$1 plus profit per vend? It's a reality!

Vending operators can successfully place “premium products” in snack vending machines to generate $1 plus in profit for each vend after cost-of-goods (COG), commissions and applicable sales taxes, a recent test has proven. Product suppliers such as Kraft/Cadbury have the information for vending operators to develop a premium product placement program to achieve such profits.

Last year, I wrote two articles in Automatic Merchandiser advocating the placement of higher priced products vending at $1.50 in both snack and beverage machines to increase weekly sales. Since then, Vending Consultants Co. (VCC) has conducted a test with several vending operators sponsored by Kraft/Cadbury to determine the efficacy of placing premium products for sale at vend prices from $1.75 to $5.

The objective of the test was to generate at least a $1 in profit per vend after COG, commission and applicable sales tax. Simply put, if you had a choice, would you place a product that produces a vend profit of $1 in your snack machines instead of $0.30, or even $0.50 for each vend?

Furthermore, what are the long-term benefits of educating your customers to use a $5 bill to buy a product vending at $2 or $3.50 in your machines? Vending operators should not apologize for selling higher priced products in their machines, especially if the products provide value and sell at similar prices in other channels.

VCC initially considered placing 16 different premium products. The size of the premium products ranged from 3.5 ounces to 6 ounces. The COG of the premium products varied from $0.60 per unit up to a premium chocolate product with a $2.25 unit COG.

Every product was tested to assure that the package size would vend. Vend price points were selected in the range of $1.75 to $5.

Locations were limited for the test to snack machines that had at least a $5 bill acceptor and/or credit card reader. The test locations at hospitals, colleges, and offices were qualified by sales of at least 600 units each month.

VCC developed a beta test to track the vends of the different premium products on a daily basis using remote machine monitoring. The beta test provided critical information as to the placing of the premium products in the machines and the acceptance of the vend price by the consumer.

For example, the sales of the premium chocolate product with a COG of $2.25 per unit and vend prices of $4 to $5 were too low to warrant continuing this product in the second phase of the test.

Other products did not attract sufficient sales to also continue in the second phase.

Point of sale (POS) materials were not used either in the beta test or the second phase of test.

Both vending operators and Kraft/Cadbury thought that with POS, an opportunity may exist in the future to promote premium products with vend prices in the $4 to $5 price range.

Phase 2: 100 machines

In the second phase of the test involving around 100 snack machines, premium products having COG from $0.60 to $1.20 were placed with vend prices in the $1.75 to $3.50 range. The operators had different vend price points for the premium products driven by the different commissions paid to the various locations to maintain the basic objective of $1 profit for each vend.

To analyze the results, the vending operator must employ a machine level stock keeping unit (SKU) profitability report.

In the article, “Technology based reports are vital to increasing profitability,” in Automatic Merchandiser, March 2011, experts stated how DEX has revolutionized the way vending operators can do business and increase profitability by cash reconciliation, product merchandising and route efficiency. Essential to this revolution is that DEX data must be collected at the SKU level in each machine.

Results: Premium Products Work

In reviewing the results from the second phase of the premium product test, VCC used SKU machine level sales reports. For example, in one 40-spiral snack machine, 1,089 unit sales produced $1,302 for the month of February.

The SKU report showed that the average monthly unit sales by spiral was 27.2, producing an average monthly dollar sales of $32.55.

The five spirals with premium product sales averaged 24.2 units per spiral, producing an average monthly dollar sales of $53.60 per spiral.

The 121 total unit sales of premium products generated a minimum of $121 in profits; $1 per vend after COG, commission and applicable sales taxes.

The rest of the regular products produced a profit in the range of $0.30 per vend to $0.70 per vend after COG, commission and sales tax at the machine. In some instances, a regular product must sell three to four units to match the $1 per vend profit from the premium products.

You can calculate the number of unit sales your own regular products would need to achieve this $1 per vend profit after COG, your average commission and applicable sales taxes.

Higher priced items make a difference

In one machine, premium products represented 11 percent of the unit monthly sales and 20 percent of the dollar sales.

Overall, for machines in the second phase of the test, premium products sold in the range of 2 percent to 15 percent of the unit monthly sales and 4 percent to 32 percent of the dollar monthly sales. Part of this variance is attributed to the fact that certain machines had only one or two spirals with premium products.

As vending operators increased the number of premium products in the machines, the unit and dollar sales increased in line with the percentages of the SKU report.

In all machines, the premium product dollar profit per vend exceeded that of regular products.

Vending operators participating in the test observed the placement of the premium products brought a new look to each machine; change drives sales.

Consider the packaging of several of the premium products tested; certainly, these premium products would give a new look to your machines.

Most important for each vending operator is that new vend pricing, up to $3.50, was established and accepted by the customers and the locations. There were no complaints by any location as to the higher prices; value was clearly perceived.

Why keep lower price products?

Some vending operators dropped the sales from the gum/mint module to calculate machine level SKU profitability. However, if the gum/mint modular sales are not included, the question is raised: why even carry such products with a vend price at $0.75 per unit? Operators are considering such price points as detrimental to the machine and are placing premium gum and mint products that vend at $1.50.

Scott Meskin, president of Black Tie Services in Baltimore, Md., concluded in reviewing these and similar results: “The placement of premium products provides Black Tie with an opportunity to increase pricing and improve profitability in a wide range of other products in our machines. Having the low price in the gum/mint module runs contrary to our program to provide premium products in all categories.”

Results must be monitored

The placement of the premium products was not successful in every machine. The vending operator must have the SKU level data and machine profitability report to track the results.

In addition, as Michael Cascione Jr., operations manager of CC Vending in the Bronx, N.Y., stated: “CC Vending needs the cooperation and support of the product suppliers such as Kraft/Cadbury to provide the premium products that will sell and to make them available through the vend product distributors.”

Furthermore, the vending operator must carefully manage a successful premium product placement program.

Todd Elliot, vice president of Tomdra Vending & Coffee Services in Tucson, Ariz., observed: “A vending operator must price the premium products correctly at each location to achieve the $1 per vend profit. You can reduce a price if sales are not acceptable; it is more difficult to increase the price. The results of such an approach only add to your bottom line.”

As discussed previously in my other two articles, a vending operator does not have to make any investment in equipment to develop the premium product placement program. Besides SKU level profitability reporting by machine, the operator must consult with such product suppliers as Kraft/Cadbury who are knowledgeable about what premium products sell.

The next test Vending Consultants is considering is to place premium products in all the spirals with vend prices between $1.50 to $5, removing all the regular products. Vending operators and product suppliers who are interested in participating are encouraged to contact me.

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