The movie theater business shows how the source of profit may come from a completely different thing on the menu than what customers showed up for in the first place. This is an important nuance to understand for eCommerce, where there are non-obvious opportunities to create value, especially in service businesses.
Movie House Economics
I’m just going to run over to the movie theater to pick up a large soda!
- Nobody Ever
The price of concessions would put movie theaters out of business if that was all they sold. At the same time, theaters do not actually stay in business by selling movie tickets. Ticket revenues mostly pay for overhead of the theater itself; meanwhile popcorn and soda are more than 90% gross profit . (We’ll leave out pre-feature advertising revenue for now.) Movie goers are seemingly happy (or at least willing) to fork over a hefty premium for concessions, but only to enhance the experience at the time of the feature. This means that the reason people go to the theater, and the reason that the theater makes a profit are not necessarily the same thing. The movie itself delivers most of the value, but the concessions drive most of the profit. (This is similar to the concept of loss-leading products in grocery stores.)
Thinking Like a Movie House Operator
So how does this relate to your business? You you may think of a product or service in these terms: selling price or revenue, subtract costs, and you have gross profit; subtract other overhead and you have your net profit. But what if, in a relative sense, you thought of your flagship offering as a “loss leader” (even if you don’t actually lose money)? It would mean that higher margin services that might not otherwise sell on their own could be profitable if they flanked your flagship service...like popcorn and soda.* Just like the theater could never sell $7 sodas without also selling movie tickets, your business might not be able to sell an eCommerce product as it’s main offering. But as a complementary product or service, it can be incredibly valuable.
Complementing Services with eCommerce Products
Sometimes you just can’t sell your core flagship service directly online. But in almost all industries a vendor can create something complementary to their main offering. eCommerce allows for gathering more customer insight and broader value creation around a current or future flagship offering. Even if you primarily deal in premium, high value products or services, selling an “appetizer”or “step one” eCommerce product complement to your offerings gives you a great deal of insight into the real problems you can solve for them. Some of those problems are not what you think because customers won’t or can’t articulate them. You can monitor visitor traffic as they read about your services and let them “vote with their footprints”, read the stories of other customers, or access to product information, but most importantly, give them a way to “vote with their dollars”. Traffic is one thing, but sales is the real barometer because the decision to spend real dollars undergoes a great deal more scrutiny than the decision to spend minutes reading online. Allowing the transaction to take place online also gives you a relatively fast way to test and iterate. An eCommerce product in isolation would be harder to market, but as a preliminary step to your flagship offering, and since it can be delivered at near-zero marginal cost, you will be leveraging the phenomenon of “movie house economics”.
eCommerce Products as Preliminary Services and Client Qualification
Say, for example, you are a manufacturing consultant, and you routinely see clients making a critical mistake in their process. If clients need to clean up their act or reach some basic level of competence in your area of expertise before you can deliver your higher-value services, then this step is a bottleneck to your business. By providing clients with a turnkey training process to fix this problem, you can accomplish three things: (1) establish trust with a low-risk purchase, (2) pre-qualify clients for your higher-value services, (3) extend the training as credit toward your future services (since they will be a more efficient and valuable client going forward), and (4) create revenue with near-zero marginal cost, assuming your training process is procured through eCommerce tools. Clients in this market might never otherwise buy the training (or even find it) if you did not also provide the high-value services. Knowing that the low-risk offering is the tip of the iceberg of your services establishes it as a step of progress toward a larger goal. For new prospects, this also allows you to establish trust and build understanding of your brand in the mind of your prospect, without much risk taken on either side. The risk is mitigated for you as well because if a prospect invokes an atypical amount of pain for you to sell or support a “step one” product, you can expect that pain to scale up for your flagship offering, and decide whether to proceed.
What's the Risk?
Is making the investment in an eCommerce product risky? Like an early movie house investing in it’s first popcorn machine, it might feel a bit risky to spend the time and effort to create something different from your core offering. But given you already have a valuable service to offer customers, and given it would incur near-zero marginal cost, creating a complementary eCommerce product could be a very profitable strategy.
Do you run a serviced-based business? Consider using an eCommerce product to pre-qualify or provide additional value to clients. If this piques your interest, let’s talk.
*Note that we are not suggesting exorbitant markup of products; rather pointing out that customers value complementary products differently than those same products in isolation.