The Fourth Principle of Happy Cash Flow

June 2007

Principle 4—Put a Little In, Get a Lot Out

The happiest business in the world is one where you put a little bit of money in and get a lot out of the back end. In our earlier example, we would like the sales cycle to generate more than 20 cents for our investment. Wouldn’t it be great if we could get 80 cents out? How about $3? Even better!

The basic formula of profit is REVENUES less EXPENSES equals PROFIT. So in order to raise profit, you have to either increase revenues or decrease expenses… or both.
Companies that operate in a competitive environment are often hard pressed to increase profits. In a competitive environment, you can’t charge whatever you like for your product or service. The market dictates the cap, the upper limit of price.  Even worse, if the market terms your product a “commodity,” you are in even more of a cash squeeze. A commodity means everyone has one or can get one, so no one wants to pay much for your product.

Dell cannot charge more for its computers than its competitors and Wal-Mart can’t charge more than Kmart or Target. And the cost of creating the product or service is likely increasing. If, as happened in 1998, the selling price of a laptop decreased while the cost of memory increased, the profit margin that Dell made per product got squeezed. This is not a good thing.

Luckily, all is not lost because commodity companies can implement the McDonald’s “Want fries with that?” concept.

The McDonald's "Want Fries With That?" Concept

Every time you walk into a McDonalds and order something, they ask you, “Do you want fries with that?” “Would you like to Super-Size it?”

Why do they push the fries and bucket-sized soft drinks so hard? Because each of those products has a huge profit margin. Fries don’t cost much to make per bag and soft drinks are incredibly cheap.

And the beautiful thing, from McDonald’s perspective, is that we don’t even pay attention to the cost of the fries. They could raise the price on us indefinitely… OK, if they were $2 a bag, we might say something, but they do have some flexibility here.
And the soft drinks are so cheap it costs more in labor to fill and refill your drink… so now they let you fill the bucket yourself.

The burger is the commodity. They have to keep that product competitively priced to match Burger King and Jack in the Box. If they raise the price of that too much, we may balk and walk over to the competitor.

But take something like the McFlurry, which is their ice-cream desert. That thing sells for $1.50 or more! It can’t cost anywhere near that to make. It is milk, and sugar, and crumbled cookies. Come on!

Remember when McDonald’s wouldn’t even consider customizing your burger? I am a “pickles and ketchup only” kind of girl. I had to wait for 30 minutes when I was a kid to get my burger. It totally threw them off. They couldn’t afford to spend more time on the burger because they weren’t making much of a profit on it. Competitive pressure caused them to change their processes to give us a customized burger, like Burger King did and does.

Now they have started packaging the meal all together in a bundle—the fries, the soft drink, and the burger—and calling it a Super Value Meal. Is it such a value? A “Super Value”? We don’t know, and we don’t care. No one stands there and adds it up on a calculator. We trust them. What marketing genius! Now we have no idea how much the individual components cost.

Have you ever been “super-sized” in an electronics store? Recently I purchased a DVD player at a large electronic appliance retailer. Yes, the price of the unit was cheap, but the accessories, warranty, and service agreement added substantially to the cost by the time I checked out.