WS Break-even calculator

[Joe Mioux]

In a few threads I have posted a little math computation that can help guide florists whether to retain or drop WS membership.

I thought I would make a new thread.

Break-even Point is determined by taking your fixed costs and dividing that the Unit's Selling Price minus the variable costs of producing the unit.

I will use my FTD activity as an example. I don't use FTD to send, I am only a member to receive some addtional incoming business.

My FTD revenue is marginal and hopefully will serve as a good indicator on what I should do.

My Membership costs were $2610. my total revenue (incoming and outgoing revenue - money I received from FTD to fill their orders) was $5415 on 154 incoming orders. We sent only 19. I am taking the net after commissions of both incoming and outgoing.

So now I know $5415/154 orders equals avg dollar/unit is $35.16. (again that is net less the commissions given up) If we divide that number by .73, we get the original average price of 48.16,

now I have to take that $48.16 times 154 order and that equals $7416.

I need that number to determine how much VC I used. For me I am only assigning COGS, not design labor because 154 orders per year is an after thought.

$7416 x 30 pct COGS gives me $2225 of variable costs.

So now the important numbers to use here are

$2610 member ship feed - My Fixed Cost

$5416 my net revenue
$2225 my Variable cost
154, my total orders.

I still have to convert the revenue and vc to a per unit cost. so$5416-$2225/154 = $20.71.

BEP= FC/unit selling price - vc

so $2610/$20.71 = 126 orders.

This number now tells me that I needed 126 order to Break-even with FTD, based on an average incoming order of $48.16

As you can see, I had 154 orders, so I did actually make money, albeit very small

And an argument can be made that I did not include some other hidden costs like FTD WS reconciliation report time, etc.

Should I stay or should I go?

Probably, the small difference between 154 and 126 orders isn't signficant.

More importantly: I now know where I stand financially with FTD and I am not basing any decisions on emotions.

Hope this helps some of you as well.
joe

btw: out of the 154 incoming orders 137 were from florists and 17 were .coms

 

[BOSS]

As you can see, I had 154 orders, so I did actually make money, albeit very small

And an argument can be made that I did not include some other hidden costs like FTD WS reconciliation report time, etc.

Should I stay or should I go?


joe

I guess the question is, was the "very small" profit worth the effort?

Setting aside "excess capacity" (Which I do not believe in) would the reduction in labor expense not filling those orders resulted in the same net gain?

 

[Joe Mioux]

If nothing else, knowing these numbers allows me to re-negotiate my membership fees with FTD and or have them direct more .com orders to me so that i generate better revenue.

joe

 

[CHR]

Joe -

Thanks for sharing your calculations. It appears there's $580 to contribute to labor and overhead, or about $3.75/order

Where or how do you account for the cost of 154 local deliveries? Would your cost/delivery exceed $3.75 per order?

 

[Joe Mioux]

I guess the question is, was the "very small" profit worth the effort?

Setting aside "excess capacity" (Which I do not believe in) would the reduction in labor expense not filling those orders resulted in the same net gain?

Any reduction in WS affiliated labor doesn't mean that I will save money on labor because my labor costs will remain whether or not these orders exists or not.

also refer to second post. If I decide to stay, I definitely have some leverage to work lower fees and more business.

Mark, since my designers do a lot of things other than just designing I don't see the need to assign design labor.

In another thread that I did, I found that most shops did not reduce their labor when they dumped the WS's.

joe

 

[Joe Mioux]

Joe -

Thanks for sharing your calculations. It appears there's $580 to contribute to labor and overhead, or about $3.75/order

Where or how do you account for the cost of 154 local deliveries? Would your cost/delivery exceed $3.75 per order?

Cathy, I am not attempting to look at this on a per unit costs basis, but rather as a whole year's worth of cost and revenues.

In some instances yes, money will be lost due to delivery fee, however much of these orders are sympathy pieces which means they can get a free ride to the funeral home along with the others.

one funeral home is 2 blocks away and the other is 6 blocks away.

the hospital is 1/2 mile away.

