Therefore, the club couldn’t increase profitability by lowering costs below a certain threshold—the greens needed to be mowed and a lifeguard had to be paid in case someone showed up. And because of that, it made sense to get more customers by lowering prices. Charging $75 for a round of golf, or $20 for a day pass to the pool, made no sense if that was only bringing in a handful of people. They couldn’t spend less on mowing or chlorine, so they might as well divide those costs among more customers, even if each paid less.
But the owners resisted. Strenuously. They couldn’t accept that they should lower their price points, even though those prices had brought in so few customers over the last few years that the club had gone bankrupt. They couldn’t accept that their profit centers shouldn’t be the admission fees, but the goods and services they could sell once people were at the club—the restaurant and bar, merchandise in the pro shop, lessons, etc. The solution for a fixed cost business is to vary the income through a variety of pricing, marketing, and merchandizing strategies. But they were stuck on a price point that was arbitrary, not what the market would bear. And that kept them from amortizing their fixed overhead among a greater number of paying customers.
A couple of weeks ago, we went up to Michigan’s Leelanau Peninsula to visit a cherry orchard. The current farmer is the fifth generation in his family to own and operate the orchard. What struck me was that his business model was almost the exact opposite of the golf course. A cherry tree can produce a relatively fixed amount of fruit. He might increase his yield a little bit, but the trees are spaced as closely together as possible, and they take years to grow into maturity anyway. He can look at a tree, a row, or the whole orchard, and guess within a very narrow window how many bushels he can produce, especially with his family working the land for five generations. Of course, the prices at market for the cherries was variable, but as a commodity business those were out of his control. His costs, on the other hand, were variables he can control: he can do more of the labor manually or with machines, spend more or less on pesticides, truck the fruit to market himself or outsource it.
What can we do to increase, or protect, profitability in our own businesses? Most of us can work at both ends of the spectrum: we can contain costs and adjust pricing to drive sales. But when internal or external forces (market or government) constrict our ability to either adjust our costs or increase our income, something has to give on the other side.
Here’s the point: I’m worried that, for some industries, government is taking away our flexibility at either pole. Labor regulations are making it harder to adjust costs while prices are being arbitrarily constrained through taxation or regulation of the markets. In either case, we are making businesses less flexible and removing their ability to adjust to the market. When that happens, there will be less businesses. Which is bad for everyone.
© Greg Smith, 2013
Greg is the founder and chief creative officer of Black Lake Studio (www.blacklakestudio.com). He is also a writer and speaker, working in a variety of non-fiction and fiction genres, and frequently collaborates with other authors. You can read and learn more at his site, SmithGreg.com. (www.smithgreg.com).
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