Part 6 – Costs, Prices, and Profits, Oh, my!

Part 6 of 7

So let’s get to part 6 — understand how much your price needs to be to before you go broke, break-even, or turn a profit.

Today, right now, there is a big disconnect between costs, prices, and profits in off-road racing.

In my blog post Race profits are evil, and other money myths, I confront this silly racer belief that race promoters should not be allowed to be happy about making money on a race.

Especially when that belief is held by racers with $10,000 bikes, or the racer that showed up in La Sportive trail running shoes driving a BMW.

They think if someone sees them happy, a flash mob will form and burn them at the stake, just behind their hand-built, five-place podium.

Make no mistake, the terror is real — to them.

Promoters actually feel that any talk of money is akin to bragging.

They are actually afraid to think about making a profit, and terrified to let racers know they have.

But you need to get past that fear.

Why?

Because if you do not make a profit, you are going to go out of business.

No money, no business.

Period.

Additional, if you don’t believe the point behind setting your prices is to make a profit — so that you can stay in business — then you have to get over that too.

The point of business IS to make a profit.

Period (again).

Races are not charity.

They can be FOR charity, but they are NOT charity.

They have their own costs, their own expenses, and their own need to make money.

It’s hard to support a charity if you spend all of your own money putting on the race, and don’t make any for the actual charity.

The hard reality is that each and every race you build needs to make a profit.

Failing to make money will doom your race promotion company before it begins.

Now that is something to be afraid of!

Luckily, fear can be overcome with courage and knowledge.

Today’s lesson is all about courage and knowledge.

I am going to give you the knowledge needed to connect your costs and prices, with how you make a profit.

And the courage to act on that knowledge, set good prices, and become successful!

Shall we get started?

Alright!

#1 – Knowing How Much Each Race Costs

In Part 5, I talked about your understand of your own value, and what you bring to the table that is different or special.

Being different or special is not free.

Not free?

Each and every part of your race promotion has a cost associated with it.

Do you know what each one of those cost are?

You should.

Every single one?

Yes. Every single one.

Before you know how much money you have made during an given race, you need to know how much you spent.

This is an integrity check.

Could you leave things off the list to make your bottom line seem better?

Yes. Yes you could. But would it be realistic?

No. It would be a false bottom.

So don’t do it. Write down every single expense that went into building your race, or that will go into building your race.

The cost for buying more bib numbers because the free one’s were worthless?

Yes.

The cost that you would have had to pay if you were not given $100 in free merchandise from a new sponsor?

Yes.

The cost of buying several bags of ice for the coolers, even if you didn’t use them?

Yes.

The cost you paid for you and your volunteers to eat at McDonald’s before the race?

Yes.

The cost someone else paid for the rental of port-a-potties and gave it to your race as a gift?

Yes.

Do you say Yes to everything?

For this? YES!

Write every… single… expense down as if YOU had paid for it yourself.

Paid for it myself?

To get a true understanding of your race costs, you have to approach it as if you had no friends, no gifts, and no sponsors.

That sounds lonely!

It is, but if your bottom line is going to be realistic, it needs to includes ALL of your costs.

Take a moment to write down all your costs.

What is your total cost amount now?

That is the TRUE cost of your race.

That is how much your race will cost you if you had absolutely no help.

It is also a good way to know what your cost-per-race average is.

Think about it. How would you know if a cost went up or down?

How would you know if one race was cheaper to produce than other?

How would you know WHY is was cheaper — or more expensive?

This is how.

By tracking each over your races this way, you can gain insight into what things actually cost.

Remember that number. We’re going to come back to it.

#2 – Knowing How Much Your Business Costs

Now comes the hard part.

That wasn’t the hard part?

No, calculating what things cost is easy.

That’s Bookkeeping 101. You do that everyday with your checkbook when you sit down to do bills.

If you keep receipts, invoices, and balance sheets (which you should), you can do the simple math of adding everything up.

Unfortunately, the hard part is deciding what you want as your profit.

Or, put another way, how much profit you NEED to make during each race to stay in business.

Do you know what that number is?

Wow. I’m not sure.

Hence the hard part.

No worries, we’ll figure this one out together.

Profit is a strange animal.

How much is too much? How much is not enough?

These are all great questions.

However, I have a secret way to take the pain out of this decision.

Ask yourself this question:

How much profit do you need to pay just the overhead of your business?

What is overhead?

Overhead are the fixed costs that usually remain unchanged from season to season.

It is the MUST HAVE amount you need to come up with to keep calling your business a business.

Do you know what your business overhead costs are?

Maybe? How are they different to my race costs?

The difference is subtle. You can break it down into two different kinds of costs: fixed costs (overhead), and direct costs (costs required to produce your race).

We’ll define overhead costs for your race promotion business as follows:

  • Salaries (The salary for you and your employees)
  • Depreciation (Company vehicles, trailers, computers, gear)
  • Insurance (Business not race)
  • Licenses and government fees (Business not race)
  • Rent (storage)
  • Utilities (Phone, website, and online software services)
  • Accounting and legal expenses

If it is still confusing, I cover the different kinds of business costs in more detail in my blog post Putting the fun back in race budget fundamentals.

Just note that in that article, a fictitious price is already set.

We have yet to set ours.

Meanwhile, the idea behind your overhead costs is to make sure you cover your costs BEFORE you factor in any kind of profit targets.

Take a minute now and go through your lists of costs.

Pick out the ones that could be defined as “fixed costs” and place them in a new column called “overhead costs”.

There may be some new costs to add to this list. Go ahead and add them now.

Is there any other costs I need to consider in my overhead costs?