 

[Dee Dee]

Joe,

I really wanted to understand this but, yup you lost me on (where is the delivery cost, where is the labor cost) I wish I had a more math minded brain her with me today.

It's CFA weekend here so I am alone in the shop maybe if I post and watch other peoples questions I will catch what I lost.

Really though thanks for posting! I love to see people's views on this when there is actual logic involved and not just complaining.

 

[Joe Mioux]

by all means!!!!!

every shop who uses this little formula needs to charge ALL their variable costs to their orders.

Again, if I were doing this for a different shop, I could probably add lot of VC in it and make the outcome look different. I could change the VC to 40 pct to reflect delivery and design labor if I need to. or some other number.

Like i said in the initial post, profitabilty with FTD is marginal at best. a 24 order spread probably doesn't cover some of the ancillary costs that i didn't include in the analysis.

joe

 

[Joe Mioux]

Joe,

I really wanted to understand this but, yup you lost me on (where is the delivery cost, where is the labor cost) I wish I had a more math minded brain her with me today.

It's CFA weekend here so I am alone in the shop maybe if I post and watch other peoples questions I will catch what I lost.

Really though thanks for posting! I love to see people's views on this when there is actual logic involved and not just complaining.

dee dee;

most shops that I know don't hire design labor based on incoming ws business, it is a fixed cost that is borne by the entire revenue of the business, not just the WS business.

that is why i didn't include it.

We all need to be honest with our own businesses. Using faulty numbers will just lead to bad decisions.

joe

 

[Joe Mioux]

one other point I wanted to make.

now that I know that FTD is only marginally profitable, by just using COGS, I can now fine tune this analysis and add additional costs that are associated with membership.

OR, I also now know that I can keep accepting Sympathy, Hospital and simple deliveries and reject those orders that are not profitable. The only caveat is keeping the incoming orders up past 10 orders per month.... hopefully way up.

joe

 

[Joe Mioux]

one thing I didn't factor back into my revenue was my outgoing commissions and that part of the revenue's effect on my Cost of Goods Sold.

assuming 19 orders at around $50, which for this discussion may have totaled $200.

After I divided, $5415/.73 to get the $7xxx.00 number, I should have subtracted $200 from the $7Kish number to better reflect a truer VC number.

Granted $200 in my example won't cause much effect on the analysis, but if you are a heavy sender you need know your outgoing commissions revenue.

Also, the conventional wisdom around here is after numbers like this are published is to say, "ok that is it i need to dump the WS business.

What are the options?

Drop the ws,

Reduce the fixed costs associated with the ws,

try to increase the number of orders received, where by the FC associated with being WS affliated is spread out over more orders.

Increase unit pricing and reduce COGS pct, say take it from 30 pct to 25 pct.

These are just some ways to maybe increase revenue and become more profitable, rather than reducing revenue and possibly becoming more profitable.


Cathy, I am about to make a delivery for a dozen roses, sent from a florist via FTD. They gave me $75 for a dozen and my retail price is $55. Sometimes the sending florist thinks about the delivery and other costs.

joe

 

[TOTO]

Tough to get to the right Answer!

Always tough to get to the right answers Joe.

On the surface, the annual membership cost of $2,610.00 to glean 154 orders at a GROSS of $7,416.00 averaging $48.16 broke down to this.

$48.16 Less (-27%) less (-3%) (FTO) = (-30%)(-$14.49) netting $33.67

$33.67. Less the additional WS (OAC) per order acquisition charge of $16.95 leaves you with $16.72 to cover your COGS and Delivery and I didn't factor in LABOR since you don't consider that to be a consideration.

The per order additional WS (OAC) acquisition charge was based on their annual costs to you of $2,610.00 divided by 154 orders.

You can defray your annual WS costs by the $200 in commissions you earned from the 19 orders sent out, thus cost shifting that profit over to the loss side of your spreadsheet, if you choose to.

In that case, the $2,610.00 less that $200 = $2,410.00, or (-$15.65) additional WS per order acquisition costs.

