Bad Math Leads To Poor Decisions

I am sure that those of you who practice the art of embalming are annoyed when you see other practitioners making the same mistake over and over again.  I have a similar reaction when I see other DeathCare advisors in trade journals making the same errors over and over again.  A particular pet peeve is what constitutes “comparing apples with oranges.”  And one of these keeps popping up.  I don’t blame the editors.  You really can’t expect them to check the numbers on everything they publish.  But I do blame Batesville who continues to promulgate one error in their cremation division.  It’s not their error either they borrowed it from an industry advisor.  But, either they haven’t checked the math or it serves their purpose to make the issue bigger than it really is.  You decide…and if you want to forward this to them that’s fine, maybe it will encourage all of us to “count responsibly.”

Recently, Federated Funeral Directors of America published their annual industry stats.  They didn’t make the error either so don’t blame them.  In fact, we need to thank FFDA for their consistent analysis and benchmarking.  Such information doesn’t exist on the cemetery side…at least that I have been able to find.

Because Funeral Service is a high fixed cost business it should “manage to the average margin” instead of to the average sale.  Of course, no one does but, still, the average margin in our profession is much more important than the average sale. And that’s  why this annoys me so much.  Comparing the impact of burial and cremation on the basis of retail price obscures the reality of what is really happening.

In a recent article it was reported that a study had found that the average casket and service sale was $6,700 (Vs. FFDA’s $6,451 average casket & service) while the average cremation (no merchandise) was $2,917.  The article concluded that cremation contributed only 43 cents compared to every dollar of casket and service sales ($2917/$6,700).  Ignored is the cost of merchandise directly related to the casket sale.  So while the revenue from the cremation IS both the margin (an apple) and revenue (an orange); the revenue on Casket and Service is only an orange.   We still have to calculate the apple.

Traditionally, the cost of sales in funeral service is between 17% and 20%.  I would argue it is higher but let’s leave that to next week.  So the cost of sale on our $6,700 would be approximately $1,340 (20% of $6,700) and the margin (the apple) is $5,360.   An apple to apple comparison would be cremation $2,917 and burial $5,360.  So, instead of cremation contributing 43 cents to every burial dollar the real number is closer to 55 cents.  Still a gap but using their specious method of comparing percents that’s a 28% difference!

Yes, I am picking nits and being petty.  But, for the past several years I have been doing independent comparisons of preneed products for my consulting clients.  What I have learned is that this is exactly the kind of math many preneed insurance companies use to distract customers from what they are really doing.  By taking an actual block of business (no averages please) and comparing them across a common denominator it is amazing how seemingly great growth isn’t that good after all.   Did you know, for instance, that simple interest can often grow more rapidly than compound interest.  Counterintuitive, but true.  Many casket companies do the same with casket discount programs hoping that people will brag about the percentage discount they are getting and forget to actually compare the net dollars they are paying.  I could give other examples but you get the point without my beating you over the head.

Please count responsibly!

 

 

 

 

 

 

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