Here is the dilemma. Your class is not performing as well as you had hoped, and you are probably not going to make money on it, but you do have some people who have signed up. How do you know whether to cancel the class and disappoint the people who signed up, or offer the class and lose money? The answer is not as simple as just deciding that if a class loses money it should be cancelled. Here is the information you need to make a decision:
First, you should know that “Break Even” is not the same as “Go No-Go.”
With break-even, you are covering your direct costs (marketing costs, instructor costs, etc.) but not staff or overhead (your salary, for instance).
With Go No-Go, you are covering only your production costs (instructor), not your promotion costs, and of course not overhead.
How to Calculate your Go/No-Go point
The Go/No-Go point is the point at which you run the course, even if you are losing money. Here is the how to decide, on a financial basis, whether to run or cancel a class.
Calculate the income from the class and subtract the production costs. This is generally the teacher compensation, but it includes all costs required to actually provide the class. If the figure is positive, the course should be run. If it is a negative number, then cancellation is appropriate.
Example
$500 Course Income
-$400 Instructor Pay
Balance: $100
In this example, you are losing less money by offering the class. If you cancel the class, you lose $500 (plus whatever you spent on promotion). The class covers the production costs, leaving you with a positive income of $100. If you cancel the class, you are losing that $500. If you offer the course, you are losing only $400 over your sunk costs because you get to keep $100.
How many registrations do you need
There are three different financial analysis points for an individual course or class:
- Make Budget. What you want to achieve financially.
- Break Even. Covering your Direct Costs only.
- Go No-Go. This is the point at which you offer the course, even if you are losing money.
To illustrate, we take Class A and determine how many participants we need for each. We use the fee of $100 (which you should hardly ever use as a course fee) because it divides more simply into $1,000. Thus, to Make Budget, we need ____ participants. To Break Even, we need ____ participants. And to offer the class, the Go No-Go point, we need ____ participants
- To Make Budget, we need 10 participants (Income divided by Fee).
- To Break Even, we need 5 participants (Direct Costs divided by Fee).
- And to offer the class, we need 3 participants (Production costs divided by Fee).
With Go No-Go, you are covering only your production costs (instructor), not your promotion costs, and of course not overhead.
The reason financially you should run a class or event at the Go No-Go point is that you’ve already spent (and lost) promotion costs. So if you can recoup your instructor costs, then you can run the class. Now, you obviously are still losing money, and maybe you don’t run the class the Next time, but at the Go No-Go point you would run the class.
When you run a class at the Go No-Go point, you are “saving” a registration (and more importantly customer) and you stand a better chance of getting that customer back for a more profitable class. Whenever you cancel and turn people away, you run a greater risk of them not coming back.
So you want to cancel as few activities and classes as possible. Non-financially speaking, or aside from financial considerations, some programs do run classes and activities even if losing money, even if not at break even, even if not at Go No-Go, simply to keep more customers, to avoid having people tell others a class was cancelled, for image both with customers, and with the community. One program ran a class with just 3 people, at a loss, for that reason. A couple of years later one of the 3 people donated a zillion dollars to the organization.
There are some things that are acceptable and recommended.
Recommended:
-Three days to one week before a class that might be cancelled is supposed to start, email the existing participants and ask them to email and recruit a friend to the class so you have enough people to run it.
-Ask the instructor to take less pay. Less is better than nothing.
Not Recommended:
-Reduce number of weeks
-Reduce number of hours
-Increase the fee (this time).
If you offer the class again, raising the price the NEXT time the class is offered is a terrific strategy. IF there are only 5 people out there for any given offering, and IF they value it, let them demonstrate that and let them financially “decide” whether it’s worth it. Many times, especially in recreation programming, classes and activities are underpriced anyway. You should not hesitate to increase the price on a class that would be cancelled otherwise.
Aside from financial considerations, some programs run classes and activities even if losing money, even if not at break even and even if not at Go No-Go, simply to keep more customers, to avoid having people tell others a class was cancelled, and for image both with customers, and with the community. One program ran a class with just 3 people, at a loss, for that reason. A couple of years later one of the 3 people donated a zillion dollars to the organization. Thus avoiding cancellation whenever you can responsibly do so, is LERN’s recommendation.