Posted by In my last blog post, I presented a very simple example of a business – a language school – so that you can understand how to count the profitability of your business or, in a specific case, the profitability of a particular product. You are unlikely to run such a business, but in order to understand what is revenue, cost and profit, it is worth your while to read this text.
Let me remind you of the premise. We run a language school. Now we teach not one language, but two. As before – at one level and we only conduct individual lessons. For simplicity, we do not conduct group lessons (then we would have to introduce another parameter – the number of people in the group – and evaluate it, whether it pays to have 5 or 7 people). The numbers I used are examples and do not necessarily agree with the market situation.
First – revenues.
As before, let’s assume that the price of course A per semester is 1600 PLN and the price of course B per semester is 2000 PLN. Both include, for simplicity, 20 hours of lessons each. We have 20 students of such individual lessons for course A and 15 for course B. So the revenue per semester can be calculated from the formula:
P = Ca * Na + Cb * Nb
Where:
P – company revenue
Ca – price of course A, in this case 1600 PLN
Cb – price of course B, in this case 2000 PLN
Na – number of units of course A sold in the semester, in this case 20 people
Nb – number of units of course A sold in the semester, i.e. 15 people
P = 1600 * 20 + 2000 * 15 = 62000 PLN
The revenue for one semester from the sale of both courses is 62000 PLN.
Second – costs.
The cost of a language school (based on course A and course B) is the sum of (1) the fixed cost of running the company – in our case, let’s still 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 for course A and PLN 1,000 for course B – multiplied by the number of units of each course. Thus, we can calculate the cost of the school in a semester from the formula:
K = Ks + Kja * Na + Kjb * Nb
Where:
K – company costs
Ks – fixed cost of running the company, in our case it is 12000 PLN in a semester
Kja – variable cost of running course A, which is 800 PLN
Kjb – variable cost of running course b, i.e. 1000 PLN
Na – number of units of course A sold in a semester, i.e. 20 people
Na – number of units of course B sold in the semester, i.e. 15 people
K = 12000 + 800 * 20 + 1000 * 15 = 43000 PLN
The cost per semester is 43000 PLN.
Third – profit.
The profit of a language school is the difference between the school’s revenue and the school’s costs. So 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 = 62000 – 43000 = 19000 PLN.
The profit of the language school is 19000 PLN per semester.
Summary – is it profitable?
In this case, we have already achieved a profit of 19000 PLN per semester. It’s still not much, but with the right assumptions, such as that one of the courses is taught by a business owner, it starts to become a promising business. However, notice that the profitability analysis starts to get complicated. For example, there is the question of how to account for fixed costs for individual courses A and B. In other words – what are the true and full costs of course A and course B? Such knowledge would be useful to be able to consciously set the price of the two courses not just based on feel or market prices.
What options do we have here? You can divide the fixed costs into two, you can assume some proportionality depending on the number of people or the amount of revenue of the two courses. Or you could simply assign them to one of the courses, e.g. Course A, and treat this course as a “must have” for the company to exist, and only develop the other courses having more freedom in pricing these courses?
As you can see, the possibilities are many, and this is just the beginning! For now we have two products with fairly simple assumptions. What if there are 10, 20 or 100 products?
I will write about that in future posts.