Could 100 $6 beers actually be worth $4,500?

When it comes to increasing customer loyalty and maximizing profits, businesses often face the challenge of balancing immediate revenue with long-term gain.

One strategy that has proven effective in many industries is using a low-cost product or service as a loss leader to entice customers into signing up for a subscription with a much higher profit margin.

Let’s explore how this strategy can work for a restaurant that sells a burger, fries, and a beer, operating on a slim profit margin of 3% to 10%. By discounting or even giving away one of these items to encourage customers to sign up for a subscription, the restaurant can potentially boost its profits over time.

Example Scenario: The Free Beer Promotion

Imagine a restaurant that sells a beer for $6, which costs them $1 to produce. The gross profit on this beer is $5. However, instead of selling the beer for $6, the restaurant decides to give it away for free as a perk to encourage customers to sign up for a $5 per month subscription.

The business earns $2.50 per month ($30 per year) from each subscription.

Now, let's analyze the profit implications of this strategy if 100 customers take the offer and 50% of them maintain their subscription for a year. We'll compare this with the profit the restaurant would have made by simply selling 100 beers.

Profit Analysis: Beer Sales vs. Subscriptions

Here’s a breakdown of the profits and revenues from beer sales versus the subscription model over three years:

Beers / Memberships	Profit from Beer Sales - 1 Year	1 Year Subscription Revenue (100 x 50% X $2.50 x 12)	Subscription Profit 3 Years
100	$500	$1,500	$4,500
1,000	$5,000	$15,000	$45,000
10,000	$50,000	$150,000	$450,000

Key Insights:

1. Immediate Profit vs. Long-Term Gain: While the restaurant would make a quick $500 profit by selling 100 beers, it would generate $4,500 in profit over three years by converting 50% of those customers into subscribers. The subscription model generates 3X as much profit year one and 9X the profit over 3 years if 50% of the signups maintained their membership.

   
   

2. Scalability: As the number of memberships increases, the profit difference becomes even more significant. With 10,000 memberships, the subscription model yields a whopping $450,000 in profit over three years, compared to just $50,000 from beer sales.

   
   

3. No Cost of Goods on Subscription Revenue: Unlike beer sales, where profit is tied to the cost of goods, subscription revenue has no such direct costs. This makes the profit from subscriptions far more scalable and sustainable over time.

   
   

Conclusion

Using a low-cost product as a loss leader can be an effective way to drive customer sign-ups for a high-margin subscription service. In the example of the restaurant, giving away a $6 beer can lead to substantial long-term profits through a subscription model, especially as the number of members grows. This strategy not only boosts revenue but also fosters customer loyalty, ensuring a steady stream of income that can significantly outpace traditional sales methods.

By carefully analyzing and implementing such strategies, businesses can transform small losses into major gains, securing a more profitable and sustainable future. ​​