What is revenue?

Simple. The money we get from circulation, advertising, the Internet and, of course, from the myriad value-added services and products launched on the back of our brands.

Easy. That’s revenue.

And costs?

Well, there’s newsprint - always too expensive. Production costs - a noun, verb and conclusion all in one sentence.

Labor? Ten percent below last year. Editorial. Subject to witchcraft. Marketing? Never enough. And don’t forget overhead, which none of us are allowed to question because this is code for the accounting department.

Add the costs up. Subtract them from the revenue. And that leaves profit. Everyone knows that running a good business is about keeping the costs below the revenues, and these days keeping your job is also about ensuring revenues grow while costs fall.

Or something like that.

Dichotomy

I was reminded of this recently when talking to a colleague whose bosses - the big corporate bosses; not the local ones - had asked him to cut ad department costs. Since his only costs were sales staff, the ax 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 architects of profit and loss simply don’t understand the business. It’s really quite simple: Revenue. Costs. Revenue. Costs. Revenue. Costs. Revenue. Costs.

What really matters is the cost of the revenue, and after deducting that cost, what remains pays for the rest of the business.

One practice, one 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.

In the case of circulation, we deduct distribution, marketing, commissions and the cost of circulation staff. In advertising we deduct sales costs, bonuses, marketing costs and creative costs.

Benchmarks show that on average newspapers are left with around a third of their circulation revenue after costs are deducted.

In the case of European subscription newspapers, this figure is around 18 percent. In other countries, particularly in the United States where churn levels are high and subscription rates are low, costs can exceed revenues.

This is acceptable because these papers make up the difference from advertising, but it does raise the question of whether free distribution might be more effective.

The real costs

Since newspapers are also relatively price elastic, changes in price have an impact on circulation (the rule is a 2 percent rise causes a 1 percent decline), so if the circulation costs are largely fixed, the revenue benefit of a subscription price hike is quickly erased.

Advertising revenues, on the other hand, are what pay the wages. On average, 85 percent of ad revenues remain after costs are removed. I have a saying that circulation is vanity, but advertising is sanity. The editor might be very proud of the circulation, but the advertising department pays for the car he drives.

Newspaper business managers are generally charged with achieving some basic numbers, whether it’s from 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 maximize their contribution to the company.

This often includes decisions on staffing levels. We have become so obsessed with head counts, labor contingent, FTEs (full time equivalents - notice how they’re never called people!), that we are often cutting effectiveness in the name of efficiency and economy.

Restructuring the P&L to track net contribution over time makes for a far more strategic overview of the business. It enables managers to make better decisions, and for their managers to realize the impact of broad strategies.

Cause and effect

It also permits more interesting analyses of cause and effect.

Let’s revisit what happens when subscription rates are increased. Because the negative impact on circulation is half that of increasing rates, then a boost in prices should bring in more money.

This is hilariously naive. In many markets, a major reason for newspapers losing share of advertising is that their circulations are declining.

There is a strong, direct correlation between declining circulation and falling market 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 advertising share. But few newspapers are armed with the means to track such consequences. 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 maelstrom 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 were 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 illiterate ones working on the sports desk.

Lack of proof

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 relative benefits of one workflow method over another, they are not armed with objective rationales to track resources.

The point is that we have the means to track performance measurements in terms of economy, efficiency and effectiveness.

But we need to know whether what we are measuring is appropriate to steer the business forward.

That we choose the wrong measures as far as advertising and circulation is concerned, and that we don’t measure editorial at all, is a conscious decision.

But that doesn’t mean we can’t change course and adjust accordingly.

There is an old joke about not letting facts get in the way of an argument. I would contend that if we are armed with more facts we’d argue a lot less and achieve a lot more.

Jim Chisholm is joint principal of iMedia, Ifra’s joint venture advisory service. He can be reached at jim.Chisholm@imediaadvisory.com.