How to choose ‘premium’ products

Several vending operators and product manufacturers contacted me regarding my April article, “Pricing, machine collection and profitability” with the same question. They wanted to know what “premium products” vending at $1.50 should be placed in snack and beverage machines to increase the average machine weekly sales by $10.

To determine what products to select, the operator must consider a number of factors. Some of these are:

What is the gross profit of the product?

If the premium product is a line extension of an existing product in the machines, will sales and profits be cannibalized?

To calculate the gross profit, the cost-of-goods (COG) is the starting point. Premium products have a wide range of costs. Beginning with the candy/snack machine, following are some sample COGs for vend products:

Consider rebates

The operator should consider the impact of rebates in calculating the COG. The operator can calculate the COG based on pre-rebate or post-rebate. Each operator has his own approach for this calculation. Given that rebates fluctuate each year and that quarterly goals may or may not be met, many operators employ a pre-rebate COG.

There are other issues relating to gross profit in addition to COG. One very important question is whether the product is subject to a sales tax. Gross profits will not include other costs such as commission, labor and overhead, etc. These costs are part of an operator’s net profits, which is not the subject of this article.

Certain premium products are subject to sales tax while others are not. For example, in New York State all candies are subject to an 8 percent state and local sales tax while such products as potato chips, certain cookies and pastries may not be subject to the sales tax. Each operator should review the premium products that are not subject to sales tax. In New York State, such products increase a vend operator’s gross profits by 8 percent.

Calculate gross profits

With the COG and sales tax information, the vending operator can calculate the gross profit figure for each premium product. The gross profit range is significant. In New York State, at a vend price of $1.50, the gross profit for king size chocolate is $.54 compared to between $.78 to $.90 for the 5-ounce pound cake.

Complicating the gross profit is the cannibalization issue. This can happen if the premium product is a line extension of an existing product already in the machines. What is the sales impact and profitability on a snack machine where an operator either 1) adds Snickers king size and keeps Snickers regular in the machine? or 2) adds Snickers king size and removes Snickers regular?

In addition to cannibalization, there is the issue of sales velocity. A new product that does not sell at a rate that is similar to the product it replaces may not generate an acceptable gross profit for the operator, no matter what the COG and tax status are.

Will a 5-ounce non-chocolate candy outsell a 3.5-ounce chocolate significantly to generate more profit despite the COG difference?

Should only new products, or at least those products that are not currently placed in an operator’s snack machines, be placed in the $1.50 row?

I am currently contemplating a test with operators to provide insights, if not answers, to these questions. Whatever variances these choices will create, an operator should consider other benefits of creating a row of premium products priced at $1.50.

By offering a row of premium products vending at $1.50, operators will educate their customers about the benefits of higher prices without creating controversies at the location about these higher prices. Premium products obviously cost more and justify the higher vend price. This benefit alone can justify placing a row of premium products in the machine.