Having the right product mix can be an important component of your business model. Most businesses have several product or service offerings. Some of these offerings have low gross margin, some have high gross margin. A business model that can successfully sell more of the high-margin items is significantly better than a business model that sells only the low-margin items.
You can call this phenomenon gasoline, cigarettes, and soda. The typical corner gas station costs approximately $4 million in land, building, and equipment to build. This same gas station sells 1 to 2 million gallons of gasoline per year at a gross profit around $0.25 per gallon.
If you run the math, that’s $250,000 to $500,000 of gross margin before paying any expenses — such as rent, interest, utilities, employees, regulatory fees, and more. You’re probably thinking that this is a lousy business model. However, gas stations also sell cigarettes, soda, chips, coffee, bottled water, candy, car washes, and so on.
Gas stations lose money pumping gas. Gas stations make excellent margins on everything but gas. Here are the margins on some of their best-sellers:
Bottled water: 60-percent margin
Soda: 80-percent margin
Candy: 50+-percent margin
Cigarettes: Best of all, a $0.75-per-pack profit on fast-moving cigarettes. A typical gas station turns the entire inventory of cigarettes in two days.
The key is for gas stations to maintain the right mix of gasoline, cigarettes, and soda. If the gas station fails to attract customers with its unprofitable gas, sales of profitable soda and cigarettes will suffer. If the gas station sells only gas, it generates insufficient gross margin to support the enterprise.
The same holds true for your business. To maximize profitability, minimize sales of your lowest-margin items while maximizing sales of your highest-margin items.
Sounds simple right? It isn’t! In many business models, the low-margin gasoline is the customer acquisition item. If the gas station prices gasoline $0.10 more per gallon than the station across the street, it fails to sell not only gas but also cigarettes and soda. Design your business model to ensure you sell more than just the low-margin gasoline.