All managers want to know how profits will change as the units sold, selling price, or the cost per unit of a product or service changes

Home Depot managers, for example, might wonder how many units of a new power drill must be sold to break even or make a certain amount of profit. Procter & Gamble managers might ask how expanding their business in Nigeria would affect costs, revenues, and profits. These questions have a common “what if” theme: What if we sold more power drills? What if we started selling in Nigeria? Examining these what-if possibilities and alternatives helps managers make better decisions.

The following article explains how Goldenvoice, the organizer of the Coachella music festival in California, generated additional revenues to cover its fixed costs and turn a loss into a profit.

How Coachella Tunes Up the Sweet Sound of Profits^*

Each year, the Coachella music festival in California features more than 150 of the biggest names in rock, hip-hop, and electronic dance music. Putting on this annual music extravaganza is costly. Headlining acts such as Beyoncé command as much as $4 million to perform, and production—including stagehands, insurance, and security—costs up to $12 million before the first note is played.

WENN Ltd/Alamy Stock Photo

To cover its high fixed costs and make a profit, Coachella needs to sell a lot of tickets. After struggling for years to turn a profit, Goldenvoice expanded Coachella to two identical editions on consecutive weekends—same venue, same lineup, and same ticket price—and Stagecoach, a country music festival at the same venue 1 week later. This allowed temporary infrastructure costs such as stages and fencings to be shared across all events. With tickets prices from $429 to $9,500, the 2017 Coachella festival sold $114 million in tickets, while Stagecoach grossed more than $22 million in ticket sales. By expanding Coachella’s volume, Goldenvoice was able to recover its fixed costs and tune up the sweet sound of profits.

High fixed cost businesses, such as American Airlines and General Motors, pay particular attention to “what ifs” behind decisions because these companies need significant revenues just to break even. In the airline industry, for example, the profits most airlines make come from the last two to five passengers who board each flight! Consequently, when revenues at American Airlines dropped, it was forced to declare bankruptcy. In this chapter, you will see how cost–volume–profit (CVP) analysis helps managers minimize such risks.