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Panpa Bulletin : July 2007
PANPA Bulletin July 2007 29 commentary What is revenue? By Jim Chisholm Commercial managers are generally charged with achieving some basic numbers advertising revenue, or circulation volume. They are rarely charged with delivering gross pro tability... Simple. The money we get from circulation, the advertising revenue, the squillions that are now pouring in from the Internet, and of course all added value services and products we launched on the back of our brand. Easy. That's Revenue. And costs? Well there's newsprint. Always too expensive. Production costs -- a noun, verb and conclusion all in one sentence. Labour -- 10 per cent below last year. Editorial -- subject to witchcraft. Marketing -- Never enough. And overheads, which none of us are allowed to question because this is code for the accounts department.. Add them up. Subtract them from the Revenue. And that leaves profit. And every- one knows that running a good business is about keeping the costs below the revenues, and these days keeping your job, is about keeping the revenues growing while the costs are falling. Or something like that. I was reminded of this recently when talking to a colleague whose bosses - the big corporate bosses I mean, not the local branch management -- had asked him to cut the cost of the advertising depart- ment. Since his only costs were sales staff, the axe had to fall. We need the money went the argument, and in a swing of the scalpel so went any chances of a Nobel Prize in economics. I rarely visit a newspaper that has enough sales staff. The problem is that these archi- tects of profit and loss simply don't understand the business. Revenue. Costs. Revenue. Costs. Revenue. Costs. Revenue. Costs. It's gibberish? What matters is the cost of the revenue, and after deducting that cost, what remains pays for the rest of the business. A practice, that I learned from the Swedes, is to structure the P&L in such a way, that sales costs are removed to produce a net revenue figure. So in the case of circu- lation, we deduct distribution, marketing, commissions and the cost of circulation staff. In advertising we deduct sales costs, bonuses, marketing costs, creative costs. Benchmarks show that on average news- papers are left with around a third of their circulation revenue after costs are deducted. In the case of subscription newspapers, this figure is around 18 per cent. In many news- papers, particularly in the USA, where churn levels are high and circulation prices are low, the costs are greater than the revenues. This is acceptable because, advertising off-takes are so high, but it begs the ques- tion whether an alternative possibly free distribution model would be more effective. Since newspapers are also relatively price elastic, changes in price have an impact on circulation (the rule is a two per cent rise causes a one per cent decline), so if the circulation costs are largely fixed the revenue benefit of a rise is quickly dissipates. In advertising the general rule is that 85 per cent of revenues are retained after costs are removed. It is the advertising that pays the wages. I have a saying that circulation is vanity and advertising sanity. Commercial managers are generally charged with achieving some basic numbers advertising revenue, or circulation volume. They are rarely charged with delivering gross profitability from their activities. In other industries managers have more leeway to decide on the most appropriate way to maximise their contribution to the company. This often includes decisions on staffing lev- els. We have become so obsessed with head counts, labour contingent, FTEs (full time equivalents -- notice how they're never called people!!!), that we often are cutting effective- ness in the name of efficiency and economy. Restructuring the P&L to track net con- tribution over time, makes for a far more strategic overview of the business, that enables managers to make better decisions, and for their managers to realise the impact of broad strategies. It also enables more interesting analyses of cause and effect. A very common belief is that because the impact on circulation downwards is half that of pricing upwards, then an increase in pricing must bring in more money. This is naive. In many markets a major reason for newspapers losing share of advertising is that their circulations are declining. There is a strong, direct correla- tion between falling sale and falling share. Very often (I won't say always), the revenues gained from a cover price increase are more than lost in the consequential loss in adver- tising share. But few newspapers are armed with the means to track such consequences, within their statistics. So prices keep going up, and advertising share keeps falling. Such an approach to management reporting works across other areas of the business as well. At risk of starting a mael- strom of hatred, I would argue that such an approach can be equally applied to the newsroom (Don't shoot me. Don't shoot me). Every argument with the editor about efficiency is seen as an attack on quality. If I was to concede on this point, I would have to admit that every editorial department on earth is understaffed and that the only route to true perfection in the newsroom is through the employment of every literate person on earth as a journalist, with the il- literate ones working on the sports desk!! The problem is lack of evidence. Faced with only subjective opinions about costs, and quality, it is inevitable that arguments ensue. Editors are absolutely correct to fight their corner for quality and resources. I wouldn't respect an editor who didn't. And since few publishers actually track the rela- tive benefits of one workflow method over another they are not armed with objective rationales re resources. The point about this is that the means to track, and react to performance measure- ments, in terms of economy, efficiency and effectiveness are before us. But we need to be clear about whether what we are meas- uring is appropriate to steer the business forward. That we choose the wrong meas- ures in the commercial areas, and choose not to measure at all in editorial is a choice. It is not that it can't be done. There's an old joke about not letting facts get in the way of an argument, but I would argue that armed with more facts we will all argue a lot less, and achieve a lot more. © Jim Chisholm. Jim Chisholm, joint principal, iMedia--Ifra. email@example.com
August September 2007