We have a few things going on here where I think we are all coming from the same point of view, but using different words, and seeming to contradict each other.
Firstly with the labour. DRS is describing a concept known as an “opportunity cost”. He is saying that “your labour is free, unless you could be doing something else”. That “lost opportunity” is the cost of HRP’s labour. So, if he could be (say) window cleaning, by not window cleaning you have lost the cash from that. If you would be sitting in the pub, then there’s no income in that, so you are missing out on nothing, hence no income. That’s correct (subject to the “value” one would put on being in the pub – sort of “how much would I be willing to forgo to stay in the pub” – which is difficult to establish) but pointing at a slightly different issue from HRP’s point.
HRP is trying to establish if it is possible to make a living from bees, or at least earn any money. He has written a rudimentary business plan there, and wants to take account of opportunity costs. To do this he has put a “virtual cost” on his labour, and chosen minimum wage. That’s a perfectly good assumption – indeed, I’d have done the same. That makes the calculation correct for HRP’s purposes, and interesting reading for me.
A few things we’ve not really thought about:
• Capital costs. You have to buy hives, smokers, hive tools, frames etc. that last for years. They still cost money, so there is an ongoing cost there. In accounting terms we take the capital cost and write a proportion of it off every year that we think it could be useful for. So, if a hive cost £100 and will last for ten years we give it an annual cost of £100/10 = £10. It’s called “depreciation”. If we didn’t do that then you’d make a massive accounting loss every time you bought a new hive/extractor etc.
• Finance costs. You have a lot of money tied up in equipment, which could be doing something else. For example if you took out a loan to start the bee business, you have to pay that back to the bank plus interest. If you have a mortgage you may have been better off paying off part of that rather than buying the hive. This is a really difficult concept and thing to calculate, and is related to DRS’s point above
• Other costs – liability insurance, advertising, smoker fuel etc.
And on to Winker’s points. Both Winker and PH are making the same point. PH is saying “charge as much as you can for your honey” Winker is saying “charge as much as you can for your honey”.
With the example given, it’s a bit more complex. Consider an apiary that costs £5,000 to run and jars cost 10p each. If the apiary makes 10,000 jars of honey the total costs (assuming it’s all put into jars) is £6,000. Now he has his bounty, the beekeeper has to do something with it all. If he thinks he will only be able to sell half of it at £5.50 he knows he will get about £27,500 – a profit of £21,500. Which is good. He also now has about 5,000 jars of honey to store somewhere. Storage costs. The jars cost, he has cash tied up in them. If he sold all 10,000 for £3.50, he has income of £35,000, profit of £29,000. His costs for running the apiary are the same in each case (called sunk costs) but in the latter case he does not have to store the honey, and he has another £7,500 in his pocket. He needs to weigh up a lot of things:
• How much will it cost me to store all that honey?
• How much will it cost me to have cash tied up in all those jars?
• Will I be able to sell the 5,000 jars left next year at £5.50?
The last point is important. Ignoring pesky things like inflation he may think that next year there will be a terrible crop, so he can sell all the honey from this year and make a lot of money. If he is wrong, and he has another 10,000 jars of the stuff, and he can only sell 5,000 he has 10,000 jars to store, more money tied up etc.
Of course he may choose to feed honey back to the bees (saves money on sugar), he may choose to sell some cheaper at the end of the season, it’s whatever works for him. With a fixed cost business (as in the total cost does not vary all that much no matter how much you sell) then volume becomes everything, as once you have sold over your fixed costs, the rest is yours to keep. Our beekeeper here, once he has sold £6,000 of honey the rest is his to keep. High turnover is Very Good News for him. There will be a calculable balance point between price maximisation, sales maximisation, leaving stock for next year, and customer satisfaction. The trick is to get that balance right – and it relies upon knowing the future. None of us can profess to that.
Your photography business is successful by the same coin. The “variable cost” to you will be the cost of charging your batteries, the electricity in using Photoshop, the costs of printing the albums etc, and your time (see above). The fixed costs are your cameras, software, marketing collateral etc – you have to pay for those whether you “sell” one wedding or a million. You must be good to command the premium price. You could make more money by doing more weddings at your price (or you may have hit the limit of weddings for your price, I don’t know), but you consider your time doing other things to be more valuable. Your balance point is “If I charge £10 less, I do one more wedding. Is that worth it?” the answer you give is “no, my time doing other things is worth more to me than the time lost doing that other wedding earns me” so you have reached your balance point.
Where it differs is that the amount of honey made is elastic – depending on the weather, the bees, local forage (which the beek can’t control) and the number of hives (which he can). Your weddings are limited by the fixed and predictable number of weekends in a year. It’s a subtle difference, but worth thinking about.
In short - sell your goods for as much as you can to sell enough to make the most money.
Now I'm confusing myself...
L
