Shutting Down the Factory…not a Key to Success

Michael Kaiser of the Kennedy Center wrote this in the Huffington Post:

“Many arts managers are angry with me. They do not appreciate my advice not to cut programming during this recession. I continue to say that creating large, important projects is central to creating fiscal health. Especially when there is less money for the arts (and there is less money for the arts today), arts organizations must compete harder. As donors decide which organizations to continue to support, the institutions that are doing vital, important work are the ones who will continue to be supported. Not only must the work be interesting but the marketing of that work and of the institution as a whole must be aggressive and creative.”

And I fully agree.  When you take an introductory economics course, you learn about when and and how to make a ‘shutdown’ decision.  Now, life’s not as simple as an Econ 101 course, but you can still learn a lot from this way of thinking, which I’ll try to explain.

Imagine you’ve got a factory that makes skates.  Whenever you run your factory for a day, it costs you to pay the workers, the electricity, to ship the skates, etc.  These are called variable costs because you only have them if you produce something.  The other costs are called fixed costs because you’ve got to pay them whether you produce or not.

The ‘shutdown’ question is this: does operating your skate factory produce more revenue than variable costs?  You can’t count the costs you’ll be paying anyway because, well, you’ll be paying them anyway.

So if producing 10,000 pairs of skates brings in $200,000 (at say, $20 per pair), then the question is what does it cost you per day, not including rent, salaries, insurance, taxes, and all the other things you have to pay regardless, to produce those skates?

If the number is less than $200,000 you should produce.  If not, Econ 101 would tell you to shut down.

So let’s stop talking about skates.  If you’ve got a venue to run, your fixed costs are pretty high: building costs, salaries, taxes, maintenance, whatever.  The variable costs of having the show can also be high, but obviously, they’re only a certain part of the overall cost structure.

And honestly, if your variable costs exceed your revenue on a show, you should really be rethinking what you’re programming.

Because in my view, your job as a marketer of live entertainment is to put something interesting in the building every night (and every hour) possible.  You want a non-stop stream of people coming to see what you’re up to.  You want to leverage the very significant fixed costs that go into running an organization in as many interesting shows as you can.

You want life in that building 24/7 or as close to it as practically possible.

The only reason to shut down in my view is this: you’re losing money badly and you need to rethink your programming.  Take 2 or 3 months off and do that, but when you come back, you’d better have some better ideas about what goes on the stage.

Because if you can’t do that, your real ‘shutdown’ decision is just a matter of time anyway.