Pricing, machine collections and profitability

Have you ever considered installing a row of products selling at a $1.50 vend price in your machines? Certain vending operators have employed such a program with great success.

For the past couple of months, I have spoken to many veteran operators. Several have stated that, despite the economy, their dollars per service collections have never been better: $100 per service. Weekly route averages are “up” to $10,000 per week.

The $100 per service has been a goal for many operators. As price points have increased over the years, it would stand to reason that dollars per service collection would also increase.

Achieving $100 per machine remains the goal for many operators. But with price points increasing, it stands to reason that unit sales have decreased if collections have remained unchanged.

Raising prices will improve profitability to a point that will keep most operators financially healthy.

Operators in general are reluctant to raise prices much because they fear unit sales will decline. I believe that operators can raise prices if they do it strategically by placing “premium products” in the machines while maintaining and even in some circumstances increasing unit sales. By “premium products,” I mean products priced at $1.50 and higher.

But first, let’s consider why the current $100 goal per machine is not sufficient. Let’s first consider beverages.

WHAT’S HAPPENED TO COLD DRINK TURNS?

Five years ago, operators were selling 20-ounce beverages at a $1.00 vend price. If the operator averaged $100 per service, then four cases were being sold per service. The operator was selling 40 percent of inventory, assuming the average beverage machine holds 10 cases.

Today, what does $100 per service mean? The operator selling 20-ounce beverages at $1.00, in my opinion, will be out of business given the product cost, commissions, and operating costs. The following simple chart shows the possible weekly beverage unit sales to achieve $100 per service:


$1.15 vend price 87 units
$1.25 vend price 80 units
$1.35 vend price 75 units
$1.50 vend price 67 units

Since we know that the $1.50 price point for beverages in vending machines is rare in most markets, let’s assume the next best scenario is happening: a $1.35 vend price.
At a vend price of $1.35, only three cases are sold per service; just 30 percent of the machine inventory. This means unit sales per service are lower than they were five years ago.

SNACK MACHINE SALES ALSO DECLINE

For snack machines, the declines in units sold is similar. Five years ago, the average vend price in a snack machine was 70 cents per unit, according to industry averages. The typical snack vender had to sell 143 units at 70 cents per unit to achieve the $100 per service figure.

An average snack machine has an inventory of 400 units (five rows of five double spirals, 10 units per spiral, and one row of 10 single spirals, 15 units per spiral, not counting the gum/mint module.)

Five years ago, the average $100 per service figure resulted in sales of 35 percent of the snack machine inventory. Today, only 30 percent of the inventory in the snack machine can be sold to achieve this $100 per service figure. Only 118 units, a decline of 25 units per service from five years ago, can achieve the $100 per service figure based on an average vend price of 85 cents per unit.

Operators are then selling between 20 percent less units in snack machines and 30 percent less units in beverage machines per service than five years ago. Given these declines in unit sales per service, there are several questions to address.

CRITICAL QUESTIONS TO CONSIDER

1) What is the profitability of $100 per service given the cost of products, commissions, and increases in operating costs?

2) How can the operator regain the average unit service figure of five years ago? (An additional case at a $1.35 unit vend price results in a weekly sales increase of $34.40. An additional 25 snack units at an 85-cent unit vend price results in a weekly sales increase of $21.25.)

3) Can the product mix in the machine be changed to increase the unit vend price to increase the average dollar per service figure?

Can the operator increase the vend price of products to increase the average dollar per service figure? I believe this can be accomplished.

In 2009, my company, Vending Consultants Co., conducted snack product tests placing “premium products” at a $1.50 vend price. The products vending at $1.50 must be considered “premium products” by the consumer.

Vending Consultants Co. has identified such products during these tests, and in the next month will be conducting an additional test of such “premium products.” (Operators with SKU-level data who are interested can contact Vending Consultants Co.) The tests, during one of the worse years in the vending industry, when it was very difficult to raise prices, provided informative results regarding the placement of “premium products.”

PREMIUM PRODUCTS’ IMPACT ON TURNS

When an operator placed only one “premium product” at the $1.50 vend price in a snack machine, the average monthly unit sales of the “premium product” was a third of the average monthly unit spiral sales in the machine. If a snack machine averaged 12 unit sales per spiral, the “premium product” only sold four units per month.

In contrast, when there was one complete row, five spirals, of “premium products” at the $1.50 vend price, the average monthly unit spiral sales was virtually the same as the other spirals at an average vend price of 90 cents.

Consumers determine the best value based on the selection available to them at the time and place of purchase.

It is not uncommon for consumers to avoid purchasing one product that is selling at a substantially higher price than other products — the consumer does not perceive the value of the single higher priced product. However, if there is a choice of several higher priced products, the consumer is more likely to perceive the value of such products.

UNDERSTAND THE PSYCHOLOGY OF SHOPPING

In shopping for a shirt, you look in a certain price range. If only one shirt is more expensive than all the others, you may not perceive that the more expensive shirt has any additional value. But if there are several shirts in the higher price range, you may check the differences between the shirts in the two price ranges and purchase a shirt in the higher price range, perceiving its value. The same thought process seems to be in place with purchasing “premium products” from a vending machine.

In the test, the snack vending machines with five spirals of “premium products” averaged 755 units in monthly sales. The “premium products” represented 10 percent of the sales, 76 units. These 76 units produced a sales increase of $10 per week at the $1.50 vend price, 60 cents more than the 90-cent vend price in the other spirals.

The installation of “premium products” results in annual sales increases of $500 per machine, increasing profitability at no additional operating costs for the operator.

By placing “premium products” in one row, with five spirals, an operator can increase the dollar value of the products sold by 10 percent a week. The purpose of testing is to challenge the current conventional wisdom that lowering vend prices increases sales.

These tests demonstrate that by installing the right “premium products,” operators can increase consumer satisfaction, improve profitability per service, and grow the industry. My next article will examine the profitability of the $100 per service figure by analyzing the gross profit margins of the products sold (for example, chocolate candy versus LSS chips), commissions, sales taxes, labor and truck costs per service.

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