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Money / Pricing strategy

How to adequately cover penalty rates

The subject of penalty rates has been a hot topic in the news recently. Without wishing to wade into the political debate, it’s still worth looking at how a business owner should manage the situation.

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A business owner has a few choices when it comes to the effect penalty rates has on the profitability of their business.

One way is to compensate for the extra cost of running the business by charging a surcharge on days when penalty rates apply.  You regularly see a surcharge of 10 or 15% levied on café menus.  The sad fact though, is that this is nowhere near enough to compensate for the extra cost the café is incurring on that day. If this is the percentage used, the business owner will undoubtedly be operating at a loss on those days.

So what then is the correct amount of surcharge?

Industry benchmark data indicates that cafés spend approximately 28% (on average), of their sales revenue on employee wages.  Based on this benchmark, if those staff wages increase by 2.5 times (as occurs on a public holiday) then the café menu prices need to carry a surcharge of 34% to recoup the cost of the increased wages.  And this 34% surcharge only results in recouping the penalty rate cost of the wages and results in a nil profit for the café owner for the day.

"If you deliver a great service you should be able to charge a premium for it. And one way to justify this premium is what we call ‘making the invisible visible’."

As mentioned, most cafes only charge a 10-15% surcharge, or no surcharge at all on days they have to pay penalty rates. So only those lucky few cafes that either have significantly increased customer traffic or charge a higher surcharge will make ends meet for the day.

It’s critical in any business (not just cafes) to understand the correct price needed to be charged to not just cover costs, but to make a profit.  A ‘thumb suck’ can be a very costly way of calculating such a vital figure.

I know many business owners are reluctant to increase prices due to fear of losing customers.  We had an example recently with one of our clients who wasn’t charging enough for their product.  When we analysed the situation our question to the business owner was “do you have any close-by competition to worry about?”  Their answer was “No”.  A small price increase was recommended to our client who implemented it with absolutely no customer resistance at all.

Now obviously, if you have a café, chances are you do have close-by competition. But if you deliver a great service you should be able to charge a premium for it. And one way to justify this premium is what we call ‘making the invisible visible’.

In other words – let customers know why you’re the best at what you do.  Are your baristas the best trained in the area? Is your machine is the best maintained? Are your basic ingredients are the best quality? Does your venue have the best ambience?

If you’re able to communicate why you’re different and why you’re worth the premium you’re charging, then you should be able to go beyond simply covering costs on days you pay your staff penalty rates.

Do you operate a business subject to penalty rates? How do you stop those rates impacting on your profitability?

Sue Hirst

is the founder of CAD partners (also known as ‘CFO On-Call’), a team of Financial Controllers who can help business owners grow their business safely.

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