This is a loaded question, because it could include some other factors:

  • Do you plan to live solely off the income of your racing business?
  • Do you plan on reinvesting some of your income into your business?
  • Do you have another source of income to supliment your business?

The answers to these new question can also impact your final profit need.

But let’s assume a few things:

  • You don’t have a day job and race promotion is your full time gig.
  • You do plan on reinvesting some of your profits back into the busines.
  • During the first few years, your racing business needs to support your entire lifestyle.

If this does not describe you (e.g. you don’t plan on making race promotion your full time gig right out of the gate), that’s ok.

You should be able to plug-and-play these concepts to figure out your needs as well.

Take a moment and come up with your final overhead costs list.

You should now have two lists: Column A has your Race Costs, while Column B has your Overhead Costs.

Now it’s time to put these two columns into action.

#3 — Knowing How Much You Need To Make

Using the sum of both our above lists as the basis for some assumptions, it’s time to work out our profit estimate.

Take your Race Cost number from Step #1 above.

Your number may be different. But for sake of example, we’ll say that number is $3,000 per race, and includes ALL our costs with no help.

Next, we’ll use our Overhead Costs to factor in what it costs our business to be in business.

To make this easy, we’ll only included your fictional salary in our example.

According to the latest data available (Census ACS survey), the median household income for the United States was $53,657 in 2014.

We’ll round that up to $60,000 to make the numbers easy.

For this example, let’s assume that this number includes your salary, your business costs, and all your fixed costs for one year.

Now remember that our Race Cost is “per race”, while our Overhead Cost is either month-to-month, or annual. Try to make it the total cost you need to run your business for one year (assuming nothing changes).

Now we’ll assume that we can effectively plan, build, and direct 10 races a one year.

That’s 10 races in one season.

At a cost of $3,000 per race, we can determine that one season (one year) will cost us $30,000.

Now, take our Overhead Costs of $60,000 for one year, and divide it by the number of races (10) you plan on doing during that year (without adjusting for taxes).

That makes our Overhead Costs equal to $6,000 per race.

Add our Overhead Costs per race to our Race Costs per race, and we now need $9,000 per race to break-even.

The running of our race promotion business, that will produce 10 races in one season, will require us to earn a minimum of $90,000 per year.

$90,000 seems like a lot of money to earn!

Remember what that pays for. That number pays for the planning, building, and directing of 10 races WITHOUT help, AND pays for your salary, business expenses, and other fixed costs.

Hopefully, you can now see that the cost of your race contains much more than the just the literal cost of the race.

It includes the money you need to keep your business open.

It is this understanding that changes your relationship with the price you set, and the number of registrations you need to sell.

Some call this business challenges. But I see this as the motivation that will drive you to make your business work.

Cash Flow is the life-blood of any business.

At a cost of $9,000 per race, you now have an very good idea on how much “cash flow” you need to keep your business alive.

#4 — Knowing How To Reduce Your Cost Burden

In the above example, we know that we need $9,000 per race to pay for one race, pay for 1/10th of our business expenses, and stay in business until the next race.

That is a total of $90,000 for our first season of race promotion.

How are we going to pay for all that?

Another great question!

The answer is Revenue.

It’s time to start setting prices, earning money, and geting the cash flowing into our business.

Which leads us to our first revenue challenge:

What do we need to charge per person, per race, to at least break-even?

The answer is in the understanding of two very important numbers:

  • What is the price for one registration (price per ticket)
  • How many registrations do I need to sell to break-even (number of tickets)

In Part 4, we learn how to collect useful data on your competitors. Then in Part 5, you learned how to determine what your race value would be in comparison to your competitors.

Now it is time to use that data to make our pricing decisions.

Take the average price of two (2) of your competitors.

Which three?

First, use the competitor directly below your value ranking. This is your initial minimum price estimate.

Second, use the competitor directly above your value ranking. This is your initial maximum price estimate.

This gives you a price range.

If the number are exactly the same, subtract $10.00 from the minimum price, and add $10.00 to the maximum price.

Now find the mean price — the price in the middle (rounding to the nearest dollar).

What is the that price?

Remember it, because we’ll be using it in this next example.

Let’s say that mean price turns out to be $40.00, and the minimum and maximum is $30.00 and $50.00 respectfully.

The price of $40.00 answers our first question:

What is the price for one registration (price per ticket)?

Using our mean price of $40.00, we now need to answer the second question:

How many registrations do I need to sell to break-even (number of tickets)?

Take your total Cost Per Race ($9,000) and divide it by our mean price ($40.00) using the formula:
(C/P) = B

C = Cost Per Race (Total)
P = Price (Lowest)
B = Break-Even Point

That works out to be:

C= $9,000
P= $40.00
B = X Registrations Needed

$9,000
————— = 225 Registered Racers
$40.00

The final result is the minimum number of registered racers you will need to to make your break-even point for each of your 10 races.

In our example above, that turns out to be 225 registered racers, at $40.00 each.

Now apply this computation to your minimum and maximum prices.

At the $30.00 price, you would need 300 registered racers. While at the $50.00 price, you would need 180 registered racers.

Now it’s time for you to play with these numbers.

Using the data you collected during the lessons in Part 4 and Part 5 will continue to inform your Pricing Strategy, it is the work you did in this lesson that will formulate your first price.

But that price is only an estimate for now.

It would be great if we could all charge $50.00 per regsitration AND have 300 racers show up.

However, too many races have only 30 racers show up. When you need a certain number to just break-even, 30 racers is a crushing result.

In your final lesson in this course, you will learn how to finalize your pricing strategy, and come away with the confidence to set your own prices.

Keep on the lookout for:

Part 7 – Setting Your First Price

See you next week!

Cheers,
Kyle

Kyle M. Bondo
Reckoneer | reckoneer.com