Kettle & Co: Does a ₹150 price cut actually pay?
Kettle & Co runs a single-format café in Pune's Hinjawadi belt. Last month it served 3,200 covers at an average bill of ₹160 per cover. Monthly fixed costs - rent, salaries, utilities and the POS licence - total ₹1,80,000. Ingredients, packaging and aggregator commission come to ₹85 per cover, which the owner treats as strictly variable. The café sits two minutes from a 4,000-seat tech park, and the 11 a.m. to 1 p.m. window is visibly under-used. The owner is therefore considering cutting the average bill to ₹150 to pull in the weekday office crowd. Her rough modelling says a 20% rise in covers is plausible at that price. Nothing else changes: same menu, same staffing, same ₹85 variable cost, same fixed cost. She holds ₹2,00,000 in cash reserve. A friend who runs a food truck has told her that any price cut which raises volume must raise profit, and she is inclined to sign a two-year rent-freeze agreement on the strength of that.
1. Compute the café's current monthly profit, its break-even volume at ₹160, and its profit at ₹150 assuming the 20% uplift. Does the cut improve profit?
Read the worked answer
At ₹160. Contribution per cover = 160 − 85 = ₹75. Profit = (3,200 × 75) − 1,80,000 = 2,40,000 − 1,80,000 = ₹60,000 per month. Break-even = 1,80,000 ÷ 75 = 2,400 covers, i.e. 75% of current volume.
At ₹150. Contribution per cover = 150 − 85 = ₹65. Covers at a 20% uplift = 3,840. Total contribution = 3,840 × 65 = ₹2,49,600. Profit = 2,49,600 − 1,80,000 = ₹69,600. New break-even = 1,80,000 ÷ 65 = 2,769.2, so 2,770 covers.
So yes, in the owner's own scenario profit rises by ₹9,600 (+16%). But the mechanism matters: contribution per cover falls 13.3% (75 to 65), so volume must rise by 75/65 − 1 = 15.4% merely to hold profit flat. The assumed 20% clears that bar by only about 4.6 percentage points, which is not a comfortable margin of error for a number nobody has tested.
2. The owner concludes that because profit rises by ₹9,600 the cut is a clear win. Test that conclusion against the downside: what uplift does she actually need, and what happens at a 10% uplift?
Read the worked answer
Uplift needed to match today's ₹60,000 = (1,80,000 + 60,000) ÷ 65 = 3,692.3, i.e. 3,693 covers, or +15.4%.
At a 10% uplift: 3,520 × 65 = ₹2,28,800, so profit = ₹48,800 - that is ₹11,200 below today, a fall of nearly 19%.
The decision therefore sits inside a narrow band: profit rises if the response exceeds 15.4% and falls if it does not, and the owner has no evidence beyond a guess. The friend's rule ('any price cut that raises volume must raise profit') is simply false - it holds only if the volume response exceeds the ratio of old to new contribution per unit. Two further points soften the risk but do not remove it: break-even at ₹150 is 2,770 covers, only 85% of the planned 3,840, so the café would still survive a disappointingly small uplift; and the uplift is being assumed for a time-poor lunch crowd with a short window, which is exactly the segment most likely to be insensitive to a ₹10 cut.
3. What should the owner actually do, and how should the rent-freeze offer be weighed against the price cut?
Read the worked answer
Separate the two decisions. The rent freeze is a certain, quantifiable gain (24 × monthly rent, whatever that is) that does not depend on customer behaviour; the price cut is a bet whose upside is ₹9,600 a month and whose downside is roughly −₹11,200 a month at plausible volumes. The first should not be signed on the strength of the second.
Test rather than reprice. The stated problem is an under-used daypart, not an over-priced menu. A four-week trial price of ₹150 restricted to 2 p.m.–4 p.m., with covers per hour and average bill tracked separately from the lunch peak, would cost very little and would produce the one number the model is missing. If the uplift turns out to be genuine, extend; if not, nothing has been given away on the main menu.
Rank the levers. Repricing is the least reliable route to profit here. Raising contribution per cover without touching the headline price (menu engineering, renegotiating packaging or aggregator commission below ₹85) or filling the dead window through local corporate tie-ups both improve profit without betting the whole margin on an untested elasticity. Do not capitalise a 20% assumption into a two-year commitment.