Ok if you are thinking… “I don’t need to know this”… I hate to break it to you but it is crucial if you are serious about your business. Are you optimising the contribution of each product or service?
What do I mean by contribution? To answer that we need to look at two different sorts of costs: fixed costs and variable costs.
If you have rented a room at a clinic you have to pay for that clinic whether you use it or not. These sort of costs that stay fixed whether you do 2 sessions or twenty are called ( not surprisingly!) fixed costs.
What are all your fixed costs?
In addition to fixed costs there are costs that go up as the number of sessions ( sales) go up… for example couch roll, oils etc. These costs are called variable costs as they change depending on the number of sales made.
So if you take the sales income you receive for each session ( say £38) less the variable cost of each session (say £3) you are left with the “contribution” of £35 for each session. Why is it called a contribution? Because it is a contribution to fixed costs. So your first sales will be making a contribution to fixed costs and when that cost is covered ( called the break even point) you start making a profit.
To work out your break-even quantity divide the total fixed assets by the contribution per session. If your total fixed costs are £700 in a month, taking the contribution per session of £35 you will need to do 20 sessions in a month just to break-even ( £7,000 / £35). It is only who you get to the 21st session in the month that you start to make a profit.
What is your break-even sales quantity?
When you have different products or services you can work out a contribution for each product or quantity and calculate the optimum contribution to cover your costs. Thus you may have a contribution per session of £45 for each hour and a half session for say aromatherapy and £35 per hour session for reflexology. Thus the contribution per hour is £35 for reflexology and £30 for aromatherapy. If you are restricted to the number of hours you can rent a room in a clinic the optimum contribution would be to maximise the reflexology sessions.
What is your optimum contribution for each product or service?
Obviously the more products and services that you have the more complex the interaction is…. but it is worth having a sense of which product optimises contribution so if you have a clash of resources you can make a better decision based on real figures.
Eventually you get to the stage where you have to increase your fixed costs… you may be offered another room in the clinic for example. Is it worth taking? You need to work out your breakeven calculation for that room. It will really depend on your personal circumstance – it may be better to optimise the room you have already rather than take on additional fixed costs unless you know you can fill enough sessions to cover the additional fixed cost.
The more information you have about your optimum contribution the better decisions you will make and the better financial results you will get.
I know this is a little more technical than normal, but if you can get the hang of this it is really worthwhile. As a general rule once you have taken on fixed costs you need to maximise the contribution from your sales ( i.e. do as many sessions as you can until you have used your fixed costs … in this case the room to capacity). It is for this reason that people will often sublet a room ( even though you get a lower contribution) to help cover the fixed costs. It is worth making the effort to understand this for your business as it will really assist in your business decisions.