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Beef Jerky and the Science of Pricing

Mar 2nd, 2012 | By | Category: Nick Kemper's Blog

I broke down the other day and bought food from a vending machine: Premium Cuts Original Slow-Cooked and Mesquite-Smoked Beef Jerky, 0.9 oz for $1. It looked not like a total rip-off through the window of the machine, but after opening the package, I figure that, based on how much I got for my dollar, the cow was worth about $48,000 if it was all made into jerky. Of course, it isn’t, because this jerky is “premium cut,” which explains why they had to slice it paper-thin. Does snack food really have to be a total rip-off? Why can’t they just make a reasonable profit?

I heard somewhere that the actual raw material cost of a can of soda is about three cents. Everything else is production labor, marketing, distribution, and packaging. Here’s something to think about. Let’s take two very similar items, one made in China, one made in the U.S. We can imagine that the raw materials are about the same cost, wherever you are. We know that labor is lower in China, on average, and that this is supposedly the reason why stuff from China costs less, even though we have the additional expense of shipping it around the world.

If over half of the cost of the item is marketing and distribution, how can that small percentage of production labor have such a great effect on retail price? I don’t know all of the details, but something doesn’t add up.

When I was in the impound business, I talked to a lot of unhappy vehicle owners who ranted about our impound pricing. “How much could it cost to tow a car one mile?” they would ask. Then they would proceed to name off a few obvious expenses — fuel, driver labor, insurance — things that are relatively low on a per-call basis. Sometimes I would try to explain to them that, like any business, ours had fixed expenses that were there whether or not we ran any calls, such as property lease, dispatch and management staff labor, my weekly round of golf, etc. The way I looked at it, there was a number we had to hit every month to cover fixed expenses, so any call run up to that point had no profit at all. Any call run past that point had a relatively high profit, because the variable expenses of driver commission and fuel were covered by the tow bill, with plenty to spare. The vehicle owners usually didn’t want to hear it.

We used that base number of calls as a monthly goal, and we would purposely not include some auxiliary income streams in our figures to give us extra breathing room if we were close to the goal or just under it. I liked to post the call numbers daily for everyone to see and to show how we were projected to do for the month, and how that compared to our goal. It seemed to work pretty well, even for the employees that were outspokenly in it just for themselves. They understood that failure to earn profit could negatively affect their work status.

The flaw in our system was that the only reward for exceeding the goal was positive recognition for the group as a whole, which is valuable, of course. However, it’s not enough. If you want to make real profit, you need to share the profit — with everyone in your organization. How can it hurt? Let’s say you decide you will pay 20 percent of the net profit to your employees, divided up in a way that takes into account position and seniority. No matter what, you’re going to get 80 percent of the profit. The higher the profit, the more you get.

What if you take a loss, you ask?

Well, you can’t very well take 20 percent of the loss out of your employees’ paychecks, but you can take it out of future bonuses can’t you? Why not? That creates a real incentive to stay in the black for your employees — day in, day out.