margin to cover your fixed costs and make a profit.
If you are selling, say, ice cream at $2/cone, and your variable cost of each filled cone is the same, let’s say it’s $1.00, leaving a contribution margin of $1/cone sold, while your fixed costs are the same, let’s say $20/hr for labour, electricity, etc. First, if you sell 20 cones in an hour, you break even: $20 contribution margin minus your $20 fixed costs; 30 cones gives you a $10 profit for that hour, and so on. The more cones sold, the more profit. Second, if you sell 100 cones in one hour, but the first hour you sell to individuals at $2/cone, while the second hour you sell to a few people who come in, buy in bulk, and have a pre-arranged “local resident” discount of 20%, you make a much higher sales ($200) and gross profit ($100) in the first hour than in the second hour ($160 and $60, respectively).
Every business has to find the balance between the “walk-ons” and the “subscribers.”
The “walk-ons,” a.k.a. “onesy-twosies” (seriously, I have heard CEOs use that term in Board presentations), are the people who pay the full bore $2/cone. If you can sell no more than 100 cones/hour, you would love to sell all 100 to these people, every single hour. The problem with these people is precisely that they are walk-ons; they come in without regularity or predictability. They buy one or two of what you are selling, hence “onesy-twosies”, never more.
The “subscribers,” on the other hand, are predictable. They agree to come in and buy a few cones every single day for a discount, or perhaps to buy 1,000 cones/month, or commit to 500 room-nights in your hotel. But to get them, you need to give them (and they expect) a decent discount. I regularly travel on business, have stayed well over 175 nights in one particular hotel over the last 2.5 years, I get a discount over the normal “find-it-online” rate.
Note that some businesses are built around subscriptions (think FreshBooks, Heroku, or Dollar Shave Club), but they just have multiple tiers of subscription: low-volume/high-profit subscribers (our walk-ons) and high-volume/low-profit subscribers (like our subcribers).
The subscribers (or high-volume/low-profit customers) keep the lights on and the business going; the walk-ons (or low-volume/high-profit) boost your bottom-line. Finding the balance between the two is crucial to having a predictable base and good profit.
Our intrepid rink owner is making the classic mistake of ignoring the balance between subscribers and walk-ons. Sure, walk-ons are more profitable… if there are enough of them to continually fill all of your hours. That is almost never the case, hence the manager’s change of hours. Slowly, the owner is learning about the critical balance. Every business would love to sell its entire inventory of widgets, time or services to walk-ons, all the time. The real world just doesn’t work like that. He could have saved himself a lot of headache (and probably a few months of lost profit), if he had gotten some experienced help.