The Perils of a “Break-Even” Price
If you’re not careful about the way you evaluate the price at which you need to sell tickets in order to break even, you could be setting yourself up for some big losses.
Here’s how a “break-even” price gets established a lot of the time: somebody, somewhere takes the total cost of delivering a show and divides it by the number of tickets they believe, based on experience, intuition data or whatever, they will likely sell.
For example, the total costs on the show are $10,000, and, based on the last time a similar show came to town, recent sales, the time of year and whatever other information the person might use, they estimate that 250 to 300 tickets in our 350 seat house will sell. To be on the safe side, they assume 250.
Then $10,000 divided by 250 tickets is $40, which they enshrine as their “break-even” price.
Is that correct?
If it were, then we would lose money if we sold a ticket for less than $40, wouldn’t we?
But we don’t. Imagine a customer walks up at the very last minute and buys a ticket for $40. We get the $40, but what did it cost us? In other words, compared to one minute earlier, what money have we spent?
The answer is none. We haven’t spent any money, but we’ve gotten $40, so we didn’t “break even” on the $40 ticket. We made $40.
If the ticket sold for $30, we’d make $30. We’d be $30 better off than we were before, but if you really believed you “broke even” at $40, you’d turn that business down.
Break even, when calculated this way, is faulty by design. It’s based on an assumption about how many tickets we’re going to sell AND it treats fixed costs as though there’s something we can do about them.
Once we’re committed to the $10,000 in costs, in other words, that $10k is gone, never to be retrieved again.
Not only that, but these “break even” numbers are often figured out by somebody, somewhere far from the marketing department, and the rationale for the numbers gets erased, leaving just the one, faulty number behind.
So what should you do instead?
You should develop a Break Even Revenue Per Seat. Don’t make an assumption about seats you’ll sell. Divide your costs by the number of seats and then keep track of your Revenue Per Seat. In this case, your Break Even Revenue Per Seat would be $10,000 divided by 350 (our total seats). That puts our Break Even Revenue Per Seat at $28.57, and if we’re tracking to that, we’re in good shape.
Don’t let a fictional measurement based on an assumption and something you can’t change force you into a costly mistake!
- Measure Success Using Revenue Per Seat
- Why Some People Want to Pay More
- Variable vs. Dynamic Pricing