Scalability: Why This Took Me 40 Years to Unwrap
Tom Stimson
March 14, 2023
A person holds a pen over a pad of paper with various graphs on it.

For the next several weeks, I want to share what I’ve learned about running a consistently profitable organization in the Live Events production space. It will come to you as chapters, and there’s an endgame for all of this: 

Each year, right before InfoComm, I plan on holding a masterclass for business owners and principals on the most pressing topic I see in my consulting practice. This year’s theme will be Scalability.

Registration is ongoing, and I’ll remind you of that each week. 

Whether you can attend or not, I encourage you to follow along with these emails to better understand how we got here and where our industry is going. One small favor: Please forward this to the owners of your business, and hopefully this can become part of your management focus.

Chapter 1 — Why This Took Me 40 Years to Unwrap

Once upon a time, someone had a great idea: AV Equipment Rental. You buy the equipment, rent it to someone else for a short time period, they give you money, they use the gear — and then they give you the equipment back! The margins were huge. Take the purchase price, divide by 10, and that was the daily rental rate. Some gear paid for itself in a matter of weeks. Most gear kept paying year after year. 

Eventually, those renters needed help using the equipment. They needed labor, and later, expertise. No problem. Buy a delivery truck and teach someone to set up the equipment. No need to make money at labor and delivery when the margins on rental were so huge!

Competition was sparse through the early 1980s. Manufacturer dealer networks limited competition, and some rental dealers enjoyed a near monopoly on key products. All of that came to an end with the advent of equipment leasing, which opened up the markets to newcomers. Soon, the dealer territories fell apart and anyone could buy anything with easy financing available to all.

This had a major impact on the pricing mode, which went from being based on the purchase price to a formula derived from the monthly lease payment. Rental companies would negotiate deals and slash pricing on jobs to cover their lease payments that month. 

At the same time, wholesale rental companies emerged, taking advantage of the loose financing environment and the fast growth economy. There were now effectively no barriers to entry in the production rental industry. As big companies rolled up smaller ones, displaced employees started their own firms.

Rental prices dropped dramatically as the market was flooded with products.

In the meantime, not much changed in labor pricing. It remained a loss-leader through the turn of the century, into the next Recession. Even as the demand for highly skilled technical personnel increased, labor margins were often less than 15%. 

While companies were quick to outsource rental equipment from the wholesalers, most rental companies were loath to hire freelance technicians. To increase margins, dealers hired full-time technicians, believing it would keep their costs lower. Just like lease payments drove rental rates down, the burden of monthly personnel expenses forced labor prices down as companies scrambled to stay ahead of cash flow. 

The end result was that buyers took control of the marketplace, dictated prices, and forced dealers into lower and lower net profit every year.

To put this in perspective, an AV rental company in the 1980s routinely earned 30% or more net profit. By the year 2000, that figure dropped below 20% and kept falling. Before the pandemic in 2019, a rental dealer was grateful to earn 5% net profit, and if they were honest, most years they lost money by buying more equipment than they needed to take advantage of tax incentives.

Oh, and they kept hiring staff to control costs.

By 2020, the U.S. probably had TEN times more capacity in rental gear and full-time technicians than there was demand. Dealers staffed up their companies to meet the needs of their busiest months in a seasonal industry. The average AV rental company enjoyed three to four profitable months and lost money in the rest. 

Where did we go wrong? One word: scalability. 

Scalability in business means that as your revenue grows, your net profit as a percentage of revenue also increases. Sound impossible? 

For most AV Rental companies in the Live Event space, an increase in revenue means an increase in direct costs as internal resources are applied, and more expensive external resources are required to meet demand. On the surface, it’s good that your internal resources are less expensive than your external, but what if you have more internal resources than you really need?

Or, more importantly, what if you inadvertently reduce your selling price by giving away your cost advantage in owning equipment and retaining employees? Most owners will admit to sometimes (okay, often) slashing rates just to create some cash flow. 

The ultimate test of scalability comes in a downturn. What happens when revenue is 50% of what you expected? Or worse?

By the end of 2019, the race to the bottom was nearly complete. Business was booming, but margins were still shrinking. In early 2020, the COVID-19 pandemic began. Live events were effectively shut down, which put rental inventory on the sidelines, along with 90% of the employees of these AV rental companies. 

Our focus at that time was survival. Now we have the benefit of hindsight. Why would we ignore those valuable and expensive lessons?

This is Chapter 1 in my study of the business of Live Events and what I’ve learned over the past four decades. Sadly, the most valuable part of what I know I learned in the past three years.

Over the next couple of weeks, I’ll send you chapters on this saga, but my goal is to help you talk about it more openly. Our collective trauma taught us a very valuable lesson — one I will never stop talking about. 

The key to business is scalability. 

Once you’ve mastered scalability, dips in the economy will become your fuel instead of thwarting your plans and undoing your hard work. 

You’ll stop seeing your business as a series of good months and bad months, hoping there’s enough good to make up for the bad.

Masters of scalability no longer fear the unknown — they expect it. They build their business around the inevitable. 

Scalability doesn’t just promise reliable profit; it guarantees it. More net profit to grow your business, fund your retirement, or simply enjoy your life more now.

My Masterclass for 2023

In Las Vegas last year — right before InfoComm — I held my first masterclass for owners. Twenty-five principals attended, and we dove deep into Exit Strategies and Succession Planning. The teaching, guest speakers, and networking combined to make this the most productive event I have ever held. 

“Thank you again for organizing this event. The topic and speakers were very good and got me thinking. The dinner and company was fantastic!” — Rennie Colelli, CEO bbBlanc

This year, I want to create the most valuable event. 

The Masterclass on Scalability will take place in Orlando on June 13th, 2023 from 12:00 — 5:30 p.m. followed by cocktails and dinner. This is once again the day before the InfoComm show floor opens. And seating will, once again, be limited. Follow this page for updates and early registration:

About Tom Stimson
Tom Stimson MBA, CTS is an authority on business and strategy for small- to medium-sized companies. He is an expert on project-based selling and a thought leader for innovative business processes.
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