There are Only 2 Business Models (Part 1 of 2)
I was asked the other day, ‘which is better, fewer cars but more profit on those cars, or more cars but less profit per car?’ Really what this person was asking is-should I be Wal-Mart or Gucci? Try as we may to prove that there is a third model in the universe, if you stand in the middle of the road long enough you will get hit by the truck! What I am talking about here is-High Volume, Low Margin or Low Volume, High Margin. Let’s look at the benefits of each.
High Volume
What does high volume do for me? It generally means that you have a large customer base and strong cash flow. Every day you are busy washing cars and bringing in cash. Our business is primarily a fixed cost business so having volume means you are keeping your assets working and producing revenue. Having a large customer base will give your business margin for error. Take a look at this chart, we will assume this car wash was doing 200,000 cars/year and then we will look what happens when weather or the economy (maybe both) cause a 20% drop in business.
|
Annual Volume |
Customer Base |
Avg Ticket |
Annual Revenue |
|||
|
200,000 |
57,143 |
$5.50 |
$1,100,000.00 |
This car wash made a very nice profit that year, now for a quick look at losing 20% of that volume.
|
Annual Volume |
Customer Base |
Avg Ticket |
Annual Revenue |
|||
|
160,000 |
45,714 |
$5.50 |
$880,000.00 |
Again this car wash probably made a nice profit, not as much but still survived a tough time in the economy. So what are the negatives to having high volume? Being busy does not always mean efficient, if you look at your expenses on a % of income you may be paying more to operate more than needed, just look at the federal government. Higher volume will also lead to more potential damage claims, maintenance costs and faster replacement of equipment. So why or how do you achieve high volume?
Generally speaking there are two things that can create high volume. Be the only game in a large market, referred to as a monopoly, or by your price point. The basic assumption here is that if you charge less, more people will come creating higher volume.
Higher volume will cover your mistakes, generate consistent cash flow, utilize your assets and give your business margin for error in tough times. Also, since we are primarily a fixed cost business at some point more of that Avg. Ticket goes to your bottom line with very little extra expense. Being a high volume low margin business has worked for several companies, Wal-Mart is a great example.
In the next article we will talk about the positives and negatives of being a Low Volume, High Margin business and how you can decide what is best for your site and your personality.
