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Cost of Sale

July 9th , 2012

Yesterday I bought two ice creams for my daughters. They were £1.75 each. Not hugely expensive for ice cream. But the scoops were rather on the stingy side. And the people serving weren't very friendly. Or efficient. Factored together, it wasn't the most enjoyable £3.50 I've ever spent.

My girls enjoyed their ice creams. But they don't buy them, so they're not going to feature in the rest of this post, which is most certainly about buying ice creams.

When I left the cafe I was thinking about how easy it would have been to make me happy. Perhaps the ice creams could have been £1.50. Maybe the scoops could have been remarkably big. Maybe with free sprinkles and a smile. Nothing too heavy. No need to employ a consultant.

I always imagine that the thinking behind most cafes is the same. "How can we charge as much as possible for the minimum?" This is an easy strategy. Work out how much people are willing to pay and how little ice cream they'll find acceptable. Assuming the cost of the scoop in this case was about 10p, then this isn't a bad margin.

But as I was walking away I was thinking of all the people I'd have told if the ice cream had been exceptional. The last exceptional ice cream I had was about six years ago and I still remember it. Sadly it was in Italy. But if it had been in Somerset I'd still be sending people to get one now.

So I could have told lots of people if the ice creams we bought yesterday were amazing. And all those people could have told their friends. Which raises an interesting point.

Good businesses know that word of mouth is important. If I do something well other people will get to know about it. But it's a fairly intangible concept. How many people will get to know? Businesses like the cafe I went to probably don't grasp the reality of this idea and I don't blame them. They have to think about the numbers, deriving the most profit from each individual transaction.

So I was thinking about a more effective way to translate the word of mouth idea into numbers.

Let's assume that we're all connected. That between face-to-face friendships, telephones, the pub, the school run, Facebook, Twitter and everything else we know everyone in the world. 104,100 of those people live within a few miles of that cafe. It wouldn't be asking much to imagine each one of those people buying one exceptional ice cream a year.

The area around the cafe also attracts about 3 million visitors a year. Again, I don't think it would be asking too much for 10% of those people to go and buy an exceptional ice cream each. So that's another 300,000 ice creams.

All in all, with the right product, our little cafe could be selling 404,100 ice creams a year. I estimate that they're probably selling closer to 10,000. In other words they're missing out on about 394,100 ice cream sales by being a bit crap.

If they adjusted their pricing (lower) and product (better) a bit they might manage £1 mark up on each ice cream. Adding all this together their approach to ice cream sales is costing them about £394,100 a year.

Of course, they did make about £3.30 on the two ice creams they sold me. And that's money in the till. But £394,100 of money they could have made is never going in the till. That's a very expensive product.