$5 Footlongs: A Case Study in Cost of Goods Sold

Posted by Matt Reilly on 18 January, 2018

I remember seeing TV commercials for Subway’s “Five Dollar Footlong” sandwiches ten years ago. I could probably still sing the jingle too. Getting a footlong sub sandwich for five dollars (plus tax) was a good deal. Suffice it to say that I enjoyed splitting one of those sandwiches with various friends and family a few times over the years.

Imagine my surprise when I walked back into a Subway about a year ago, after a long hiatus from the sandwich franchise, and found out that the sub I ordered would cost me almost eight dollars.

“What?” I thought to myself. “What happened to the five dollar sandwich deal?”

Well, it didn’t take too long for me to realize that Subway had recently stopped the Five Dollar Footlong promotion. To be honest, I was disappointed. Everyone I know associates Subway with that promotional sandwich price, so hearing that it doesn’t exist any longer as I stood at the cash register was an instant let down.

But this story is taking an hopeful turn! Subway has announced that it will soon be re-launching the Five Dollar Footlong promotion. This sounds like a great way to get people back into the restaurant, a much needed jolt of marketing!

The people who own individual Subway locations, however, don’t think so highly of this return to form. The reason? In a few words: Cost of Goods Sold (CoGS).

What are CoGS? Well, the simple way to calculate this business metric is to add up the cost of all the inventory you sold throughout the year. So, if you started a coaster selling business and ordered a shipment of custom coasters from a manufacturer (5,000 coasters for $1 each), and sold 3,850 of them over the course of the year, then your CoGS for this year of business was $3,850. Although you paid an additional $1,150 for the original shipment of coasters, they are not counted toward your CoGS because you still own them as inventory.

Also worth noting: how much you actually sell each coaster for is irrelevant to this metric. All you need to know is how much you paid for the wholesale inventory, and how many you sold.

If your business involves some significant transformation of the raw inventory, especially if that involves labor, then calculating a useful CoGS number is more complex. For example, the CoGS for a sub shop will include not only the cost of the bread, sandwich fillings, condiments, and so on, but also the wages paid to sandwich makers, the cost of running, cleaning, and operating the ovens, fryers, and more.

The reason the Subway promotion ended in the first place was that franchisees couldn’t afford to run it anymore. The five dollars could no longer cover the cost of the sandwich materials, plus the labor and operating costs involved in making each sandwich. The profit on each sale was too small to sustain.

There’s no doubt that the original five dollar promotion drew a huge amount of business to Subway stores, but now that it is unsustainable, trying to reintroduce it is creating undue friction between the franchise and its individual locations.

That can be the danger of marketing around an excellent price point: if you can no longer afford to sell at that price, customers will see the higher prices as unreasonable, even if they are right in line with the normal market rate.

For my money, they best way to keep customers happy while also not bankrupting your business is to make your great deal a moving target. Don’t live and die on the hill of the “Five Dollar Footlong,” instead, make it obvious that this is simply a limited promotion, and then move on to the next promotion. That way, you can continuously reevaluate how profitable your promotional pricing is, and update your strategy to make sure your marketing lines up realistically with your Cost of Goods Sold.

Topics: Small Business Advice


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