At its most basic level, business is about:
- Taking inputs,
- Producing something of value with them,
- And then selling the outputs for more than they cost to make.
Few businesses do this more conspicuously than Coinstar. Their gross profit margin is visible to everyone: 8.9%. Feed $100 into their machine, and it will hand you back $91.10. But your coins are now counted and sorted. Was it a good deal? I guess it all depends on how much you value your time and how long it takes you to roll quarters, dimes, nickels, and pennies.
Some customers apparently don’t like this much transparency in their business dealings. Coinstar has received its share of bad publicity due to the 8.9% fee, which is completely irrational. There are plenty of companies that don’t share their gross margins, and customers love them. Ever buy anything at full retail price from Nordstrom or another clothing retailer? It was probably marked up 50%. Yet no backlash, because it’s not as transparent as trading one amount of money for a smaller amount of money.
I imagine Coinstar’s openness could also invite competition. What if a new, more efficient company (CoinSuperstar?) came out with a new machine that would count your coins for a fee of 8.8%? It reminds me from this scene from There’s Something About Mary:
In an effort to perhaps improve their image, Coinstar now offers FREE coin counting when you redeem your coins for gift cards from one of their retail partners. This is a much more interesting business!
The partner stores, which include Amazon, Old Navy, Borders, and Starbucks, must know their average “loss ratio” on each gift card sold. Loss ratio is a term from the insurance industry — if a policy costs $100 and pays out $75 in claims, it had a loss ratio of 75%. For the insurer, the lower the loss ratio the better.
In gift cards, unlike insurance, the risk is capped at 100% — the payout will never exceed the value of the card. But this new Coinstar option tells us the redemption rate doesn’t reach 100% — because they wouldn’t really be doing it for free. Let’s say for every $100 in Starbucks gift cards sold, perhaps only $90 ever gets redeemed; a “loss ratio” of 90%. We’ve heard about the millions of dollars in gift cards that goes unspent each year, which adds up to extra profit margin for these retailers. Plus, the stores will make money on whatever portion does get redeemed because it will be just like a normal purchase. It’s all very smart; stores increasing their sales and sharing an unknown percentage of their margins with Coinstar.
And my guess is that it’s greater than 8.9%. But it’s a win-win, because the customer doesn’t see the coin-counting fee any more. They just get hit with it later when they don’t redeem the full gift card value. Love it.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
Tags: business
