After 24 months of activity, my friend found a business partner with 25 years of experience in the Food and Beverage industry.
My friend: “She brings investment and market expertise with the aim of boosting growth.”
She estimated the growth they can reach if they follow specific commercial strategies.
After analyzing the business model, she proposed to change the pricing mechanism to increase the average basket size.
My friend: “She wants to offer tiered pricing discounts to incentivize bulk purchases.”
However, the risk is to impact profitability and cause a liquidity crash as we reduce the turnover per box sold.
My friend: “If we implement strategy X, can you tell me how much growth we need to keep the same profitability?
For each strategy, we can use the model to estimate the minimal growth needed to improve profitability compared to the baseline.
Baseline & Profitability Indicators
For this analysis, we defined the baseline using the 2023 historical sales with updated terms and inventory management rules.
More than 70% of the turnover comes from direct sales to coffee shops, and the remaining is from distributors with four-week payment terms.
We don’t have liquidity issues thanks to favourable payment terms with our suppliers and the coffee shops.
Considering fixed and variable costs, we can reach $3,910 in profit per pallet sold for this scenario.
This profitability is influenced by the green indicators that cover fixed and variable costs.
Five growth scenarios for each pricing strategy
My friend’s business partner based the pricing strategy on the market practice and her industry knowledge.
The simulation aims to trigger data-based discussions to support business decision-making.
My friend: “If you want to apply Pricing 1, can we ensure that we have at least +50%? If not, we loose profitability.”
Let us start with the first pricing strategy.
Scenario 1: Low-risk pricing 1
This strategy incentivises customers to order at least a full pallet by providing a 2.5% reduction if the volume exceeds 50 boxes.
How much growth we need to maintain the same profitability?
As we can see in the rebate scenario, implementing the new pricing results in a profit loss of 171 ($/Pallet).
However, as sales growth mechanically decreases unit costs, this loss is compensated when we reach +50% growth.
- Variable costs are also reduced thanks to inbound flow optimizations.
- Storage cost per pallet increases due to the higher safety stock required.
They must bring at least 1.5 times the current turnover if she wants to implement this strategy.
Business Partner: “We’ll never get more than 50% growth without an additional rebate. ”
Scenario 2: Middle-risk Pricing 2
Indeed, the first pricing strategy does not incentivize ordering more than 1 pallet (50 boxes).
Therefore, they would like to add a 5% rebate if customers order over 150 boxes (3 pallets).
If we keep the same volumes, implementing this additional rebate induces a 315 ($/Unit) profitability loss.
Do we lose profitability if we only reach +50% growth?
Yes, we only get 3,751 ($/Unit) of profit with +50% growth vs 3,910 ($/Unit) for the baseline.
Therefore, we need at least +200% sales growth to recover the profitability level of the baseline scenario.
- Unlike the first pricing strategy, the turnover per pallet sold decreases until reaching a plateau after 100% growth.
- Costs of goods sold (COGS) are lower than the first pricing strategy because the 30% sales commissions for the sales representatives are based on the invoiced amount.
We lose 171 ($/Pallet) of profit compared to the first pricing strategy if we reach +200% sales growth.
However, according to the business partner, this strategy is more likely to help us reach these targets.
My friend: “What if we implement another 10% for large orders?”
Scenario 3: High-risk Pricing 3
Even if this does not seem like a good idea, they want to estimate the profit loss with an additional 10% rebate for orders larger than 500 boxes.
Samir: “This brings interesting insights about your business.”
The slight reduction of profitability with the rebate scenario (from 3,595 $/pallet with strategy 2 to 3,588 $/pallet with strategy 3) shows that they currently have nearly no orders with a quantity higher than 500 boxes.
However, they will have the bad experience of seeing their profitability decrease when they reach +50% growth.
Samir: You’ll never be able to reach the profitability level of the initial scenario.
The model provides data-driven insights on assessing the business partner’s suggestions.
Translating Business Ideas with Analytics
This exercise exemplifies how translating business ideas based on intuition to actual figures is important to save the margin and avoid bankruptcy.
My friend is a former data scientist with a quantitative approach to business, which may not be compatible with the culture of the F&B industry.
What is the quantitative impact of your business decision based on your intuition?
This model supports dealing with his business partner when discussing a strategic approach by assessing ideas with an objective third-party judge.
Based on the simulation, if we choose pricing strategy 2, we need at least +50% growth. Can we make it?
I have started using data analytics for business decision-making with a small bakery that wanted to optimize its profitability.
At that time, it was a small exercise of using linear programming to provide strategic insights to a business owner.
What is the best set of items to sell to maximize profitability?
This modelisation continues the journey of trying to use data analytics to support strategic business decision-making.
Do you have examples of similar projects supported by data analytics?