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The One Question That Makes Fast-Food Restaurants Profitable

The One Question That Makes Fast-Food Restaurants Profitable

  Business   3 Comments   October 17, 2019   David Eden & Lauren Francom

I know what you’re thinking, there’s no way that the Fast Food industry’s entire business model rests on one single question to make a profit. Fast-food chains, such as McDonald’s (…the fast-food giant with 37,855 stores in 120 countries that makes 68 million sales every day). How can one question be so powerful to prop up a titan of a business like that? Well, that’s just the raw power of up-sell and cross-sell.

Advertising Costs for a Customer

Think back to all of the ads you’ve seen this year I know it will be A LOT but the chances are a good chunk of them will have been from McDonald’s, whether it was for their latest burger range or the new spicy McNuggets. Whether it’s on Spotify, Billboards, TV, Google or Facebook, McDonald’s spends a massive amount of advertising. If you break it down it costs McDonald’s a total of £1.54 or $1.91 in advertising to get a customer into the store.

This is before any kind of operational overheads are even considered, building rent, wages, or the cost of the food. Therefore, if a customer goes to McDonald’s and spends less than £1.54 or $1.91 McDonald’s have made a loss. Now you might be wondering if people need to spend £1.54 to turn a profit… how can McDonald’s have a saver menu where everything on it is below that price?

The Saver Menu Bankrupts McDonald’s?

Does the saver menu bankrupt McDonald’s? … Yes and No. McDonald’s would never keep around a group of products that actively caused them to lose money, so there must be some reason that they are still on the menu. Whilst it is true that if you just walk into McDonald’s and buy a 99p burger they have made a loss, the saver menu brings in a lot of new people to McDonald’s.

Once McDonald’s have gotten you into the store they have increased the chances that you will then come back into the store again, particularly if customers perceive value for money. The probability of selling to a new customer is anywhere between 5% and 20%, but selling to an existing customer is between 60% to 70%. Getting customers through the door is hard, but getting customers to return by offering the best deals (quality products, good service and value for money) is much easier. This is because once a customer has bought from you once they will have developed a relationship with you and broken the fear of the unknown when buying from a new business. Customers can sometimes be reluctant to spend money on something if they don’t yet know whether they like it (this is why sample tastings in supermarkets can be so profitable!).

So if a customer comes into McDonald’s to buy a 99p burger once, they are then more likely to make another purchase in the future, so it makes sense to try and up-sell them another product.

McDonald’s also regularly update the digital menu boards with new food items so customers may decide to dive into something new one day and spend more money. The special limited time offers usually hold a price premium. Currently, limited-time items at McDonald’s such as The Canadian Stack with Maple BBQ Sauce and the Indian Chicken in a Garlic Naan cost £4.39 for the burger... or you can make this into a meal for £5.79… and make it large for 40p (making it £6.19 if you opt for all). Yet, even customers who simply opt to purchase a drink or McFlurry can change the tides of profit for McDonald’s.

The Power of Up-Selling and Cross-Selling

By this point, you may be wondering, what is up-selling? Well, up-selling is getting a customer to buy a more expensive product. On the other hand, cross-selling is getting a customer to purchase an additional product. This is based upon 2 principles. The first being that once a customer has come into the store and made a purchase, the hardest part of the sale is over, so it’s a huge waste not to try and sell to them again. The second principle is that once you’ve got them into the store you’ve already paid the cost for that customer so anything extra they buy is pure profit, meaning you can 5x your profit just from 1 up-sell or cross-sell.

Up-Sell/Cross-Sell

Let’s say a customer walks into McDonald’s and buys a 99p burger. McDonald’s paid £1.54 to turn them into a customer, now McDonald’s is currently at a 55p loss. If the cashier then asks they would like fries and a coke with it for an extra £2 and they say yes they have suddenly gone from 55p loss to £1.45 profit, just asking one question has turned the sale from a loss into a sizeable profit for McDonald’s.

Other Industries Profit Too!

Now some people may be thinking, well that’s all well and good, but I’m not in the fast-food industry, and that is absolutely fine because you don’t need to be. This works across almost all businesses and industries. The perfect up-sell just needs to be relevant to the customer, it would not make much sense for McDonald’s to offer you a chicken wrap to go alongside with your burger because it doesn’t complete your meal, but offering the customer a drink and fries? The perfect match. When you try up-selling, make sure you consider your customer’s needs, what other items would be beneficial for them to buy?

If you’re an eCommerce business, then you can input clever algorithms into your website (Apriori Algorithm - Python) which can also learn the art of up-selling by analysing past purchase data and piecing it together to create “people who bought this also bought…”. Amazon is the online king of up-selling and cross-selling using this (they even claim that 35% of their sales come directly from up-selling and cross-selling).

When researching the Microsoft Surface GO Tablet Amazon’s choice for customer’s is the more expensive model and higher specification. This is a subtle way that Amazon is up-selling products on their website.

Surface Go Cheap

Surface Go Amazon Choice

For someone looking at buying a new tablet, Amazon also recommends cross-sell items which you may need once you’ve bought the tablet, in this case: a type cover case and the surface pen. Amazon makes it easy for the customer by suggesting things they may already have in mind for their purchase so the customer needn’t look any further - everything they want is all in one place.

Frequently Bought Together

At the point of purchase Amazon also have add-on extras that customers may want if they need to protect their device or need to add Microsoft Office and Virus Protection.

Add-Ons

Amazon reminds customers about items they may have forgotten about or not even considered yet. It is understandable why Amazon’s website is so profitable as they have considered almost every avenue that customers tend to take at the point of purchase and made this process almost seamless.

Pay attention to what items your customers are buying together. You can use your EPOS system to find out what items are frequently bought together. Next time your customers are shopping with you, try to consider what other things your customers may need and maybe even start offering bundle package deals!

3 Comments


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