5 Key Takeaways from The Frozen Yogurt Industry Ep 467



In this informative session, the speaker, a successful entrepreneur, shares valuable insights from his research on the frozen yogurt industry—a venture he considered before opening his gym. He reveals that frozen yogurt stores, while generating substantial revenue, operate on slim margins due to high variable costs and franchise fees, which can consume a significant portion of profits. He emphasizes the importance of psychological strategies in maximizing sales, such as allowing customers to control their spending by weight, optimizing cup sizes to increase purchases, and arranging toppings in order of cost to the store. Additionally, he discusses the effectiveness of acquiring equipment from business foreclosures to reduce startup costs and the power of word-of-mouth and affiliate marketing over costly advertising methods. His personal experience and observations underscore the potential for success in any industry with the right approach, even in seemingly commoditized markets.

Summary Notes

Introduction to Frozen Yogurt Business

  • Speaker A considered starting a frozen yogurt store before opening a gym.
  • Frozen yogurt was booming in 2011-2012.
  • Speaker A conducted extensive research on the frozen yogurt industry.

"Frozen yogurt stores make two $100 a day selling 500 cups at 8oz each. And it was the business that I almost started instead of starting my gym. So I know a ton about it and I will tell you how it works."

The quote provides context on Speaker A's familiarity with the frozen yogurt business and sets the stage for the detailed insights that follow.

Revenue and Profitability

  • Frozen yogurt stores have an average annual revenue between $750,000 and $800,000.
  • Profit margins for these stores are between 10% and 15%.
  • The average Menchie's owner takes home $93,000 a year.

"They on average make between 750 and $800,000 a year. They run margins between ten and 15%. The average menchies owner for context makes $93,000 a year."

This quote outlines the general financial performance of frozen yogurt stores, highlighting revenue, profit margins, and owner income.

Misconceptions About Earnings

  • Speaker A addresses the misconception that high revenue directly translates to personal wealth.
  • Owning a frozen yogurt store involves various costs and is not as lucrative as one might assume.

"I thought 800,000 a year. That means I make 800,000 a year. I'm going to be rich, right? Doesn't really work that way."

The quote emphasizes the difference between gross revenue and net income, debunking the myth that high revenue equals high personal earnings.

Operational Costs and Challenges

  • Frozen yogurt stores face variable costs, such as the cost of goods sold.
  • Owners must manage perishable inventory, equipment maintenance, and retail leases.
  • Franchises typically take a significant portion of the revenue.

"You've got strawberries that are going bad. You've got machines that are breaking in the back. You've got hard cost of yogurt, you've got a retail lease that's nice, probably prominently located with good signage, good foot traffic, good actual traffic in front of it, ample parking."

This quote details the various operational challenges and costs involved in running a frozen yogurt store.

Franchise Structure and Economics

  • Franchises are designed to ensure owners earn enough to sustain the business and possibly open additional locations.
  • They aim to provide a return on capital that beats the stock market but not to make franchisees wealthy.
  • Franchises can offer savings on bulk purchases but may also upcharge on initial costs.

"Franchises will structure their fees such that they will get it. So you make just enough that you can keep going. And maybe if you're a good operator, open another location, but not so much that you're going to get rich on it."

The quote explains the financial strategy behind franchises, balancing the need for owner profitability with the franchisor's revenue goals.

Cost-Saving Strategies

  • Speaker A suggests using business foreclosure sites like rasmus.com to acquire equipment at a lower cost.
  • Franchises may not allow purchasing from foreclosure sites as they profit from selling new equipment.

"And what they do is it's a business foreclosure site. And so I got my first gym equipment from that foreclosure site for 13 grand."

The quote introduces an alternative method for acquiring business equipment, potentially reducing startup costs.

Product Economics

  • The average cup size is 8oz with a 75/25 split between yogurt and toppings.
  • Toppings are more expensive than yogurt, affecting profitability.
  • Yogurt has higher margins, which is where the business makes most of its profit.

"The average split between toppings and yogurt is 75 25. So 25% of people's weight is toppings. 75% is yogurt. It's best for the store owner to have as much yogurt as possible in the cup because the toppings are more expensive."

This quote discusses the cost structure of the product and the importance of the yogurt-to-toppings ratio for profit maximization.

Business Model and Profit Margins in the Frozen Yogurt Industry

  • The frozen yogurt industry operates on tight profit margins, requiring high sales volumes to be profitable.
  • A 50% margin business would need to allocate 20% of top-line revenue to cover all expenses excluding the cost of goods sold.
  • Selling 500 cups of yogurt a day at an eight-ounce serving size is an example of the sales volume needed to meet financial targets.

"So if you want to run a 50% margin business, for example, then you'd have to take 20% of your top line and pay every other bill."

This quote explains the financial requirements of running a profitable frozen yogurt business, emphasizing the need for strict cost management to maintain a 50% profit margin.

