Mary Ellen and I were having dinner in our favorite Mexican restaurant when I noticed that every table but ours was having margaritas. I was reminded of the fact the television networks are not in the business of providing programming for the viewers, they are in the business of providing viewers for their advertisers. Same concept applies to sports teams, concerts and most entertainment venues. They are really in the business of selling seats, beer, hot dogs and logo merchandise. Mexican restaurants are really set up to find customers for their margaritas. The food is just a diversion.
That intro brings us right back to the question of how profitable are your customers? If a customer walks in to your Mexican cantina, orders two Diet Cokes which comes with free refills, the free chips and salsa you provide for them will only encourage more free chips and salsa before their meal arrives. An analysis of customer behavior will no doubt reveal that the aforementioned customer is marginally break even and more than likely costs you more to service than you are receiving in revenue. A customer that walks in orders two margaritas before the chips and salsa arrive, and then orders another round of margaritas with dinner is much more profitable than the Diet Coke crowd.
There are two issues at play here, first the challenge would seem to be to find a way to encourage the non alcoholic crowd to purchase the higher margin products on your menu. The challenge of profitably only becomes relevant when you have reached a level of revenue that supports the business. In a perfect world you would only encourage really profitable customers and encourage customers that are less than profitable to change their behavior. The reality is usually different. Less than perfect customers start coming in when you are starting out and you expand a great deal of energy to service these customers because you have not reached break even yet and you do not want to turn anyone away. “Never loses a customer” is my old friend John’s favorite line.
Secondly, the profitability equation takes into account only current activity. It does not incorporate any future value. That is a horrible mistake because remember the purpose of business is to create a customer and have that customer tell others about you. The Diet Coke crowd might only be marginally profitable now however they might be the ones who create the critical mass for your business.
