Cher owns a beauty shop and wants to add a new line of hair care products. The product, called Pretty Hair, will cost her about $1 per bottle. One of the reasons she’s paying only $1 per bottle is that, although the bottle is more than 5 inches long, the quantity of shampoo is much less than the other products of similar size. The way she achieves this perceived value is a clever use of a false bottom in the container. She doesn’t want to deceive anybody, so she clearly states the fluid ounces on the side of the bottle….and relies on people’s perception of value.

The minimum order for this product is 1,000 bottles, and its suggested retail is $3 per bottle. Cher has been informed by the sales representative that the best way to market this product is with an initial “sale price” of 50 percent off that should be used in connection with radio advertising. Being somewhat of a radio enthusiast herself, Cher decides the best way to create a great radio spot is to use songs from long ago—when she used to be with that guy.

Radio advertising costs $500 per month for a minimum of three months. Cher knows one of her employees (at $15 per hour) will need to devote about two hours per day speaking with customers about this product. You’ve been hired by Cher to provide advice on this project. She’s thinking print advertising is much better.

 

Break-even analysis

Operational and overhead costs for a business are the costs of resources, products and services used just to maintain its existence. Overhead costs are usually measured in monetary terms, but nonmonetary overhead is possible in the form of time required to accomplish tasks and perform services. Operating costs may include salaries of personnel, advertising, products, license or equivalent fees imposed by a government agency, rent/lease payments, office space maintenance, furniture and equipment, investment value of the funds used to purchase the assets, business property taxes and equivalent assessments, fuel costs such as power for operations, public utilities such as telephone service, Internet connectivity, equipment maintenance, office supplies and consumables, insurance, equipment depreciation, eventual replacement costs and income taxes.

You can start a break-even analysis by establishing all your business’ fixed (overhead) expenses. Most of these are due on a monthly basis, but don’t forget to include the estimated monthly amount of items normally paid on a quarterly or annual basis, such as payroll taxes or insurance. There are three ways to lower your break-even volume, only two of which involve cost controls (which should always be your goal on an ongoing basis). Send us an email to consultants@californiabusinessdevelopment.com for suggestions to improve your break-even analysis and increase your profitability.

 

Time to dig deeper

Cher has decided she needs to spice up the sales campaign. She hires her band back again and sets up on the street outside of her beauty shop. Even though they love Cher, they still want the usual $5,000 per day to play the music. Business is great, the fans are happy (though not so much the business’ neighbors) and she sells all 1,000 bottles of Pretty Hair. She considers her sales idea a huge success, since she’s sold out of the product in just one day.

She now wants to buy 3,000 bottles and hire a few more “dancers,” which is what she calls the store’s employees. Feeling excited about singing again and now considering herself a business success, she wants to have similar events every month, year round.

 

DO YOU HAVE THE ANSWERS?

a. About $1,000.

b. Less than $500.

c. She’s lost money.

 

a. More than $1,000.

b. Less than $1,000

c. She’s lost money.

 

a. Fire the employee.

b. Do not have the sale.

c. Increase the advertising budget.

 

Answers: 1. (c), 2. (c), 3. (b)

 

 

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