Is It Really Worth It?Use a Cost/Benefit Analysis
Most liquor retailers are committed to running their businesses in the most efficient way possible to ensure the best outcomes for both the customer and the business. One area that gets reviewed on a continual basis is in-store equipment and products. Often decisions are made simply based upon price saving strategies that directly impact the owner’s bottom line. While this method can lower expenses directly within the controllable expense category, quite often soft costs are forgotten when contemplating a change. If left unaccounted for, soft costs can increase overall store costs to a point that licensees are paying more after a change has been made. So, how does one decide if a change is worthwhile? Or will it just cost you time, effort, and in some cases more money?
Let’s start by ensuring we all know what a “soft cost” is. Wikipedia defines a soft cost, as an “expense item that is not considered a direct cost to the item.” Soft costs may include such things as training, labour costs to implement the new items, legal fees, increase or decrease in employee efficiencies, consumer impact and other pre- and post-implementation expenses. A great example of how a soft cost can impact the bottom line is when changes to in-house supplies, such as plastic bags, occur without considering all the variables.
Retailers will opt to go with a less expensive option only to discover the trade off has been to compromise on quality.
Plastic bags seem to be an item that gets scrutinized a lot. Often retailers will opt to go with a less expensive option only to discover the trade off has been to compromise on quality. In most instances, only the current bag price vs. the new bag price was reviewed when licensees made a change. In addition to the price, the licensee should have factored in a decrease in customer satisfaction because new purchases were breaking before they got home. They should also have considered the increase in bag use because staff began to triple bag product to ensure there was no breakage, and the increase in cost of goods because of product breakage due to the bag’s inability to carry product. After considering all these soft costs, there was no extra benefit for making the switch. In this case, it cost the retailer more money to make the change because the costs outweighed the benefits. The retailer should have considered getting rid of plastic bags altogether and implementing a “bring your own bag policy” including selling cloth bags at a reduced rate. That policy would result in an increase in customer satisfaction, a decrease in bag costs, and an improvement in social responsibility.
Conduct your own bag analysis and see where you end up!
Retailers need to be diligent in their thought processes when considering a change. A great solution is a cost benefit analysis to help guide the decision process. There’s no need to call your accountant or have an MBA to sort through this calculation. It can be as simple as making a list of every single cost—both hard and soft—to make the change. Then, create a list of every single benefit and ensure each item has a value attributed to it.
Benefits – Costs = Cost Benefit
Ensure costs are not under-estimated; that is why its important to include soft costs. When considering the benefits, be conservative. Don’t over-estimate revenues. Once the list is complete, take the difference between the two. If the number is positive, it’s probably a good decision to go forward and make the change.
Below are some key questions along with some ideas to get you started on your own cost benefit analysis. Grow your list of questions as needed. Be sure to quantify each item so you can calculate costs and make the best decision for your business, staff, and ultimately your customer.
What is the difference in cost of the product if a change is made? Beware of the hidden costs. It is extremely difficult to associate a value to this because it’s hidden; however, owners should be diligent in factoring for glitches and downtime when, for example, changing POS or debit terminals. Be sure to consider any possible cancellation fees if a current vendor contract might be changed.
Is the product the same quality? Remember the bags example from above? If the quality is not the same, what are the additional costs?
Is the item readily available? If the item is known for out-of-stocks or delayed ship times, this could cost you extra money trying to source last minute replacement items. Additionally, it could upset customers and impact their experience.
Does the new vendor provide the same or better level and quality of service? If you have a vendor who sets up product displays in your store for free and ensures the display is well managed and stocked, then switching to a less expensive product where your team manages the display might increase labour costs and affect customer experience.
Is this service included in the price or is it an additional cost? POS companies are a great example. They may have an amazing POS, but if you fail to factor the monthly maintenance fee when calculating a change, the costs could outweigh the benefits.
If you make the change, can you eliminate more than one other supplier? Does a supplier have products/equipment you currently purchase from more than one supplier? This could increase efficiencies in labour costs and possibly save on shipping fees.
Consider any possible cancellation fees if a current vendor contract might be changed.
Can you approach your current supplier and request a discount to retain your loyalty? Negotiating with your existing supplier can be more cost effective than starting a new relationship.
Is the supplier easily accessible? Are orders easy to place? Is technical support readily available on evenings and weekends during your peak times? Is shipping quick?
A cost benefit analysis can be a quick and simple tool you use to help guide your decision-making process. When decisions are well thought-out and various benefits and possible pitfalls are considered, the implementation of the change becomes less stressful. Add the benefits and subtract the costs. The outcome of this formula will guide you to your final decision and provide the best possible outcome for your business.