What can your business learn from low budget production houses in Hollywood? Turns out, a lot!
This week I listened to a very interesting NPR Planet Money podcast. The episode made a very interesting observation that likened a specific low budget production house to venture capitalists… with equally successful Returns On Investments! Why is that even remotely important for your small business? I hope that after reading this article (and listening to the podcast) you’ll find a few practical and actionable concepts you can incorporate into your business practices starting TODAY.
Rob Cohen revolutionized car chase movies with The Fast and the Furious franchise. After Hollywood turned on him, he got a knock at the door with a very lucrative offer. Today’s show: the economics of the low budget production house that gave Rob Cohen a chance to prove himself again.
Source: Episode 650: The Scariest Thing In Hollywood : Planet Money : NPR
Jason Blum is known in the movie industry as the producer having amongst the best Return on Investment’s (ROI) for his films. When comparing how much money went into making a film vs. how much profit the film earns, Mr. Blum’s films are 6 of the top 20 grossing films over the past 5 years. An example is Blum’s purchase of the movie Paranormal Activity for $15k, and returned $200M. The key to Blum’s success is very similar to how venture capitalists make bets on startups. By following Blum’s three rules, you too can net a hefty return on your business investment.
Three Rules and Their Application To Your Business
1. Not too many speaking parts. Whenever extras speak, you have to pay them $500. How does this apply to business? Remove non-essential expenses. Does your business require a physical location to operate or can you work remotely? Do you need full time staff? Select your team wisely. Are you a one-person shop? Are there any non-essential tools you can do away with? Cut out the fat and get lean!
2. Not too many locations. Adding filming locations increases both logistical costs and time. In business, you may benefit from consolidating operations and performing an analysis of your core business. Concentrate on where your business is earning most of its revenue and remove yourself from the ‘extras’ that suck up your time and resources without an adequate return. The 80/20 rule argues that 80% of your revenue comes from 20% of your customers. The same can be said of your products and services. Which products or services are keeping the lights on? Which are sucking resources away from your core business?
3. Talent gets paid as little as legally possible. However, profit is shared through blockbuster bonuses. How is the pay being distributed within your organization? Is your rock star employee bringing in enough business to justify their salary? These are some questions you may have to ask yourself and consider offering an incentive based salary. The employee might be more motivated if he or she has control over how much they can earn. Sure, you may end up paying a higher salary, however, if you’re tying incentives to your company’s overall profits, it’s a win-win scenario for all.
4. (bonus) NEVER, ever, break your budget. Think of the Sunk Cost Fallacy. In the movie industry, companies go over budget and instead of trimming the expenses, they continue to dump more money into a movie hoping to spend their way into a good film. Businesses can often fall victim to the same concept if they fail to hold themselves accountable to sticking to a budget. Necessity breeds ingenuity, and as such, face yourself to compete based on skill and competitive advantage, and not rely on your spending power. Because believe it or not, there’s always another bigger company with a deeper pocket that can outspend YOU. Rely on talent and hard work.
Just as I’ve found ways these rules can benefit my businesses, I hope you too can incorporate the concepts and ideas described above.