My upcoming book, Breakthrough Marketing Secrets, which I’m writing while you watch on this site and in my daily emails!
An old rule of direct marketing: 40% of your results are generated by the audience you choose to market to, 40% by the offer you make, and only 20% by copy and creative.
Well Rainmaker, knowing this has been a huge part of my success as a “copywriter.” Because when I help clients get the list and offer right, my copy can perform far better.
Today’s lesson is very much in that vein…
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One of the most In the mid 1970s, McDonald’s brought in some marketing number crunchers. They tore into the numbers of one particular franchise owner’s 10 restaurants. They did an analysis on the comparative sales of all the different items on the menu. And they found an anomaly.
You see, French fries were one of McDonald’s most popular menu items. And yet, on average, there were 200 customers every day at every McDonald’s location that did not order French fries.
Since French fries were so popular, and would compliment nearly any other order, they wondered if there was anything that could be done to increase sales.
The phrase that changed an industry was born… “Would you like fries with that?”
Cashiers would now ask it after every sandwich order. A minor change, with major implications.
Suddenly, half the people who hadn’t been ordering fries, were. This franchisee, across ten locations, started selling 100 more orders of fries per day, at $.60 apiece. Only $60 per day, per location, but the total for the year was $21,840. Across all 10 locations, it was nearly a quarter of a million dollars difference — $218,840 in increased sales.
The test was — obviously — a success. McDonald’s rolled it out across all franchises. Before long, they applied the same principle to meals. If someone is going to come in for a meal, why not offer it as a single menu item?
Again, a minor change… “Would you like that in a value meal?”
Major implications. Today, a Quarter Pounder with Cheese runs about $2.29, according to a menu I found online (I haven’t actually been in years). A Quarter Pounder with Cheese meal though, $3.99.
That’s only 75% more revenue, but you can bet that the profit on the soda and fries are substantially higher than the profit on the burger. The value meal probably raises per-diner profit by 100% or more.
And what happens when the customer “Super-Sizes it”? (Another minor question with major implications.) The price goes up to $5.99 — 161% more revenue than the sandwich alone, and likely a good 300-500% higher profits!
When you let a customer order a la carte they will spend less than they would otherwise, and they won’t get everything they want.
This is very common as a business grows. Maybe the business starts with a small handful of independent products. Each is sufficient to fill the customer’s need on its own. Each operates as a “choose this or that” option, and there’s very little overlap in what a customer would buy today. In this scenario, offering each product separately only makes sense.
What happens next is where many businesses start to fall short of their potential. If you’re doing a good job building your business and communicating with your customers, you’re looking for other products and services the customer might want. As soon as you fulfill their Need A, they suddenly have Needs B, C, and D. And so you build out products or services to fulfill those needs, too.
Assuming the customer will come to you if they want your help with Needs B, C, and D, you offer those as independent “menu” items, like McDonald’s offered fries and drinks separate from burgers or other sandwiches.
That is, in most cases, and erroneous assumption. There will be at least a portion of your customer base that may be perfectly happy with how you fulfill Need A, but that will not naturally make the connection that you should come to them for Needs B, C, and D.
It’s up to you to put the next step, and the next, and the next in front of them. It’s up to you to make the next offer.
In many businesses, this takes place after the first transaction, and that makes sense. They fulfill Need A, they recognize Need B, and you come back to them with an offer to fulfill Need B. And so the process goes, with them buying as much as is appropriate.
However, in McDonald’s case, it didn’t make sense to wait. You don’t offer someone fries and a drink after they’ve eaten the hamburger. So instead, they offered them after they’d ordered it.
This works well, and is implemented in online marketing via the one-click upsell. Your customer places an order through your online checkout process. And as soon as the order processes, they get a “thank you” page, that both thanks them for their order of the product that will fulfill Need A, and immediately offers them the second product to fulfill Need B as a natural next step. With the right ecommerce software, they can click a button once and get the second product added to their order.
However, what McDonald’s learned and what I’ve seen work well elsewhere is package or bundled deals.
How to use packaging to multiply your profits.
Long before I started in marketing at the IT training company, the owner had started selling the training in “Exam Packs.” To understand this, it helps to know how IT certifications work.
Most certifications are not achieved through a single exam. In fact, some of the big certifications require as many as seven exams before you are certified. And here’s what makes it really complicated. Of these seven exams, maybe four are standard to everyone who gets the certification. The rest are electives, meaning you might choose three out of nine other test options.
