Bowling Industry Online

The World's Only Online Magazine Devoted Exclusively to the Business of Bowling

Editor's Note. Please forgive the columnar formatting below.

Few business owners realize the powerful leverage that lower prices can
have on their profits. To get a feel for it, consider this hypothetical
example.
You own a bowling center and you normally sell bowling at $3.00 per game
and shoe rentals for $3.00 per pair. On a transaction of two games and shoe
rentals, your revenue is $9.00 per game.

After calculating your fixed costs and variable costs, you estimate that
your costs per game are about $1.00 per game and shoe rentals about $1.00
each. On this transaction, you make $6.00 for a 67 percent gross margin.

After keeping prices at this level for five years, you raise the price to
$3.60 per game. That’s a 20 percent increase — not small. But it’s nothing
compared to the effect on your profits. Say 200 people buy the $9 package
each week. At $10.80, 20% less games are bowled. But even at 20% less, the
business makes 3% more profits. Details:

Price Transactions Revenues Costs Profits
$9.00 200 $1,800 $600 $1,200
$10.80 160 $1,728 $480 $1,248

What happens when you cut prices? Say you drop it by $1 or 11 percent. At
$8, you sell 20 percent more games. Revenues climb about 9% or $136. Costs
per game stay the same, so total costs increase 25 percent. You make almost
3% less money for working harder. Details:

Price Transactions Revenues Costs Profits
$9.00 160 $1440 $480 $960
$8.00 192 $1536 $600 $936

When does cutting prices dramatically increase profits? The answer may
surprise you. If you cut prices about 10 percent, you have to have 18
percent more transactions to make more money. At $8, you’d have to do 188
transactions to beat the $960 profit you got from 160 transactions at $9
each. Your extra profit comes to $1. Details:

Price Transactions Revenues Costs Profits
$9.00 160 $1440 $480 $960
$8.00 188 $1504 $543 $961

On the other hand, if you raise prices 25 percent you would have to lose
almost one out of three customers before it hurt profits at all. Details:

Price Transactions Revenues Costs Profits
$9.00 160 $1440 $480 $960
$12.50 115 $1440 $690 $950

If you’re cutting prices without having a strategy to sell more ancillary
products you’re going to need a lot more new customers than you might have
suspected to avoid losing money. Just driving traffic in the hopes of
selling more food and beverage is not a strategy.

But driving traffic with a clear goal to sell more food and beverage is a
very viable strategy.

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