Evaluating your expense model: Potentially a big win for your bottom line
For most executives, keeping up with the rapidly changing publishing business has required them to "up their game" and rethink their approach to managing revenues. To compensate for shrinking print advertising revenues, publishers are placing greater emphasis on digital revenues, finding ways to effectively move print advertisers to digital advertising and counting on circulation revenue to play a much larger role in the total revenue picture. Often, newspaper executives focus only on their expense line during budget season or when revenue isn't meeting expectations. However, strategic operational expense adjustments are necessary to maintain profitability and warrant the same level of focus as revenue – especially for departments that require a significant portion of your operating budget.
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Circulation department key metrics tell a great story
Typically, newspapers measure a set of key metrics for each department. Knowing which metrics to monitor and how they compare across the industry is critical for success. And by "success," I mean "profits." Publishers and industry leaders love to talk about changing revenue models. But it is just as important to periodically examine and benchmark key expense metrics to make sure that each dollar spent in major categories has a favorable ratio compared to newspapers in your circulation size or market type.
This process can be very easy for newspapers with large corporate staffs, but much more challenging for smaller groups or independent newspapers that lack resources with experience and expertise in each specific discipline. Still, it is critically important to benchmark expense line items in a way that helps identify areas for potential efficiencies and fosters a stronger understanding of how your business operations compare to others. When evaluating key metrics and identifying effective ways to adjust business practices and reduce your cost model, it may be necessary to engage an outside resource with the level of expertise to get the job done right.
Where should you start? Schedule periodic "health assessments" for each department as a means of diving deeper into your own spending trends and gaining insight into how others have adapted to the changing business environment. There are many tools and resources available to undertake this voyage of discovery, including organizational membership, participating in benchmarking studies, reaching out to peers or engaging with companies specializing in this type of evaluation. The key is to understand the drivers of expense, ask the right questions in determining where opportunities might exist and be open to changing with the industry to maintain or improve profits.
The changing expense model: Getting started
Have you actively examined current operations, measured the need to change against other successful peers and developed a roadmap of expense change for the future? Most often, newspapers adjust expense on the fly, rather than strategically. Fortunately, there are a few simple benchmarks to examine in evaluating the health of your department. Asking these questions can lead to opportunities for improving the expense line and, ultimately, profitability.
1. The revenue paradigm is shifting. What percent of my total newspaper revenue comes from the circulation department and how does that compare with my peers?
2. The relationship between revenue and expense should be similar. How have circulation department expenses been trending in comparison to circulation volume? Are those ratios in line with reasonable expectations? In comparison to my peers or the industry? Am I adjusting to the new business model? Where is the opportunity gap?
3. Ratios are important. What is the ratio of expense to revenue for my newspaper? How much opportunity for improvement exists on each side of this equation? How do I approach evaluating potential opportunities and make sure that I've considered all the options?
4. Delivery is generally the most expensive cost center of the circulation department. How do these costs compare to peers? Am I spending too much in some areas but not enough in others? Is my route turnover running ahead of or behind the industry norm and are we diligent in examining route profitability as it relates to route turnover? Are others managing differently, or more effectively?
5. Subscribers drive revenue. Are my starts and stops balanced? Am I deliberately investing in this area since circulation revenues now mean more to my success?
6. Staff for the future. Is my staffing or compensation structure in line with like-sized newspapers or those with similar market challenges?
7. Invest where needed, save where you can. If I'm going to invest more, where do I find resources and is it possible to redirect current resources within the organization?
8. You need the right skills for the future, but you don't have to own them. Do I have the right tools or level of expertise to determine where to invest or reduce spending to maximize the effectiveness of my operation? If not, where do I get them?
9. Building the right roadmap to transition is very important. What is the most effective rollout timeline for any changes to my operation so that we experience little or no disruption?
10. Keep your eye on the ball going forward. What are the key metrics I need to monitor in the future to ensure I'm maximizing the return from changes?
We all know how much the newspaper industry has evolved over the past five years. Publishers have a strategic plan for the revenue side of the house and should be just as strategic about the investments being made on the expense side. Do the analysis, build a plan and execute. If you don't have the skills in-house to evaluate your expense line items, go find them. A fresh perspective on your operations spending model can be the biggest win for your bottom line in 2015 and beyond.
Bob Terzotis is a vice president for Mather Economics, where he helps clients achieve revenue and subscriber acquisition needs. His deep circulation background makes Terzotis uniquely qualified to assist publishers, circulation directors and vice presidents in meeting market challenges. Contact info: firstname.lastname@example.org and (337) 456-8353.
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