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Edition 147 – It’s Only $1.50

I have a client on Sydney’s Northern Beaches that I visit quite regularly. My routine is to hop in the car early to beat the traffic, then stop off at this fabulous patisserie on the lower North Shore, three quarters of the way through my journey. My wife doesn’t know (well, she does now!), however, they do the best small quiche lorraine for breakfast that is magic.

Recently, when I stopped in there on one of my latest trips, I ordered a pot of tea along with the delicious delight for breakfast. I tapped the credit card and headed off to a seat in the corner to ponder the world, read the Sydney Morning Herald (on the iPad) and enjoy my treat.

For some reason this particular morning, I decided one pot of tea wasn’t enough, so headed back for a second. Out it comes in one of those small, Asian looking, bulbous tea pots that seem to be common in the hip cafes these days. Again, I tapped the card – and the price was $1.50 more than the last purchase, 30 minutes previously.

Intrigued, when I returned to my table, I dug out the receipt and noticed the first time around, they only charged me for a cup of tea, not a pot of tea – hence the $1.50 difference.

Now, the numbers man inside me couldn’t help himself, mainly because I see this sort of thing all the time in cafes and restaurants. Whether it is a result of them always being on their toes, trying to satisfy the customer, or the result of staff members being distracted by each other when ringing up an order, I see it way too frequently in an industry where margins are tight, and differentiating yourself from your competition is difficult.

This business trades 12 hours per day, 7 days per week, 363 days per year. A $1.50 oops moment on undercharging a single customer doesn’t seem a lot in the whole scheme of things. However, here’s my guess – it happens all the time. Surely, it must do, given how often it happens to me in different cafes and restaurants.

If you assume the $1.50 oops moment happens once per hour, for every trading hour, for every trading day, that’s a $6500 revenue shortfall at the end of the year for that outlet. For those of you who have their heads around numbers, the beauty of this $6500 is that if you manage to trap it, it is pure, 100% profit. As a business, you’ve already paid out for the cost – so any additional dollar of revenue you can (rightfully) claw back is straight to the bottom line.

For some businesses, $6500 may not seem a lot. For other businesses, $6500, particularly in that industry, could form a substantial part of a business’ annual profit. Whatever it was, if there was $6500 laying on the ground, we’d all bend over to pick it up – however, when it’s an oops moment, we don’t think of the bigger consequences.

Speaking of bigger consequences, consider this. The fabulous patisserie with the best small quiche lorraine and the under-priced pot of tea is one of 12 outlets operated by this business. Multiply that through and you’re looking at just shy of $80000 per annum in lost revenue – and lost profit. Huge!

Extrapolate that out further and assuming a goodwill mutliple of 2.5 times, and you’re looking at a business that could be undervalued by as much as $200 000, simply as a result of a faux par on the part of the sales assistant.

Sometimes, $1.50 is worth a whole lot more than you think.