The Cost of Doing Business

It was said that our client Pete, during a stint at a major New York ad agency, would often gaze down at the busy street corner below, watching the hot dog vendor. After seven or eight minutes of thoughtful observation, he'd turn to an associate and say, "Not bad. That guy is clearing $1,000 a week."

Pete, who'd never even sampled the guy's wares, mentally ran the numbers and nailed the analysis. How come I can't figure out how and where our own production business is making money?


Pete had benchmarked the lunchtime traffic, extrapolated daily and hourly customer counts, and estimated the costs of wieners, buns and kraut. He factored in seasonal variations, pushcart costs and even the health department permit; thus armed, he was able to calculate the vendor's break-even point. Amazing.

Some people's minds just naturally work that way. Moreover, some kinds of business transactions easily lend themselves to such analysis. I found myself staring at the giant jug of discount wholesale club cashews the other night, wondering how much money you could make if you bought some jars and labels and divided the nuts into smaller portions. But our business isn't about commodities and portions; the expenses are broad and diffuse, and the items for sale range from the mighty to the miniscule.

In the prehistoric past, the rates we charged had a lot to do with "what the traffic will bear" and "the going rate." But increased competition and cheaper technology have conspired to create a whole new pricing landscape, one which pits a 24-year-old with a PowerBook against a building full of SDI decks and routing equipment.

At the same time, production projects are increasingly diverse in their deliverables and in their budgets, and sometimes the hardest job bills the least amount of money.

And so a more dire question emerges: Is it even possible to get compensated fairly for the work we do?

Across town, there's a small Greek luncheonette I'll occasionally visit for an egg sandwich. The proprietors, George and George (no relation), work hard for a living; still, in terms of their business model, they've got it made. They know what the eggs cost, what the rolls cost, how much Carlos the fry cook gets per hour, and what the gas bill is. And when the time is right, they hike their prices, and we all fall into line to pay what they ask.

So let's try that same breakdown at a small production firm. We know what the staff editor gets paid per hour. Well, actually, after that extra $1,000 a month for health insurance, the hourly rate goes up; better add that in, and the company's 401K contribution, too.

But how many hours should we factor in? Forty? Most weeks, he doesn't do 40 hours of chargeable editing. Who pays for those other hours, if the client's not actually getting charged?

Then there's equipment. George and George haven't bought a new stove in 17 years; we, on the other hand, can assume that the computers that run the editing applications will be too old or slow to run the latest versions in less than five years. (And don't forget the cost of those upgraded software versions.) So we take the monthly equipment lease payment and divide by... well, what do we divide by? Four 40-hour weeks? It's rare to book 40 hours on a given system--shouldn't we use the actual number, or at least an average? But if we do that, who's paying for the system the rest of the time?


And so it goes... how to distribute the costs of heating and air conditioning; whether to derive a per-square-foot edit room rent from the monthly mortgage payment; who pays for the sticky notes and grease pencils. I've been thinking that this would be a perfect opportunity for a team of young MBA candidates to tackle a real-world problem.

Unlike a cost analysis of mass-manufactured whatnots, this problem includes variations in production activity, falling competitive prices and increased competition; and technologies that need to be replaced soon after they are installed.

Go to it, kids. Tell us how to price our projects and, more importantly, how to make a little money. But remember that it's not acceptable to tell us that we're nuts and to get into a different line of work.

Although I hear that hot dog vendors make a good buck.

Walter Schoenknecht can be reached via e-mail at