And the final result looks like every order you fill at $48.16 actually nets you $18.02.

Assuming a cogs of 30% on the $48.16 of $14.45, the $18.02 equates to $3.57 left over, less any cost of delivery plus FREE LABOR.

If one chooses not to COST SHIFT the profits from the earned commissions they made on the outgoing side, the incoming WS order standing on its own, looks like this: $48.16 (-30%)=(-$14.45) (-35%)=($16.95 OAC) = $16.76 net.

In effect, those GROSS incoming wire orders suffer from a TOTAL DISCOUNT of (-65%) with a final 35% for you to work with, when all the WS SMOKE & MIRROR WAMPUM CLEARS.

With a 30% COGS of $14.49 on the $48.16, the left over is $2.27 from the $16.76 net, and we aren't even talking LABOR, DELIVERY nor Office Administration costs.

I may be wrong Joe, but it appears to be; "MUCH ADIEU ABOUT NOTHING!"

What would happen if you simply used the $2,610.00 for local advertising to capture more in the way of your own 100% customer sales?

If 154 orders only brought in an additional revenue of $555.94, would this also mean that, you would have to capture and fill only 11 customer 100% orders at $50 each to net the same amount. Add to that, the additional revenue gleaned from your own local service charges, and one might suggest that, your investment might go a longer way, not to mention the reality of a heck-uv-a-lot less effort on your part.

In other words, you could effectively reduce your total efforts in WS futility by 94% while achieving even better results in your own local market.

 

[CHR]

What would happen if you simply used the $2,610.00 for local advertising to capture more in the way of your own 100% customer sales?

Now, that's the question. (And of course, the answer is open to spirited debate.)

 

[Joe Mioux]

hi toto

I am not interested in individual orders, some of which might not be profitable.

The purpose of this thread was to show a larger picture, to show us how many orders I need to break even, given the volume of business over an entire year.

In a much simpler definition of the Break Even Formula, the formula looks like this.

Fixed Cost divided by Unit Fixed Cost to determine the number of orders needed to break even.

FC/UFC=BEP

We can use this same formula to determine a Break even point on deliveries, or some gift line.

re: you last sentence, why can't I have both? more wire service business AND more direct business.

The biggest problem I have always had with your side of the debate is that I don't like removing revenue (sales) in order to be more profitable.

I much rather prefer, reducing the cost of those sales to improve profit.

joe

 

[Joe Mioux]

Now, that's the question. (And of course, the answer is open to spirited debate.)

and it is a good question.

can that money get used to generate more than $5416 revenue?

maybe it could be used to develop an OG site? face:tongue

joe

 

[TOTO]

As Cathy suggested, more SPIRITED DEBATE!

hi toto

I am not interested in individual orders, some of which might not be profitable.

The purpose of this thread was to show a larger picture, to show us how many orders I need to break even, given the volume of business over an entire year.

In a much simpler definition of the Break Even Formula, the formula looks like this.

Fixed Cost divided by Unit Fixed Cost to determine the number of orders needed to break even.

FC/UFC=BEP

We can use this same formula to determine a Break even point on deliveries, or some gift line.

re: you last sentence, why can't I have both? more wire service business AND more direct business.

The biggest problem I have always had with your side of the debate is that I don't like removing revenue (sales) in order to be more profitable.

I much rather prefer, reducing the cost of those sales to improve profit.

joe

Sorry Joe!

I've got TUNNEL VISION on the subject of "WORKING SMARTER, NOT HARDER!"

Then again, even ER Physicians have to perform TRIAGE on their patients during a major multiple medical emergency event.

If you go for HAVING BOTH, chances are you're gonna have to increase your labor and service force, thus your per order costs, which results in COST SHIFTING from your profitable orders to the ones that are not.

Now, if you had a machine with the ability to make widgets, and the labor cost was constant on manufacturing 100 or 1000, your formula makes sense.

Since what we do is both LABOR and SERVICE intensive, I am of the mindset that, I'd rather make the 100 widgets and make a profit than make the 1000 widgets while working harder for less.

