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Recently, I was chatting with a few college students planning for a big event on their campus. All the discussion centered around how much they would be able to charge for admission and a grudging recognition that substantial costs would be incurred. Their big question: where do we start in analyzing this problem? In my not so humble opinion, no more practical application of business knowledge exists than solving a simple ‘breakeven analysis’. The purpose is to determine how many folks need to attend — paying a certain ticket price — in order to ‘break even’ and cover our costs … or how many tickets need to be purchased before we begin to make money? All too often, I have seen where good intentions have lead nice folks to sustain incredible losses, when only minor changes would have turned frowns to smiles. Einstein said that the best way to learn is by example, so allow me to tell a story familar to many of my former students:
Our first high school class reunion at 10 years
Laura and I attended the first meeting of our reunion committee oh so many years ago and it was fun getting together. No one wanted to get ‘hung’ with a huge bill if the costs exceeded the revenue , so naturally there was much discussion on pricing of the tickets. I suggested that we break the discussion into three parts:
(REVENUE) TICKET PRICING
I thought, Let’s find out what our former high school classmates would pay to attend a reunion and try and see if we could get an estimated head count and obtain a tentative verbal commitment. We would also discuss possible locations and time of year considerations that might make the reunion more enticing. A ball park on pricing would be helpful.
ADDITIONAL REVENUE GENERATORS
Often times, you will find ways to generate funds without totally depending on ticket sales and this might include: simple donations, selling advertising in your reunion book or splitting the bar precedes with a restaurant or hotel that wants your business.
FIXED COSTS
There were a large number of costs that you will incur whether one person shows up or hundreds. These types of costs are called ‘fixed’ and you need to figure out how to underwrite them in order to move forward. Some of the cost considerations were things like: choice of band, location rent, security, decorations, printing, invitations, name tags, souvenirs and anything we might likely be stuck with if it all folded like a wet taco. We knew we had to keep an eye on this one as its costs were mostly inescapable!
VARIABLE COSTS
Variable costs ‘vary’ with the number of folks who attend. The best example of this in a reunion is food. Outside of a small fixed portion ( guaranteed minimum number of meals to be prepared or total food to be purchased), these types of costs influence ticket pricing directly… they push the ticket price up the fewer you anticipate coming.
REVENUE (total ticket sales) – (FIXED COSTS + VARIABLE COSTS) = ZERO
A break even analysis is basically that. It answers the simple question of how many tickets do we need to sell in order to cover our costs? Any tickets sold above that amount can be used to cover unexpected costs which always occur and begin funding for future reunions.
OUR RESULTS
Well, we had quite a hit. Who wouldn’t have had fun? Wooden dance floor, live band, open bar, free beer and wine all on the beach in Santa Monica! Everyone seemed happy and the our breakeven was set low enough to ensure no one on the committee would get ‘stuck with the bill.’ We had enough left over to take the entire team out to dinner and put plenty aside to get the next reunion started. The funds never made it to the next committee… but that — as they say — is another story.
I have used this example in many classes I have taught over the years, often telling this story on their first day. In cost, managerial, or financial accounting, this ‘case study’ brings to young students the practical application of what they are learning to their real lives. I remember an older student taking a copy of this to help plan his own 10 year high school reunion. My marketing students like to integrate costs considerations into their pricing decisions for positioning and competitive reasons and this works for them as well.
Few examples have students found as fun or as relevant.