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Costs of Business

Let’s say that a nameless bar and grill restaurant is selling a pizza for $15.90; we’ll start there. First let’s review some important price assumptions:

– If the seller of the pizza has applied a Keystone Pricing Model to their food sales, each pizza costs them $7.95 from purchase to sale. (50% Gross Margin)

– If our mystery company’s distributor is selling pizzas at $7.28 and they are utilizing a 30% markup, the distributor’s cost/pizza is $5.60. (23.08% Gross Margin)

– If the distributor can cut their cost per pizza by $0.05, or 0.89% of their current sell price, they’ve increased their margin by almost 3% on each pizza (23.08% vs 23.76%).

Let’s say the distributor services 60 sellers totaling $500,000 of gross pizza sales/year. That is a $3,434/year increase in gross profit for the distributor.

For the pizza seller to achieve the same 3% more margin as described for the distributor, they need to cut their COGS by roughly $0.235, or 1.48% of their current sell price.

If the seller is doing $36,000 in yearly pizza sales, they’ll see a $532 increase in gross profit by cutting their pizza expenses as suggested above.

If you don’t know your numbers, you don’t know your business.

One of the hardest parts of trying to increase profitability is understanding where to focus. People commonly want to jump headfirst into more sales because that’s what everyone talks about, sales and revenue. This is especially true when a business is failing.

By managing and planning costs you can drive profitability in a more sustainable manner. An increase in sales doesn’t necessarily create profitability, but managing the costs of your sales can.