More than a few years ago, I found myself doing the same thing at the age of forty that I was doing at the age of ten – delivering newspapers. However, instead of the Herald and Globe on my battered old Schwin bike, I was distributing The Cambridge Express in my battered old Ford Maverick.
Succumbing to the siren call of entrepreneurship, I had been talked into starting up a free-circulation weekly competitor to the Boston Phoenix in order to market Cambridge’s small retailers to its rising Yuppie class. With a staff of seven, I was editor and publisher (and circulation manager, as it turned out); my partner handled production and ad sales.
Unfortunately, the early-Reagan recession hit just as we were beginning to get some traction with the business, and the retailers that we had counted on for $50-100/week in advertising were hard-pressed to give us$10. Unfortunately, too, the Newton and Brookline TAB, which had had two years’ head start, saw the same opportunity that we did. With much greater resources they expanded to Cambridge within a month of our first edition.
So we were bleeding. My partner, experienced in the publishing industry, said, “Look – we have enough advertisers like the Coop and the Cambridge Trust paying rate- card prices. As long as we cover our variable costs and fill out the advertising hole in the paper, we’ll be fine with whatever we can get from Guidi’s Pizzeria and others.”
Well, $20 for an eighth of a page when we were supposed to be getting $100 just didn’t cut it. True, printing 20,000 copies of each page of the paper did cost about $160, so $20theoretically covered its portion of our printing bill. But each page included some non-revenue producing editorial copy, and revenue from each ad was supposed to contribute to production overhead, to editorial and circulation expense, and especially to Selling, General, and Administrative (SG&A) expense.
“For the first five years in the publishing industry, “said my partner, ” success is measured by survival. You survive, you’re a success. Then the advertisers start coming to you instead of vice-versa.”
Applied to the Express , that meant: we’ll give away the ads, but we’ll make it up in volume.
Somehow that didn’t ring true. But our need for revenue- any revenue – was too great. The TAB kept underpricing its ads, so we did too. We had the better product, but they had the deeper pockets. Our prices covered our direct costs and some of the overhead; their prices covered their direct costs, but their overhead was split three ways – in Newton, Brookline, and Cambridge -so their unit costs were lower. They were the ones that made it up in volume, and blew us out of the water in thirty short, painful months.
The difficult lessons of that experience continue to provide some of the navigational aids for the Howe’s Bayou swamp buggy:
- Pricing below full cost is like getting hung up on the root of a banyan tree – you rev the engine, but you don’t make much headway.
- The cost of a can of gas may get you to the other side of the swamp, but it doesn’t pay for the boat, the trailer, the insurance – all of the full costs that contribute to the cost of a ride.
- If you’re sure you’ve covered all of your costs with your fee for the first three passengers, then the fourth can ride for nothing, but there’s a lot of potential profit in that fourth seat.
- Once the word gets around that buggy rides are going for$10, good luck getting your price back up to $20 to cover your full costs.
Alligator Bites
In the promising early days of The Cambridge Express (see main article), Guidi’s Pizzeria was our staff hang-out.Guidi even bought some ads in the paper, once we offered him a discount. Trouble was, every time that I went by his shop to collect on his invoice, he’d put me off.
“How about I send you pizza for the whole office?” he’d say.”Have a pizza party on Friday afternoon – it’s good for morale.”
Finally I relented, figuring it was the only way that I was going to collect. It was good for morale, but it was an expensive party – Guidi credited his advertising invoice with the full price for the pizzas, even though his direct cost couldn’t have been more than 20 cents on the dollar.
Guidi, it turned out, had an excellent handle on his cost equation, and an even better handle on managing his creditors.
On an affordable retainer basis, FM serves as the part-time controller and senior financial manager for multiple clients, leading them to profitability and positivecash flow.
The goal is for the organization to outgrow Financial Manager’s services, at which time FM will take the lead in identifying and hiring the right full-time financial person for the firm, and effect a smooth transition to his or her management.
Draining the Swamp
Is there really such a thing as “making it up in volume“?
Consider a manufacturer of the classic widget:
- The initial forecast for the month is that you will produce and sell 100 units, incurring the following costs:
Labor $8,000 Materials 12,000 Mfg. Overhead 10,000 S,G, & A Exp. 20,000 Total $50,000 Cost per unit for 100: $500
- The Sales Department then reports that there’s an additional order for 400 units, but the customer wants a volume discount. The cost for labor and materials goes up in proportion to the increased volume, but the overhead increases only moderately, changing the cost structure to the following:
Labor $40,000 Materials 60,000 Mfg. Overhead 12,000 S, G, & A 30,000 Total $142,000 Cost per unit for 500: $284
- The Question:
- After adding 10% for profit, do you price at $550or for$312, or somewhere in between?
- The Answer:
- Assess your market to determine the perceived value of your product or service.
- Then assess the elasticity of demand – how sensitive is the price: volume relationship?
- Estimate your sales potential at each of several price levels.
- Calculate your unit costs, as above, for each of those levels.
- Determine your profit by the difference between total revenues and total costs.
- Set your price at the level that maximizes your profit and then…
GET OUT THERE AND SELL !!