Thinking that he wanted to let people pick and choose their path to certification (and not force anything on them), the owner of this IT training business sold each Exam Pack separately, usually for $99 to $199. This mean you’d select each exam separately, based on what you’d come up with for the exams you wanted to take.
The marketing guy who came in before me (who I worked under after he became the President of the company) thought that he’d like to make the decision making process easier for the customers.
So in addition to offering each exam independently, he came up with a collection of “standard” exams that made up a sufficient set of Exam Packs that would give you the certification. This way, instead of deciding on seven separate exams on your own, and buying each one separately, you could place one order for seven Exam Packs in a bundle, and have a clear path to certification.
This had an enormous impact.
What had happened when customers were left to decide on their own, was they’d get training for two or three exam packs, and fall off. Some would come back for all of the exams, but they were the exception, not the rule.
This was actually doing the customers a disservice. Because if the customer had a clear set of exams they cold take — and all the training they needed — to get certification, they simply had to go through each set of training and the corresponding exam.
Buy buying all the exams at once, the customer was more invested in the certification, and they had all the resources they needed to actually finish their certification. In effect, by letting the customer pick and choose Exam Packs one-by-one, the company had been doing them a disservice by making it harder and less likely that they’d actually finish the certification.
Although I wasn’t there for that part of the growth, my understanding is that this roughly caused the company to double, within a couple years. Whereas the average customer value was below $200 before these bundles were implemented, it shot up to around $400 after. This meant every customer brought through the door was, on average, worth roughly 2X what they’d been worth when allowed to choose which exams they’d take on their own.
And it’s worth noting that this is very different from McDonald’s. Where at McDonald’s they’re going to sit down and consume the burger with the fries and soft drink, with this IT training company the exams are taken in succession and typically not in one sitting. And yet packaging them together to sell at the same time was good for everybody.
One more thought…
Transaction size is the hidden multiplier in bundling and packaging products.
Every single order you process has an incremental cost. There is the incremental cost of marketing and selling that brings the customer through the door. There is the incremental cost of processing, fulfillment, and customer service for fulfilling on the order. There are incremental costs associated with technology, processing the transaction, and other aspects.
While any one of these may be relatively small, they do add up. And in most cases, one order for $1000 has a much lower incremental cost than 10 orders for $100 each. That means your margin and profits on large orders is almost always bigger than on smaller orders.
Not only that, products befitting larger transaction sizes are not necessarily harder to sell than smaller transaction sizes. If you could put the same effort into selling a $30 or a $3,000 product, which would you choose? When put this way, the answer is obvious.
Plus, customers who spend more are usually better customers. Typically customers who spend the least and buy on price are the most vocal critics and complainers, and have the biggest demands on you and your staff. Whereas the customers that spend the most are — in most cases — happy to give you your space to deliver on your promises, and find better things to do with their time than complain about every little detail.
It’s also a lot easier to get to $1 million $3,000 at a time than it is $30 at a time. Even more so $30,000 at a time, or $300,000 at a time. And if you are able to come up with a package or offer of products and services that justify this price tag, you’ll likely find it to be cheaper and easier to fulfill on than the equivalent value of much smaller transactions.
But wait, there’s more! The additional margin in higher-priced products can go into creating bigger and better customer experiences. While some of the additional margin can go to your bottom line, you can also create a buying experience that your lower-priced competitors can’t afford to match. Your customers will be more satisfied, and will refer more customers just like them.
The benefits of higher prices are many-dimensional.
Even the folks at McDonald’s figured this out, long before they figured out the value meal. You may assume McDonald’s makes their money selling burgers and fries. But that’s not the whole picture. In fact, 80% of McDonald’s international stores are independently-owned franchises. The number is 90% in the US. There’s only a very small chance that any given McDonald’s is owned by the parent company.
Today, a McDonald’s franchise fee is $45,000, plus 4% of gross sales (plus rent, as the real estate is bought by the parent company and leased back to the franchisee). That’s one sale for the McDonald’s parent corporation, and a huge portion of that is profit. Compare that to the actual cost of opening up another location ($1 million plus) to have to make up their initial investment one $5.99 value meal at a time.
McDonald’s long ago figured out that it was far easier and more profitable to package up the McDonald’s business model and sell it to entrepreneurs than it was to expand on their own. This is the entire franchise model. And it’s yet another brilliant example of how you can package and sell your products and services.
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Yours for bigger breakthroughs,
Roy Furr
Editor, Breakthrough Marketing Secrets