 

[Joe Mioux]

S

If you go for HAVING BOTH, chances are you're gonna have to increase your labor and service force, thus your per order costs, which results in COST SHIFTING from your profitable orders to the ones that are not.

I am not going to add labor, for an additional $5500 in Gross sales.

Sales need to jump up at least $45K in order to justify an new hire.

joe

 

[goldfish]

This number now tells me that I needed 126 order to Break-even with FTD, based on an average incoming order of $48.16

As you can see, I had 154 orders, so I did actually make money, albeit very small

And an argument can be made that I did not include some other hidden costs like FTD WS reconciliation report time, etc.

Should I stay or should I go?

Thanks Joe.

It looks like you are approximately at a break even point within a margin of error.

In that case, profit (or lack ot it) really doesn't matter much in determining whether to quit. What matters is competition among local FTD shops.

If there was another FTD shop nearby doing a similar number of wire-ins, they, too, must be near break even. Your quiting FTD would make them profitable in terms of FTD wire-ins. So I wouldn't quit if that's the case (this point is debatable, however).

If there was no local shop competing for FTD wire-ins, or if there were too many FTD shops nearby, I would just quit. We quit TF for this very reason (we were at break-even; too many TF shops around here).

 

[Joe Mioux]

Thanks Joe.

It looks like you are approximately at a break even point with a margin of error.

In that case, profit (or lack ot it) really doesn't matter much in determining whether to quit. What matters is competition among local FTD shops.

If there was another FTD shop nearby doing a similar number of wire-ins, they, too, must be near break even. Your quiting FTD would make them profitable in terms of FTD wire-ins. So I wouldn't quit if that's the case (this point is debatable, however).

If there was no local shop competing for FTD wire-ins, or if there were too many FTD shops nearby, I would just quit. We quit TF for this very reason (we were at break-even; too many TF shops around here).

And goldie that is exactly what I was thinking.

My competitor at my branch shop location IS both FTD and TF. If I would drop FTD, she would get all my FTD incoming orders and thus make her FTD membership more profitable.

However, that assumes she is paying the same as me, which I doubt. I bet she is paying more.

 

[TOTO]

I'm still seeing an overall discount of 65%

If one chooses not to COST SHIFT the profits from the earned commissions they made on the outgoing side, the incoming WS order standing on its own, looks like this: $48.16 (-30%)=(-$14.45) (-35%)=($16.95 OAC) = $16.76 net.

In effect, those GROSS incoming wire orders suffer from a TOTAL DISCOUNT of (-65%), 30% on the surface and another 35% WS per order acquisition charge (OAC), with a final 35% for you to work with, when all the WS SMOKE & MIRROR WAMPUM CLEARS.

With a 30% COGS of $14.49 on the $48.16, the left over is $2.27 from the $16.76 net, and we aren't even talking LABOR, DELIVERY nor Office Administration costs.

If 154 orders only brought in an additional revenue of $555.94, would this also mean that, you would have to capture and fill only 11 customer 100% orders at $50 each to net the same amount. Add to that, the additional revenue gleaned from your own local service charges, and one might suggest that, your investment might go a longer way, not to mention the reality of a heck-uv-a-lot less effort on your part.

In other words, you could effectively reduce your total efforts in WS futility by 94% while achieving even better results using that money in your own local marketing efforts.

The $5,415.00 in revenue must be reduced by the $2,610.00 of the WS's DUES and FEES, which need not be treated as a FIXED EXPENSE unless one chooses it to be so, and so, it is written in stone.

The net to filling florist revenue, after that deduction, is $2,805.00 or $18.27 per each of 154 incoming orders at $48.10 or $3.84 after deducting the $14.43 COGS, thus producing a leftover of $3.84. That amount may be skewed UP due to the 19 outgoing order you sent out, thus earning you those sending commissions which were cost shifted over to your totals.

Still seems like a heck-uv-a-lotta work for a few CRUMBS FROM THEIR PIE Joe.
lol