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calculator1-300x262Since quite a while, the two beverage suppliers in Dubai (or “the few” in the UAE) are approaching the hotels for a so called “cash margin approach” when it comes to wine pricing. There are few reasons, why I am not a fan of their approach (not the approach overall).

  1. Both suppliers have quite high prices. One reason off course is the pretty high taxation of alcohol (as well as the method of taxation, as it takes the price of the beverage as basis) – but another reason is simply, that Dubai has a duopol and you simply don’t have options to buy your alcohol commercially anywhere else. Talking then about pricing seems just a bit… hypocrite.
  2. In their presentations, they are comparing several “pairs” of restaurants – their pricing and their sales – however even though the restaurants might have similar stats, you simply cannot compare individual restaurants. If it comes to statistics, the bigger the sample size, the more accurate – the smaller, the more inaccurate (or the creator can choose, what the statistic should proof – which isn’t an objective proof, due to obvious reasons).
  3. No analytical support or base. This is a bit more difficult to explain – but when I asked my contacts of the respective liquor company, if they could give me a function / formula to calculate the prices, they told me, that this is exactly the point, not to just blindly calculate it.
    I respectfully (but also full-heartedly) disagree! If you cannot solve a problem analytically, it is probably not based on an adequate business model! Off course I wouldn’t blindly follow a certain formula, but use it as a rough guideline.
    Rest assured that it is really a tough thing, to create a formula, I am not a math geek, and found out, that really nobody in my surrounding is. On the other hand I feel, that if a supplier support this approach, that they should also invest into a proper analytical approach.
  4. It is a risky business: owners and owning companies are looking at the bottom line as well as the cost. It is not necessary, that they are tightly controlling every figure, but in case, that this approach doesn’t work (basically wine sales stay stagnant at lower prices – that means lower revenue and far higher cost), they won’t be very happy (rather the opposite). This is a high risk to take.

So – as said, it is not so much the concept I am against – it is an approach, you do have in a lot of countries and hotels. It is rather the execution, which leaves too many questions unanswered. When I was in hotel school, we learned to use a “mixed calculation” for beverage items (cheaper products will have a higher margin = a lower cost and more expensive items will have a lower margin = higher cost), which is similar to the cash margin approach – only that it is rather understated and doesn’t take “its mouth too full”.
Unfortunately we used “ranges” of prices and not a more complex (but more accurate) formula.

Because if it is the said cash margin, which should improve sales, you would also need to analyze the benefits and should have an analytical base – an app would be really cool!

What do you think? Would you agree? Do you have a formula for a mixed-calculation?
Please comment below!