Updated: Nov 25, 2020
Why does this matter for marketers?
Marketing is becoming more and more about knowing your numbers.
And understanding the difference between gross margin and net margin can be crucial when deciding which marketing channel is best for your business.
Sometimes we hear questions like "how can I afford to pay 20% in commission, when my margin is less than 5%!?". Read on to gain a deeper understanding of how to choose the best channels.
Getting into the details...
Your net margin gives you an indication of the overall viability of your business. >0% equals profit and <0% equals loss. This looks at revenue from your current customer base and takes off all of your existing costs including costs of goods sold (COGS) and fixed costs (overheads).
However, your gross margin will provide you with an indication of how much additional profit you will make for each additional customer you bring through the door. For the hospitality sector this tends to be between 65% and 85%.
Your fixed costs are already covered, so use gross margin.
Revenue from your existing customers already covers your fixed costs. So use gross margin.
For the additional customers that LUX brings, you're making around 75% profit!
As we charge commission starting from as little as 5%, this is a hugely profitable decision.
Let's see this in action...
In this example, the restaurant is turning over £1million in revenue per year and are breaking even (£0 of profit/loss). Their gross margins are 75% meaning that £250,000 is spent on variable costs (COGS) such as food and £750,000 is spent on overheads such as rent.
By partnering with LUX, this restaurant can become profitable. Revenue increases by £100,000 but costs only increase by £35,000. Overheads are already covered by the existing customers.
Calculating your return on investment (ROI)
In another example, let's imagine that within one week LUX brings you 20 new bookings per week with an average bill size of £150. That's £156,000 in additional revenue per year.
If you chose to pay 5% commission to LUX then that would be £7,800. Then with 75% margins, £39,000 in costs of goods sold are added, leaving £109,200 in additional profit.
That's an ROI of over 300%. Triple your money in profit.
And an ROAS of 2,000%. 20x return on your advertising spend.
This demonstrates that not only does using your gross margin make more sense to use but LUX's commission (which starts from as little as 5%) is extremely affordable, especially compared to the discount schemes that often offer 25%-50% off the total bill.
Bonus content - risk vs reward
You have a responsibility to make sure that the marketing channels you choose provide you with a good return on investment.
A minimum requirement is that you at least get as much money back in revenue, as you pay out in advertising costs and COGS. Otherwise, you're actually costing your restaurant money!
If you think of traditional methods of marketing, the risk was all on you.
For instance, an advertisement in a lifestyle magazine could cost you £10,000. In order to make your money back, you need the advertisement needs to bring in at least £13,500 to make a positive ROI. But if it only brings you £5,000 in revenue then you will make a loss.
However, with LUX you don't take on this risk. This is because there is no upfront cost or fixed monthly fees. It's commission only. So no matter how much revenue we bring to your restaurant, it will never result in a loss for you. LUX guarantees you a positive return on investment!
Pay only for results. Take no risk. Choose LUX.
Interested in making more profit for your restaurant or bar? Contact email@example.com