The Economics of Generosity

There are obvious examples at both ends of the scale: On one side, fast food restaurants and busy commercial hospitality enterprises survive on high turnover (of goods, of staff, of customers), and thereby need only to make a buck or two of profit per serve. Many immigrant-run businesses have used low pricing for decades as a way to bring in customers and provide value – and a taste of home – to their own communities. On the other extreme, fine-dining establishments and craft cocktail bars will serve just a handful of customers per day, but bills will run into the hundreds or thousands of dollars, and margins on cost of goods are high.

Most venues fall somewhere in between. Lacking the economies of scale that benefit large corporate hospitality groups and chains, but well short of the pointy-end, $500-per-head range, the balance between profit margin and turnover is a hard one to strike. In today’s economic climate of lower consumption (especially on high-margin booze) and general financial anxiety, finding that balance is harder than ever, especially for independent hospitality operators. And while $25 for a cocktail or a glass of decent wine is pretty standard these days, we can’t keep jacking up prices indefinitely – the market simply won’t sustain it.

As such, more independent and high-quality hospo businesses like Frenchie are turning to lower-margin options, offering generosity, and hopefully volume, over high price and high margin.

Kate Hoskin, National Sales Manager for craft spirits producer Melbourne Gin Company, worked with Frenchie to make their martini make sense. She explains the mathematics of generosity by saying, “A common thought bubble in spirits sales circles is ‘you can’t bank GP [gross profit]’. If you make 82% GP on a cocktail, but only sell two per night, how is that better than selling 100 cocktails per night at 70 or 75% GP?” Plus, she says, “the perception of being generous, especially in trying times, is going to benefit a venue's reputation.”

At Frenchie, Hoskin says, “the buzz in the place is incredible, and it feels like ordering there is really care-free.” She sees this trend starting to gain traction elsewhere, too. “Rooftop Bar currently has four different $16 cocktails on their menu,” she says.

In Carlton, Dani and Oska Whitehart recently opened a more casual, faster paced outlet next door to their much-loved cocktail venue Bar Bellamy. At Melita Next Door, food orders are self taken by marking off boxes on a small paper menu that also acts as your docket for the kitchen, and drinks are all served directly from freezers, fridges and taps, no mixology required (at least not during service). It’s also cheaper than Bellamy, with most food items and drinks sitting well under the average price of Melitta’s older sibling. 

“We decided before we opened the second venue that the key thing for Melitta was accessibility for people that might see a bar like Bellamy as either intimidating or expensive,” says Oska. “We felt like we were missing a big part of our local community simply because the COGS [cost of goods sold] at a venue like Bellamy are quite high. We also saw an opportunity for growth; to scale what we do by looking at efficiencies and buying power,” he says. 

This casual, fast-paced offering has helped them find a different customer base, too. “The downside has been that there is not that same reliability on spend per head,” he says, “and we do need to have the place pumping to have it make financial sense.” 

They maintain the sustainability of the model, Davis says, by being flexible and keeping on top of what’s working and what’s not. “Some items we don’t make money on, but we keep them to bring people in, and with lots of approachable price points people end up spending more because they’re getting great value,” she says. Times New Roman also uses QR codes on the tables for ordering to keep staffing costs low. Doing so, Davis says, comes with a fair amount of negative feedback, but it’s one of the only ways they can keep their prices so low. “Split bills and trying to figure out who’s paying, trying to get the waiter’s attention just to get another drink – that’s all in the past. I would love it if people would stop being so negative about the humble QR code,” she says.

Oliver Brown is the CEO of Big Easy Group, a family of successful hospitality businesses in Adelaide, many of which have had to adapt and change with the economic and social uncertainty of the last decade. He’s recently started posting videos on Instagram with advice for small business owners, sharing some of the wisdom he’s learned the hard way. 

We asked Brown his thoughts on pricing strategy based on ten years of running successful venues. “Here's the thing most people miss,” he says. “Cost of goods is your only truly fixed cost as a percentage. Sell ten steaks or 1,000 — your COGS percentage stays the same. But every single other cost is dynamic. When volume goes up, all your other costs like rent, overheads and wages all shrink as a percentage. So you can run higher COGS and still hit your profit target if the volume is there to support it.”

But high-volume, low profit isn’t a game everyone can play, he cautions. “The moment your 'irresistible offer’ becomes the industry norm, it becomes a race to the bottom,” he says. “Worse, you've built a business model with zero resilience. If you drop from 100% to 80% capacity, the whole model collapses on you; there's just no buffer.” 

Brown suggests a balance can be achieved by using pricing as a short-term lever to drive interest and volume. “I love volume pricing as a promotional tool,” he says. “Making premium things like champagne accessible or driving covers for a specific night lets you bank dollars even when you can't bank margin.”