Wednesday, January 27, 2010

Calculating an Event’s Break-Even Point [Part II]

Last week, we looked at the “Rate Per Person” equation for events and went over each variable. Here it is again:

Rate Per Person = [SM + FC + (X * VC) + IC + PM] / Y

If you need to review what all of the variables mean, click here for the previous post. This week, let’s take an example and see how it plays out. Ready? OK, here we go...

I want to do a small gathering of cross-stitch fans for a luncheon. Let’s say we expect to have a maximum of 30 people attending, including an invited speaker whom we will not charge for their participation. I am also attending and am included in the 30 count.

SM (Sunk Money): I am able to advertise this fairly cheaply. I spend $25 on flyers that I distribute at local fabric stores, who allow me to post on their message boards for free.

FC (Fixed Costs): The speaker has a Power Point presentation that they plan to do, using their own laptop. Let’s assume that an LCD package (projector, screen, power, and cords) will cost $400, including tax and service charges. The total number of guests is small enough that I should not need a microphone for the speaker. And, since I am providing lunch as part of the program, the hotel will not charge me a room rental fee. (Aren’t they nice?)

X (Number of participants): We expect 30 total participants.

VC (Variable Costs): The only cost we have in this category is the lunch itself. I was able to negotiate a rate of $20 inclusive for my lunch. Remember, this is a per person rate.

IC (Indirect Costs): I am donating my time, so there are no admin costs that I am trying to recoup, but I will not be paying to attend either. This figure will be $0.

PM (Profit Margin): If I make a profit, that would be great, but I do not have a specific profit goal – I just want the event to pay for itself – so this number will be $0.

Y (Number of Paying Guests): We have two people who will not pay to attend (comps), so that means we have 28 paying guests.

OK – putting it all together, the equation now looks like this:

Rate Per Person = [$25 + $400 + (30 * $20) + $0 + $0] / 28

When we do the math, the final figure comes out to $1,025/28, which works out to $36.61 per person. Many novice planners’ initial reaction is to charge that amount; maybe they’ll round up to $37. If 28 people pay $37 each to attend, we’ll make $1,036, which covers all of our expenses. We have broken even!

However, there is one drawback to this – we need to sell out in order to break even. So, how can we fix that? We adjust the number of attendees and paid attendees and recalculate. Let’s assume that only 20 people attend (including our two comps). Now the equation looks like this:

Rate Per Person = [$25 + $400 + (20 * $20) + $0 + $0] / 18

We will now have to charge $45.83 per person to break even. Of course, each paid attendee after the 18th one starts adding to our profit, but our break-even point is 18 people at $45.83 per person.

You can also work from a predetermined rate to figure out how many people would need to pay that amount in order to break even. If, say, we wanted to charge $40 per person, then we’d break even with the 24th paid attendee (the Rate per Person with 24 paid attendees and 2 comps is $39.38) and start making profit with each paid attendee after that.

While most of these two posts have been just about the math, the art of calculating a break-even point comes in figuring out realistic numbers for all of the variables – especially since you do not always know what those numbers will be when you first begin – and that is one of the places where a professional planner can be of assistance to anyone who has to manage their event budget. They can help identify expenses and help come up with realistic numbers for you, as well as using your event history to generate solid tracking of paid attendance.

- Karl Baur, CMP • Project Director, RDL enterprises