Posted by In the previous post, I showed you a method and formula on how to count whether it pays to produce or sell a product. Today I will show you how to use these formulas and how to count whether it pays to do business. Of course, this will be a simple example on one product, and in the next post I will show you an example on two products. You will see that this is not a simple issue, so I refer you to the blog post in which I argued that it is worth having few products, not many.
Let’s assume we run a language school. We only teach one language at one level, and only conduct one-on-one lessons. We know that in reality, in a language school we can learn more types of languages, at several levels, we usually learn in a group, and there are more than one group. However, such a real-world example simply requires a lot of additional assumptions and calculating the profitability of each such course separately. The numbers are also exemplary and do not necessarily agree with the market situation.
First – revenues.
Let’s assume that the price of a course for a semester is 1600 PLN and includes 20 hours of English lessons. We have 20 students of such individual lessons. So the revenue per semester can be calculated from the formula:
P = C * n
Where:
P – revenue of the company
C – the price of the product, in this case 1600 PLN
n – the number of units of the product sold in a semester, i.e. 20 people.
P = 1600 * 20 = 32000 PLN
The revenue for one semester is 32000 PLN.
Second – costs.
The cost of a language school (based on a single course) is the sum of (1) the fixed cost of running the company – in our case, let’s assume PLN 12,000 per semester – and (2) the product of the cost of running the course – let’s assume that we pay the teacher PLN 800 for 20 hours of individual lessons – multiplied by the number of units of this product that we intend to sell in the future or are selling now. So, we can count the cost of school in a semester from the formula:
K = Ks + Kj * n
Where:
K – company costs
Ks – fixed cost of running the company, in our case it is in a semester 12000 PLN
Kj – variable cost of producing one product, which is 800 PLN
n – the number of units of the product sold in a semester, i.e. 20 people.
K = 12000 + 800 * 20 = 28000 PLN
The cost per semester is 28000 PLN.
Third – profit.
The profit of a language school (based on one course) is the difference between the school’s revenue and the school’s costs. Thus, we can calculate the school’s profit from the formula
Z = P – K
Where:
Z – profit of the company
P – revenue of the company
K – costs of the company
Z = 32000 – 28000 = 4000 PLN
The profit of the language school is 4000 PLN per semester.
Summary – is it profitable?
4000 PLN profit per semester? Is it profitable? A semester is 6 months, which is a rather poor result… If we assume that in fixed costs there is no salary for work and the owner is not also a teacher, this is a very poor business idea.
I must emphasize here that we assumed individual lessons, which gives a very “low ceiling” of revenue. If we had put together group lessons, for example, with 5 people, we could have lowered the price at the same time increasing revenue. Costs would probably increase too, since we would have to increase the salary of the lecturer, but probably revenue would still increase more than the variable cost. And thus the profit would be much higher.
However, if a service or product is bought by a group of people, another variable comes into play – the number of people at which it is worth opening a group at all. This is seemingly one variable, but its introduction would obscure the example based on the patterns in the previous post.
In the next prompt, I’ll show what happens when we start teaching two languages in our language school. Although we will remain with individual lessons, the complexity of the issue will increase significantly…