Learn how overhead costs can impact a business. The problem is that businesses are often competing in a market where they are a price taker—not a price maker—making it difficult to recoup their overhead costs.
- We both work at Brigham Young University. Our offices are within 50 feet of each other. we teach similar classes. We've been there together for almost two decades, and, on occasion, we go to lunch together. - [Kay] When we do, we walk down the street and pass, what we affectionately call, the Bermuda Triangle of eating establishments. For years, we've watched restaurants and fast food places come and go. A new eating establishment will open up and, within a year, it'll go out of business. - As a result of this coming and going of businesses, we thought a lot about why this keeps happening.
It's not for lack of demand. This Bermuda Triangle is sandwiched between a major university and a local high school. - There are other food establishments in the area that have made it and have stayed in business. So why do some make it, and some don't? - These small business entrepreneurs have dreamed of opening their own business for a long time. They've scrimped and saved. They've planned and thought things through. They invest their life savings; and then it's gone, and with it, their dreams. - [Kay] Through some careful observation over the years, we've noticed a trend among these small businesses that try and fail.
They don't watch their overhead costs. - They have a menu and the food quality is good, so food quality's not the issue. They have a great location, so location is not the issue. Because these new eating establishments are located among so many other restaurants, price is not an issue. They must price their menu items to be competitive with the surrounding competition. - So what is the issue? Costs. Costs are the issue. Not the cost of their food, not the cost of their labor, but instead it's the cost of their overhead.
- When opening their restaurant, the owners want it to be nice. They want customers to walk in and say, "Wow." - So the owners purchase very nice furniture. They order very nice menus. They have the nicest lights, the most beautiful window shades. Their employees dress in snappy uniforms. The computer systems used to place and process orders: first rate. - And all these things cost money, and those costs must be recovered. The problem is these businesses are competing in a market where they are a price-taker, not a price-maker. - [Kay] A price-taker is a business in the market that must take the prevailing price and ensure that they can provide a product, in this case food, at a cost lower than the price they are able to charge.
- In the case of a price-maker, the business is providing a product or service that is so unique that they can determine what the market price will be. By the way, it's worth noting that a price-maker doesn't exist for very long because price-makers tend to attract others into the market. - [Kay] Now back to the Bermuda Triangle. These businesses that come and go are assuming that they can be a price-maker; that customers will come because of the nice atmosphere, because of the quality of the experience, and because the food is good. - What these businesses fail to realize is that most customers who frequent this Bermuda Triangle are not coming for the experience, they are simply coming for food, and the market dictates what they will pay for that food.
- These businesses that fail have misread the market. They've assumed that potential customers will pay for a premium food experience. What they will pay for is lunch, and they will not pay a lot for it as the market in this area offers plenty of options at competitive prices. - Businesses that fail often misread the market and assume that they can be a price-maker, when in fact, price-makers are somewhat rare, and when they exist the market efficiently attracts competitors. - [Kay] If you're thinking of starting your own business, investing your life savings in your dream, make sure to read the market appropriately.
You're probably going to enter a market where you'll be a price-taker. - That means you'll want to carefully watch your costs, so that you can deliver your product or service at the market price, and still be able to provide a profit for you. - Wonderful business opportunities are out there. Just keep your cost under control so that you can afford the price that the market is paying. You don't want to be like those businesses that have gone out of existence in the Bermuda Triangle.
Skill Level Beginner
Q: Why can't I earn a Certificate of Completion for this course?
A: We publish a new tutorial or tutorials for this course on a regular basis. We are unable to offer a Certificate of Completion because it is an ever-evolving course that is not designed to be completed. Check back often for new movies.