Industry Competition and Brand Differentiation

  • Many frozen yogurt stores are commoditized with little differentiation between brands like Menchie's, Yogurtland, and Golden Spoon.
  • The lack of a standout brand in the frozen yogurt industry is compared to the presence of a dominant brand like Chick-fil-A in the fast-food sector.
  • The opportunity exists to outcompete in any industry by offering a superior customer experience and building a strong brand.

"There is no chick fil a of the yogurt world, because if there were, they'd be dominating."

This quote highlights the absence of a dominant player in the frozen yogurt market, suggesting an opportunity for a brand to distinguish itself and achieve significant market share.

Customer Experience as a Competitive Advantage

  • A poor customer experience is common among frozen yogurt stores, with issues such as messy environments and inattentive staff.
  • Improving customer experience can be a simple yet effective strategy to outperform competitors and attract more business.
  • Excelling beyond the bottom 25% in terms of customer experience can lead to profitability.

"All you have to do is walk into any yogurt land and see the floors are sticky, the chairs are all over the place. The cups are a mess."

This quote illustrates the typical shortcomings in customer experience at frozen yogurt stores, suggesting that there is room for a business to excel by addressing these issues.

Pricing Strategy Innovations in the Frozen Yogurt Industry

  • Frozen yogurt shops have innovated by charging by weight rather than by cup size, giving consumers control over how much they spend.
  • Consumers feel accountable for the price they pay when they serve themselves, which can lead to higher satisfaction compared to fixed pricing.

"The reason psychologically, this is so important is that the consumer gets to pick how much they spend."

This quote explains the psychological impact of the pay-by-weight pricing model, which empowers consumers and can lead to a more positive perception of the purchase.

Sales Tactics and Consumer Behavior

  • Frozen yogurt stores have increased sales by offering larger cup sizes, which encourages consumers to serve themselves more yogurt.
  • The default options presented to consumers can significantly influence their purchasing decisions.
  • The order of toppings is strategically arranged to encourage consumption of high-margin items first, followed by more expensive, lower-margin items.

"When you give people a bigger cup, they will fill more of it because it is the projection of the expectation that they had."

This quote describes how consumer behavior can be influenced by the size of the serving container, leading to increased sales without direct upselling.

Marketing and Community Engagement

  • The podcast host encourages listeners to connect on LinkedIn to foster community engagement and listener interaction.
  • Engaging with the audience on social platforms can strengthen the relationship between content creators and their audience.

"Hey, mozanation, quick break. Just to let you know that we've been starting to post on LinkedIn and want to connect with you."

This quote is a call to action for listeners to engage with the podcast host on LinkedIn, highlighting the importance of community building in marketing strategies.

Networking and Community Engagement

  • Tagging relevant connections in social media posts is encouraged to foster networking.
  • The speaker offers gratitude ("all the love in the world") for such engagement.

"Here's anyone you think that we should be connected with, tag them in one of my or Layla's posts, and I will give you all the love in the world."

This quote emphasizes the importance of community engagement and networking on social media platforms, where tagging can lead to new connections and opportunities.

Cost and Pricing Insights

  • Demonstrating cost versus retail price through an experiment with Hershey syrup.
  • Comparing the price of bulk Hershey's to yogurt, highlighting similarities in pricing strategies.

"Now, if you really want to have a fun experiment, take one of the Hershey syrup things and just put it on the scale, and you can see what they're making from just selling that bottle."

The speaker suggests an experiment to understand profit margins by comparing the cost of Hershey syrup to its retail price, providing insights into pricing strategies.

Customer Acquisition Strategies

  • Successful stores focus on service, cleanliness, selection, and word of mouth.
  • Word of mouth and affiliate partnerships are key due to low average ticket items like yogurt cups.
  • Pay per click was once affordable but is now too costly for many businesses.

"Corporate noted that the number one way that they are able to get more customers, and the highest performing stores did so with better service, cleaner stores, more selection, and the most important one, word of mouth..."

This quote highlights the importance of word of mouth and quality service in customer acquisition, especially when products have low average prices.

Store Experience and Design

  • Intention to create an overwhelming selection and a memorable experience in-store.
  • Strategy to increase sales by making dispensers clunky to add more weight to the product.

"So I wanted to have floor to ceiling kind of candy see through experiences. So when someone walked in, they were overwhelmed with the appearance of selection, right."

The speaker describes their vision for a store designed to entice customers with an abundance of choices, aiming to enhance the customer experience and increase sales.

Sales and Marketing Tactics

  • Offering a wide selection encourages more consumption, as seen in buffet settings.
  • Plans to engage local universities and Greek life in competitions to drive sales.
  • Utilizing text message lists and strong incentives for customer retention and acquisition.

"And then my promotional effort, my plan was to go to the university, so I wanted to be close to colleges. And then I was going to partner with all of the fraternities and sororities and have competitions between them to see who could get the most yogurt..."

