In May 2020, we learned how to quickly shutter an event staging operation. Opening your business back up does not mean ‘do the same steps in reverse.’ First, we need to apply what we learned when live events went dark: The biggest lesson of the pandemic is that the average event company business model is not scalable.
Scalable means that you make money when you are busy and when you aren’t.
Before the pandemic, most production rental companies built their operational teams to support the busiest six months of the year. The result was an over-staffed operation more than 50% of the year. The juicy profits from busy months could not make up for the deficits of slow months.
Ironically, the busiest month of the year was barely profitable. Those extra projects were loaded with unexpected costs.
To make matters worse, equipment owners purchased gear to support peak loads. The benefit was to reduce costs for sub-rentals when busy. The downside was the debt and depreciation that need to be serviced year-round.
The resulting oversupply of equipment and labor helped to drive prices down year-round. In effect, your busy months were less profitable because you were over-prepared. Your slow months were less profitable because you needed to lower prices even more.
It took two decades of compound growth to reach this level of incongruity, but only one virus to expose its tragic flaw.
Unpack Your Baggage
We’ve inherited from our AV forefathers some bad habits that drastically diminish our fiscal effectiveness. When your overhead outruns your revenue, we enter into what I call The Event Production Death Spiral. No matter where you start, as you move around the spiral, business results worsen.
It might manifest like this:
- Rather than cultivate a better pool of freelancers, you maintain a larger staff of techs who also prep their own shows, which reduces the need for warehouse staff.
- Techs send extra gear and “pack their own parachutes.” In doing so, they take equipment that wasn’t accounted for.
- With all your staff out on showsite, the warehouse is never tidied up. Check-in/out if left incomplete.
- Since items aren’t checked in properly, extra equipment was pulled, and it is impossible to find anything in this mess, sales people are reluctant to take that extra order.
- Sales cannot sell to capacity because they think you’re too busy to do another show. Proposals slow to a crawl.
- Lack of closed business results in poor cash flow, which creates a sales crisis.
- You sell on price because you’re trying to make up for losses, which drives profits down.
- When you sell on price, everyone is billable. After all, you’re trying to recover your overhead costs for the full-time techs. The warehouse and inventory problem gets worse.
- The tech bench shrinks because you only hire freelancers at the last minute, which means you don’t always get the best techs. So, you hire more full time techs.
- The cycle repeats. Your staff grows. Profits shrink.
In this un-scalable model, each negative point worsens because urgency increases. Fear drives decision-making. Soon you rationalize smaller profits as normal, because you have done all you know how to do.
3 Keys to Increasing Your Scalability
Scalability is the secret to growth and profit, but to design a scalable business model you first need to rethink some fundamentals. Redefine your customers, be honest about your costs, and respect your capacity.
Know Your Customers
Who are your future customers, and how can you best meet their needs? To most effectively operate your business, you must understand your pipeline and realistically forecast future jobs. Sales people are supposed to stay positive and believe they’ll win the bid every time, but that’s not realistic. You need to identify what conversations will turn into money, and what’s just a pipe dream. Only then can you be ready to meet customer needs.
One primary customer need is flexibility. Customers are people — which means they’re not a static element in the equation. They don’t ask for the same things every time. Be ready to think on your feet, answer their questions, and present your capabilities in flexible ways.
Concerned about returning to business as usual? You should be. Let’s chat.
That doesn’t mean every order should be fully customized. If we know our customers and understand their needs, we can create kits and systems to better meet those needs. Right now, too many of us sell from a bottomless pit of customized services that we configure to any customer request.
If you understood your customers, you could design products and services in packaged ways that make it easier to sell, budget, and buy.
Think of yourself as a chef. Chefs don’t create fully customized meals for every customer. Instead, they create a menu. You know your ingredients — how can you craft a menu to offer customers great options that will satisfy their needs?
Know Your Costs
If you do not understand your cost basis, your sell price will most likely be too low.
One way to gain insight into what things are worth is by tightening the reins on what is purchased by whom. Purchase orders provide a way to record our financial obligations, so we can calculate it in our cash flow projections. Outlier purchases are simply unacceptable.
Central purchasing helps significantly with P.O. compliance. If you put one person (or one small group) in charge of buying, you’ll negotiate better, make fewer mistakes, and have a clearer record of costs which will help you better calculate your margin for customer pricing.
When calculating the value of any project, use replacement cost in your estimates. Don’t conflate cash flow with profit.
Finally, you also need to know where and when to find outside resources. Your competitors are busy at the same time as you. This means you must predict outsourcing needs and make deals in advance to utilize the better suppliers and freelancers.
Know Your Capacity
To be scalable, you have to have a firm grasp on your equipment, budget, and staff. What will you run out of… and when?
Spoiler alert: This affects your price. The more limited your supply, the more jealous you should be about gross profit.
Most AV companies run out of people before we run out of gear – at least until we regain pre-pandemic business levels. Raise your labor prices. Your costs have risen, but more importantly, labor is currently scarce.
Specialized labor is even more precious!
Conversely, if your equipment is oversupplied then reduce those prices. Make it clear that your talent is what is valuable and keep that promise.
How To Master Capacity NOW
Knowing your customers, costs, and capacity is an essential part of effective business operations. When you have a solid grasp of these components, you can unleash your business to sell beyond your capacity and make money in ways you didn’t anticipate.
- Trust Your Forecasts: Your grasp of the future is a combination of data, experience, and gut instinct.
- Optimize your gross profit formula by making labor services your main profit center.
- Learn when and how to say ‘No’ to new projects that want your core assets at bargain prices.
For many business owners in our segment, these are some major changes in how to view your business. You might benefit from outside perspective and different experience. If you are ready, let’s chat about how to accelerate your return to growth and profitability.
Note: This article was originally published in May 2020 and has been updated for accuracy.