In 2015, Tim Hortons launched a new line of Nutella infused products, including a donut, croissant, cookie and fill. These four items are premium priced to most current Tim Hortons offerings, ranging from a 24% to 52% price premium.
From a consumer standpoint, the added value of Nutella and chopped hazelnuts on a regular donut for an extra fifty cents is completely logical. From a revenue manager’s standpoint, the new product introduction is a textbook example of mix management. Consider the following cost structure estimates for both regular and Nutella donuts based on similar products within the food service industry.
For every Nutella donut sold the revenue increases by fifty cents, or 50% whereas profit increases by thirty-one cents or 37% as compared to a regular donut. Not only has Tim Hortons created value for their consumers, but they have been able to capitalize on that value by charging a price that drives profitability.
Granted, not every Tim Hortons consumer is going to switch from the standard donut offerings to the Nutella offering, but the option can still drive significant revenue and profit improvement. If 3% of buyers switch, the mix effect would result in a 1.5% increase in overall donut revenue and 1.1% increase in profit.
As a revenue management consultant, I find that Clients often feel that uniform price increases are the only way to drive the bottom line. Although important to monitor and evaluate on a regular basis, general price increases are often short-term solutions. Mix management is the simple concept of shifting product/service volume to drive incremental revenue and profit to the bottom line in a sustainable manner. The attractive consequence of mix management is that it can provide the bottom line benefits of a price increase without having to adjust the price.
Managing Mix Takes 2 Main Forms
1. Closing existing negative mix leakages
Closing existing mix leakage is a simple concept in theory but is difficult to diagnose. Discontinuing negative mix pack sizes, formats and offerings are all common examples of closing gaps. However, difficulties often arise when calculating mix, especially in businesses with geographic, brand and product complexity. Systems, processes and management need to be aligned to create a sustainable mix management capability to identify negative mix leakage and close gaps.
2. Driving positive mix initiatives
Driving positive mix initiatives is somewhat easier then closing gaps. It takes two main forms, specifically:
- Adjusting price gaps
- Innovation (product or package)
Adjusting price gaps requires a comprehensive understanding of how consumers trade between products and prices. Most often supported by elasticity and consumer choice models, the process adjusts price gaps between products and brands to maximize revenue and profit based on how consumers switch between options. Innovation comes in the form of new products or packages that drive positive mix effects, much like Nutella donuts for Tim Hortons. What is important to note is that percent margin is not always the best indicator of positive mix. Notice that Nutella donuts only have a 77% margin as compared to an 85% margin for regular donuts, however they drive significant mix improvements in profit per donut.
Mix management is complicated! The simple Nutella example does not account for regional, customer or brand mix. But mix is also a significant driver of sustainable revenue and profitability growth. It should not be feared, but rather embraced and supported by routine, process and tools. Tim Hortons is a prime example of how small mix management initiatives can drive impactful changes to the bottom line.
ABOUT THE AUTHOR Avy Punwasee is a Partner at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Avy at [email protected]