Too often, we think of business in terms of mathematics. Certainly, there’s an anticipation or expectation that numbers will add up, books will balance, and existence will be sustained. There is also a tendency in consumers to view prices in a strictly comparative perspective. They limit their examination to what one meal experience costs compared to another. This is a value-based analysis that is not wrong but may be overly simplified.
Each element of an experience engenders a certain degree of cost. Fixed overhead may include the rent or mortgage cost of the premises, taxes, and more. That is somewhat easy to predict.
There are also variable costs, and variability can be dependent on volume. For example, the cost of food or beverages. As the volume of served patrons increases, so does the marginal cost (each meal plated costs something). Some in business school strive to convince students such costs are strictly variable (no meals plated means no marginal cost).
However, there is an undeniably fixed element that is too often ignored. One cannot serve the marginal (additional) patron, a chicken parmigiana unless money has been expended in order to possess some inventory of chicken. That chicken is purchased with an eye towards serving, in which case it will become a marginal cost of that meal if served. However, if the chicken does not sell, it remains a fixed cost of doing business (inventory).
These financial relationships are largely subject to management, through careful ordering, inventory control, market predictability, and other tools. It is perhaps more easily controlled with beverages, due to the greater propensity for shelflife and extended use. Nonetheless, in order to be in business, some volume of cost must be expended in anticipation.
My views on these management challenges dawned eons ago in college but were honed in the real world. There exists no singular absolute formulaic approach to the interrelationships. The best management will periodically be left with unsold inventory, or with disappointed customers, troubled by output shortages ("I’m sorry we’re sold out of that").
When a business makes a fixed-cost commitment, it must, then hope for a customer response that is sufficient to allow the business to meet that obligation, as well as the marginal expenses, and render some profit. Profit, for all of the negativity too often expressed, is the purpose of business. If there is no potential for profit, what is the motivation for the business to take the risk of investing in fixed or variable costs?
Some of these linear examples may certainly be mathematical. However, it is suggested that the overall success of any business enterprise is largely multi-variable calculus. There are interrelated, independent, and unfortunately, unpredictable variables involved. And unforeseen circumstances can frustrate even the best planners.
One of the most studied independent variables is the human element. Staffing any business is largely art instead of science. A particular server may be capable of unbelievable focus and volume. Others, perhaps not so much. I have managed dining room crews of which one server was barely capable of covering five tables, and yet another could easily please 10.
I’ve had to contend with the jealousy and animosity of the five-table staff, and their inability to recognize personal limitations. “Why does she get 10 tables and I only get 5?” The inverse complication is as likely, “just because she can only handle five tables, why do you limit me to that?” Similar arguments are raised by others in the tip-compensation category (bartenders, valets, etc.).
Would you hear the same complaints from hourly wage workers? Surprisingly, I have. I have had cooks explain to me that they prefer to be alone in their kitchen. I have witnessed a single cook handling a 100-table lunch rush with efficiency, efficacy, and aplomb. however, I have also witnessed three-person cook crews, who could not handle such a rush under any circumstances. Volume and human individuality each require management.
These thoughts came to me recently, as I read an article regarding a musician, who was scheduled to perform at a venue. He canceled because of his personal shock and dismay regarding the venue's pricing of the event ($90.00 to $200). The performer has a perception of the reasonable price for such an experience ($25) and canceled the commitment based on conclusions regarding the higher prices. The sentiment is admirable, and the theme is interesting.
This performer had agreed to appear for $120,000 in exchange for a one-hour performance. The outside observer might examine that mathematically and conclude that this performer is worth $120,000 per hour, $2,000 per minute, or $33 per second. However, such a conclusion would, perhaps, fail to consider the other costs associated, including transportation to and from, crew, set-up expense, other performers (“the band“), taxes, licenses, and more. Just as a venue might have variable costs, so might a performer.
Upon publicity of the cancellation, the venue in this story voiced its perspective regarding costs. It explained its size limitation, 1,500 people. It explained some of its hidden costs. 1,500 people at $25.00 is only $37,500. If you sold each of them four drinks at $7.50 (assuming a 75% profit margin on each), then there is another $33,750. Not enough to pay the singer $120,000. If you sold each patron ten drinks at $7.50, that would yield $84,375, and the cost of the singer would be covered ($37,500 + $84,375 = $121,875). There is food sale revenue also, it must be considered, but the margins are thinner on food.
Is it rational for a venue to host an event at a loss, or to expect such consumption? What about the ticket commission? What about the bookkeeping? What are the odds you can get each patron to pay for ten drinks, or that you can get them each to buy 5 at $15.00 each? And, if you could, at the end of the shift you simply covered your singer cost, but what of the other fixed and variable costs? What of the venue, the security, etc."
No one is "right" or "wrong" in this discussion. The bottom line is that this venue cannot stomach a $25.00 ticket price and this singer cannot abide a $200 price. They are at impasse. However, it is important the relationship and information reveals the challenge of “hidden cost,“ which is a real interest of workers' compensation, though too rarely discussed.
Workers' compensation at its best is a hidden cost, included in service or product pricing of many market participants. I say many rather than all because there are certainly legal methodologies for avoiding the inclusion of this cost. For example, products and materials might be procured from off-shore sources (while the Big Three shut down this week, the foreign cars kept flowing). Those are produced at a likely lower cost, and without the hidden cost of Worker’s Compensation. Workers in foreign countries often do not enjoy this benefit or other protections such as FMLA, ADA, Unemployment, and more. Buying a foreign-produced product or service perhaps diminishes cost.
Similarly, to reach the market, a manufacturer or importer might use a large transportation company, with the benefits of size, diversity, and depth on the bench. Alternatively, one might select an independent contractor, an owner and operator, for the same function. In doing so, one might absorb the cost of Worker’s Compensation, or avoid it.
This discussion is largely of macro and microeconomics. Unfortunately, that subject is not common in America’s high schools. Furthermore, the average college graduate will likely escape with a degree and have largely avoided any study of the implications of the laws of economics. Despite the resulting lack of foundation, everyone engaged in business, must confront the challenges associated with the fundamentals of economics, the difficult choices, the probable shortcomings, and the potential for misunderstanding.
In the end, business is difficult. This absolutism remains. Whether one is the business, owner, manager, labor, or supplier. The complexity is difficult for those who study economics. Unfortunately, it is harder still on those who have no time for such study as they scramble about striving to earn a living in the complex calculus of economic exchange.
The implications of these thoughts are important. The existence of hidden costs can impact the overall price and profit of any supplier of goods or services. The seller and the consumer may be very sophisticated and yet not share identical visions of what value each conveys in a particular exchange. Each may have wants, desires, and perspectives that are not apparent to, or appreciated by, the other.
Either might be labeled as "greedy," "generous," "impractical," or "brilliant." Each is striving to maximize earnings and that may be from minimization of cost or maximization of income. Each has proprietary knowledge, hidden costs, and personal challenges. Each is managing a process that the other may not understand.
In the end, it is often difficult to calculate the actual value of any exchange, even for those who are intimately involved in them.
