Does it have MULTIPLES ?

As I teach students how to develop a winning business strategy, I introduce the topic of multiples.

In order for a business to be successful, successful beyond the job stage, that business must have structured itself so as to take advantage of multiples. Multiples is simply that process by which a company is able to increase unit sales without a significant or corresponding increase in overhead and with perhaps a slight decrease in unit variable costs.

Now, this definition is awkward at best!

What I am talking about is structuring the company so that if we hit a home run, we can take advantage of it. We are looking for ways in which we can ramp up rapidly or increase our sales if demand increases unexpectedly.

Let me give you a few examples.

A rock & roll band has huge fixed cost when ever they go on the road. The multiple is not achieved by giving more concerts; the multiple is achieved in being able to sell more tickets to each individual concert. Each ticket sold, after overhead has been covered has a dramatic effect on the bottom line. The ticket sales are multiples; they are an increase in unit sales without a significant increase in overhead. Variable cost at a concert is almost none existent.

The stage company that the rock & roll band hires to set up the stage lighting and sound, on the other had has no multiples. Each concert, each job requires a certain amount of direct labor. While the stage hands may become more efficient as they become more experienced, this benefit is small. In order to increase their sales and therefore their profits the staging company must just set up more concerts which comes with an almost direct increase in both overhead and variable costs.

A unique example of multiples is the “Blue Man Group.” While most performing artists whether they are comics, singers, or entertainers must actually show up in person to perform. The Blue Man Group has developed a performance style that allows them to farm out the performance to trained gymnasts. The Blue Man Group is a style of performance. As a result, the Blue Man Group is able to hire and train several performing groups that may or may not perform on different stages in different parts of the world. It is entirely possible to have a BMG in Las Vegas and London performing simultaneously.

A body and fender shop may not be able to increase profits by increasing the through put of damaged automobiles being repaired. There is a limit as to how high you can mark up the labor rate of your employees. However, multiples are achieved when the body and fender shop recognizes that profits on the mark up of body panels and light assemblies require little labor to install. In recognizing of this, the body and fender shop begin to adjust their bids to select those automobiles that have a higher percentage of bolt on parts that need to be replaced and a lower level of sand and paint work.

For centuries it has been correctly said that there is no money in teaching. The reason for this is that teaching has no multiples. A teacher must be in front of the classroom instructing students and school districts are loathed to increase classroom size. However, as soon as the classroom size limit is lifted teaching begins to have multiples.

I am not suggesting that we increase classroom size in our public school system. I am suggesting that teaching can be very profitable as soon as you recognize the principle of multiple. You can teach in several ways that begin to be very profitable.

Video tape your presentation and place it in the internet.

Give your instruction as a seminar to a paying public.

In doing this you begin to have multiples. After covering your initial overhead, the incremental increase in cost of delivering the course in minor compared to the increased sales revenue each time the course is purchased.

Generally we could say that multiples are difficult to achieve with custom work or where there is a direct one to one relationship with labor. Multiples are achieved when the work can be easily and cheaply duplicated.