This quote outlines a marketing strategy focused on engaging local college communities through competitions to increase sales and brand loyalty.

Customer Psychology and Pricing Strategy

  • Allowing customers to control their spending can lead to higher consumption.
  • Directing attention to higher-margin items first maximizes profit.
  • Offering a wide selection without conflict increases purchase and consumption.

"Number one, when you have the option to give a customer the ability to pick their own pricing by usage, do it, because oftentimes people will blame themselves, not you, when they overuse or overspend."

This quote discusses the psychological aspect of pricing and consumption, where self-service models can lead to higher customer spending and reduced blame on the business.

Business Startup Advice

  • Learning from failed businesses can reduce startup costs.
  • Purchasing equipment from failed businesses at a lower cost is a strategic move for new entrepreneurs.

"Number four, if you are starting a business, unless it's something brand new and completely radical, there's likely somebody who started a business just like yours, who failed, and you can oftentimes buy all their stuff for ten cents or five cents on the dollar and dramatically decrease your startup cost."

The speaker advises new business owners to consider buying equipment from failed businesses to save on startup costs, underscoring the importance of strategic financial planning.

Acquisition Strategies

  • The speaker discusses strategies for acquiring customers without relying on paid advertising.
  • Referrals and affiliate marketing are highlighted as the two most profitable strategies.
  • Good products and a strong referral system are essential.
  • Encouraging customers to share their experiences can significantly boost growth.
  • Affiliates should be businesses or groups with the desired audience.
  • Providing strong incentives to affiliates can enhance the value of their offerings.
  • Systematizing viral and grassroots marketing efforts can make them duplicatable.

"Most strategies. It's very difficult to acquire customers with paid advertising profitably." "the two most profitable strategies for acquiring customers, beyond just creating content and creating a brand, which still is very difficult on a local level, is to get word of mouth, which is referrals."

The speaker emphasizes the difficulty of acquiring customers profitably through paid advertising and suggests that referrals and word of mouth are among the most profitable strategies, especially at a local level.

"And you have a strong referral system in place. And this is key. It's not just having a very good product, which is important, but reminding and encouraging people to share it." "As soon as we did that, we 20 xed the number of reviews that we were getting and our growth skyrocketed just because I asked."

The speaker underlines the importance of not only having a good product but also actively asking and reminding customers to share their experiences to boost referrals and growth.

"The second way is through affiliates, which means other businesses that have your other businesses or groups that have your desired audience." "If you give those people a strong incentive and you say, hey, just so you know, at your clothing store, I'll give them a free yogurt, all of a sudden you just enhance the value of what they're selling."

Affiliate marketing is presented as a method of leveraging other businesses or groups that already have the desired audience, by offering them incentives that add value to their own products or services.

Psychological Selling Tools

  • The speaker discusses the concept of the default option as a powerful psychological selling tool.
  • Changing the default option can significantly influence customer behavior.
  • The example of organ donor registration demonstrates the impact of default choices.
  • Default options are often unnoticed by customers but can lead to increased sales or participation.

"The power of the default option. So the fact that they went from removing the tiny cups to only giving large and bucket sized cups for yogurt encouraged people to use more yogurt themselves." "Many people just like organ donors, which by the way, it went from, I think it was like ten or 15% of people opting into being an organ donor, to getting 80% of people to become organ donors by simply saying, do you not want to be an organ donor? Versus do you want to be an organ donor?"

The speaker explains how the default option can encourage customers to consume more by altering their perception of what is normal or expected, as evidenced by the increase in organ donor registration when the default choice was changed.

Business Liquidation Sales

  • Business liquidation sales are presented as an opportunity to acquire equipment at a discount.
  • Motivated sellers who have lost money are likely to offer significant discounts.
  • Liquidation sales can be a strategic way to start a new business or expand an existing one.

"And that is a motivated seller, somebody who's lost all their money because they did a business, because they weren't watching the right YouTube videos, who's not part of Mozi nation, right?" "Liquidation sales is a great way to buy those equipment back."

The speaker suggests that finding motivated sellers who have experienced financial loss can provide an opportunity to purchase business equipment at a lower cost, which can be beneficial for starting or growing a business.

Personal Endorsement

  • The speaker shares a personal favorite frozen yogurt store, Orange Leaf.
  • The preference is based on flavor quality and attention to detail in product offerings.
  • The speaker's endorsement is unsponsored and based on personal experience.

"My favorite frozen yogurt chain is orange leaf. I believe that they have the best flavors." "The flavors themselves are decadent. They don't have all these weird fruit things like it's just like caramel, chocolate, peanut butter, you know what I mean? The good stuff."

The speaker provides a personal recommendation for Orange Leaf as a favorite frozen yogurt chain, praising the quality of flavors and the attention to detail in their dessert offerings, which align with the speaker's taste preferences.

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