In this ongoing series, I share what I’ve learned about running a consistently profitable organization in the Live Event production space.

In Chapter 2, I explored the promise of job cost best practices and how that helped us focus on controlling the expense of execution. 

TL;DR: Job cost mentality wrecked our margins.

Chapter 3 — Our Hangups Have Been Holding Us Back

It’s exceedingly difficult to unlearn something when our current practices have had decades to rust in place. 

Like many of you, when I entered the rental industry, I learned the AV rental price formula: Purchase Price divided by 10 = Rental Price, except when it doesn’t.

It seems so arbitrary now, but 40 years ago it made sense. The value you offered was in owning a piece of equipment that could be rented. Customers could buy it themselves if they planned on using it more than 10 times. It was a good deal for all. 

Unlearning one thing doesn’t seem so hard. However, when it comes to building a scalable business model in Live Event Services, there are a TONS of things we need to unlearn.

Like the price formula, so many of these things seem to make sense when you look at them in isolation. For instance:

• Staff technicians are cheaper per hour than freelancers, so they cost less per job.
• Staff technicians care more about the job than freelancers (argh, I hate this one).
• Staff technicians can do other tasks when they’re not on shows, which keeps costs down (it hurts to even type that one out).
• Start every warehouse worker on the path to becoming a technician. (Why do people think this works?)
• Warehouse workers will never be able to prep a show. You have to let Show Technicians “pack their own parachutes.” (This and the previous seem to support each other?)
• Buy equipment to reduce sub-rentals, which keeps job cost down. (How much is enough?)
• Lease equipment, and use other people’s money to grow your business. (Death spiral anyone?)
• Send detailed price lists to your customers, so they know nothing is free (and they can see how smart you are, too).
• Salespeople need multiple pricing tools to win the job: discounts, multi-day rates, reduced line items, and no-charge items. (If the only issue is price, why do we need salespeople?)
• If the customer is asking for a lower price, it’s because they know they can get it from someone already. (uh huh, right)
• If you turn down a customer on price, they’ll never come back to you again. (If only that were true.)
• Mark up is greedy. (smh)

Here are some hard truths:

1. Over-staffing and owning too much gear is the root of our profitability and scalability problem. This is exactly why the pandemic shutdown was so devastating. We created recurring direct costs that didn’t align with revenue. 
2. Customers care more about price when they don’t have a budget. If they don’t have a budget, then your job is to educate them without giving away the secret sauce. We need more professional salespeople on our teams and fewer order takers.
3. Over-staffing across the industry meant the talent pool was stretched thin prior to the pandemic, which justified hiring full-time techs when you could find them. It was EASIER to keep a large full-time staff than to find qualified people on demand. Procurement may be difficult, but being lazy is expensive.

This all makes sense, but…

I’ve been living in a consulting laboratory since February 2020. Metaphorically, we’ve been growing cuttings of businesses in Petri dishes and discovering they flourish under conditions we once thought were detrimental. 

I won’t equate scalability to fusion energy, nor can I take credit for discovering it. Working with my best clients, we simply moved from lab to real life because there was nothing to lose by trying.

First, scalability means that for every increase in revenue, your net profit as a percentage of revenue also increases. In practical terms, this means a $5 million per year business earning 12% net profit will earn a higher percentage of net profit at $6 million per year, if they hold overhead in check. 

This is, of course, contingent on the business model being scalable in the first place. Most of you have never seen this happen before because you haven’t been scalable since your first year of business. 

The first thing you’ll notice is that your Cost of Goods Sold (COGS) will increase since more direct costs are outsourced. Resist the urge to buy gear or hire employees.

A scalable organization will have fairly consistent COGS and nearly static overhead. New revenue will come with outside costs, but it doesn’t require new overhead. Well, until it does. 

Even a scalable organization will eventually need to add capacity in sales, planning, or procurement. The trick is to know when.

In the lab, we tried things like raising labor prices to offset the increased costs. We adjusted equipment prices. We charged for services that were previously “value-add.” Enhanced revenue all became additional gross profit, which in turn dropped straight to the bottom line. 

Applying this in real life required a stroke of luck: In 2022, demand far exceeded supply.

The only thing that really changed in 2022 was that Live Event production rental stopped selling from a position of fear and used their scarcity to sell just the right amount of work to yield maximum profit without raising overhead. 

When more demand for high-profit work beckons, add a dash of overhead and increase your capacity for selling, planning, and procuring.

In short, we don’t make money by micromanaging jobs costs. We make money by controlling overhead. 

In a downturn, remove a dash of overhead. 

There are some practical steps to take to become a scalable version of yourself. Whether you fully embrace the concept of scalability or not, these are smart moves to make:

1. Always sell from replacement cost. Add margin commensurate with the inherent risk of the product or service. Every job will be inherently profitable, no matter how busy you become.
2. Staff your business with experts in sales acquisition, project planning, and supply chain management. Outsource everything else. If the team isn’t trying to micromanage resources to keep costs down, they have a lot more time to double your business volume.
3. Be laser-focused on what types of customers you want to work with. There’s plenty of work out there, so you can afford to be more picky.
4. Turn down work when your suppliers can no longer keep up. 

The devil is in the details. 

Here’s How to Learn the Details

Jumpstart Management Workshop on Intentional Scalability

Jumpstart Workshops are networking, sharing, and learning events for managers and owners of Live Event Production companies on the road to Intentional Scalability. They are produced by Tom Stimson, the foremost expert on the business of corporate event technical production.