You are considering opening a new Muse Paintbar location. The one-time cost for construction and other start-up investments is $400,000. After that, you must pay annual rent, management, utilities, and other fixed costs of $200,000.

The average ticket price is $35; materials and variable labor costs are $6 per person. The average customer also spends an additional $17 on food and beverages; profit margins on these sales average 70%.

1. How many customer visits does the store need to generate per year to cover its annual fixed costs?
2. How many customer visits would the store need to generate over three years to both cover its annual fixed costs and pay back the start-up investments?

Suppose this Muse studio will have 40 seats and offer 10 sessions per week, year-round.

3. What average capacity utilization (percentage of available seats that get filled) would the studio need to maintain in order to achieve the three-year payback described above?

4. Thursday-Saturday evening sessions very frequently sell out. But attendance is usually weaker for weekend daytime sessions, and can be downright poor Monday and Tuesday. The business is also seasonal: great from November through April, but very weak in July and August. Given this, whats your gut impression about whether this Muse Paintbar studio will be financially successful? If you had to make the decision, would you go forward with this location?

Summer is upon us, and business at Muse is slow. To drum up business, you conduct a BOGO price promotion: one free ticket for each ticket purchased. Assume theres no change in your typical advertising costs, because youll advertise with a combination of email marketing and diverting ad spend. Assume also the same price and cost numbers from Q2 above.

Suppose that over the course of the promotional period you generate 1000 visits, which is 200 more than you would have expected had you not run the BOGO promotion. However, 300 of the tickets ended up being free.

1. Was the BOGO promotion profitable?

2. In evaluating the promotions profitability, you might have assumed that BOGO customers behave the same as regular-price customers. Are there reasons this assumption might be wrong? How so?

3. What are the potential long-run implications of price promotions like this? What might be done to manage the downside?