Wednesday, 1 August 2007

Making a Profit: Part One

A lot of company owners in the event industry have trouble with understanding profit. Event managers and producers can earn income either as contractors or as employees. As an employee, a producer does not have to be concerned with profit. However, for an independent contractor, there are two possible methods that may be used to obtain a profit, the supplier markup method and the hourly fee method. Today, we'll examine marking up supplier costs.

Markup of Supplier Costs

This method is representative of the majority of events for which producers are contracted. The producer is normally the only person in direct contact with an individual supplier and all communication and contracting goes through the producer. The event organization deals directly with the producer and has no dealings with the supplier. In other words, the producer is in an agency relationship with the supplier. There are separate contracts between the producer and each individual supplier and usually a single contract between the producer and the event organization, the producer’s client. Because the producer is taking all the risks associated with the contracted delivery of the supplier’s services or products and because the producer must of necessity also arrange for payment to that supplier, the producer is entitled to a fee or markup for the service of being a “one-stop shop.”

The industry norm for markups is in the range of 20 to 35% of the supplier cost. This markup may be calculated in two ways. The first is to multiply the supplier cost by a given markup percentage. For example, if a dance band costs $2000, the producer may choose to markup that amount by 25%, or multiply by 1.25 to arrive at a figure of $2500, which would then be the price the producer would quote to the client. The second way to calculate a markup is to divide by a fixed amount. Again, if the band costs $2000 and the producer wishes to make 25% (also called the gross profit) of the funds available for dance entertainment, then the $2000 must be divided by 0.75 to arrive at a cost of $2666. This number would typically be rounded to the next higher multiple of 5 or 10 for easier working, so that the price charged to the client would be $2670.

There is no right or wrong way to calculate profit in the markup situation. It is simply a matter of preference for the producer in terms of what is needed to survive (i.e. to pay the producer’s company’s bills) and what works the easiest in budgeting. It is important to understand, however, that there is a difference in the end amount. A markup of 25% does not yield a gross profit of 25%. Again, to illustrate with a simple example, a markup of 100% on a $500 cost gives a price of $1000 which yields a gross profit of 50% ($500) based on the final price. It really depends on whether the calculation is referenced to the supplier cost or the final price.

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