February 6, 2013 |

2010 November: A Pizza My Mind

By Dave Ostrander

2010 November: A Pizza My MindApproximately 50 years ago, Tom and James Monaghan bought a struggling pizzeria named DomiNick’s and made a splash on the Ypsilanti, Michigan, restaurant scene by delivering pizza — for free.




Or so customers thought. The Monaghans merely built the costs of delivery into their margins and quoted one price. With almost no competition for delivery, what later became Domino’s formula worked brilliantly for a while until others matched that service advantage. From then on, most customers believed “free delivery” was here forever.

That is until Saddam Hussein convinced us all otherwise in 1990. Back then he thought it would be cool to send the Iraqi army on a road trip to Kuwait and see if the rest of the world would notice that it was heavily armed. It did — especially the U.S., whose need for Middle East oil put its supply in a precarious position.

Gasoline prices soared and my delivery drivers freaked out. Big Dave’s supposedly free delivery was suddenly costing them, and they couldn’t afford it. The drivers held a meeting out behind the dumpster — to which I wasn’t invited — and they appointed a spokesman who very subtlety asked for more money.

I sympathized with them and promised to raise their run compensation from 50 to 75 cents per run. Since we were delivering about 4,000 pizzas a month, that meant I’d created out of thin air a $1,000 monthly expense. Ouch!

When I told my accountant to comb through every line item on my financials and find a grand in fat, he assured me those funds didn’t exist. When I said they had to be there, he said: “Well, Dave, it looks like you and your wife just financed a raise for the drivers.”

As I fretted over what to do, he asked, “What does it cost you to deliver a pizza?” I had no answer. So we crunched the numbers and discovered that every “free” delivery actually cost me $2.51. I dreaded what I knew he’d say next: “You have to charge for delivery.” I whined and told him he didn’t understand the pizza business. He agreed and told me, “You don’t understand the money business.”

Naturally, I feared customers would hate us for it and go elsewhere, but I had no choice other than to charge a buck per delivery. I experienced some pretty severe tongue lashings, threats of false advertising and bodily harm. Over a buck! I blamed it on Saddam Hussein and the gas crisis. Some accepted it, some didn’t. Some saved the dollar and drove in to pick up their orders. I came very close to caving in under the pressure, but held steadfast. Within 30 days, we dropped from about 4,000 deliveries a month to 3,000. That was scary, but just a couple months later we were back to normal. Long story short, we kept our delivery charge and gradually increased it over the years as needed.

Not everyone joined us, of course — especially large chains. It would take the brutal price slashing, 2-for-1s and 5-5-5 deals of the new millennium to crush margins so thin that most of the industry knew it had to flee the “free delivery” model.

By my calculations, it costs between $3 and $4 to deliver a pizza in 2010. Whether that’s tacked on as a fee, absorbed into the pizza price or spread between both changes with every operator. In addition to the added expense, the hassle factor of delivery created more than its share of grey hairs for me.

Either way, you cannot eat the cost of free delivery if you expect to make money. You might fool your customers into thinking you’re doing it for free, but you’ll never fool your accountant.?

Big Dave Ostrander owned a highly successful independent pizzeria before becoming a consultant, speaker and internationally sought-after trainer. He is a monthly contributor to Pizza Today and leads seminars on operational topics for the family of Pizza Expo tradeshows.