Maximizing Profits: Contract Out or DIY?

(Photo: davidd)

We did a kayak/hike/swim tour with Kayak Wailua in Kauai, Hawaii, mainly because our guidebook said it was as good as other tours and less expensive. I think the book was correct, so I asked the guide: “How do you guys charge a lower price and still survive?” 

He answered that they are larger (because they have more permits for river trips), enabling the owner to do his own booking directly, thus saving expenses. Fine, but implicitly the opportunity cost of his time must be less than the cost of contracting out, or he is not profit-maximizing. If he is profit-maximizing, then implicitly he has taken advantage of economies of scale in this “industry,” while his competitors haven’t. If that is so, I would expect some consolidation among his competitors as they understand the shape of long-run average costs. (HT: KY)

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COMMENTS: 8


  1. Matt says:

    I think the answer lies not so much in “profit-maximizing” as much as “getting to hike, bike, and swim in Hawaii rather than sitting in an office.”

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  2. Pat McGee says:

    A possible reason against consolidation: would that mean the current owners would get less time on the water? I expect that most if not all of them consider that the biggest part of their income, even if it isn’t cash.

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  3. TexCIS says:

    So now your Hawaiian vacation is tax-deductible as a business expense . . . thus maximizing YOUR profits.
    ;)
    Clever.

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  4. Brian says:

    You need to remember the market you are dealing with. Nothing against guides I was a river guide for many years, but the barrier to entry for a tour company in Hawaii is fairly low. You just need a permit, sometime a certification and insurance. So you have an industry that is saturated with Joe Guides who are hungry for clients and happy to work for fairly low wage in exchange for surfing, diving, kayaking all day rather than sitting behind a desk. In comes your “profit maximizing” booking agents which are typically hotels, travel agents and those “tourist information” booths. They are more than happy to push clients your way, but at a price. So with a lot of demand for clients and little supply of clients, Joe Guide has to share a big part of his cut with the booking agent. As a right of passage if you can build your own clientele and reputation enough you can start booking your own clients at a discounted rate and stop sharing with the booking agents while increasing your profits.

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  5. Jerome S says:

    tl;dr version: “shrewd businessman doing well for himself”

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  6. RGJ says:

    If his answer had more than five “dudes” in it, you may be overanalyzing his buisness acumen :-)

    Also, you aren’t factoring in quality control in booking effort…maybe he is getting a benefit with the personal touch.

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  7. Ryan says:

    Maybe he likes doing his own booking, so the effective opportunity costs are low. Maybe there are large barriers to consolidation because those owners enjoy being their own bosses. Small businesses frequently do not maximize profits because they have other priorities.

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  8. mannyv says:

    You’re asking the guide why the owner does something. It’s quite possible the guide has no idea what they charge less. Maybe it’s because they make less, and everyone else’s prices are inflated? Maybe this owner doesn’t spend a ridiculous amount of money buying marketing that they don’t need?

    Without a look at the numbers you can’t tell…but it’s almost a given that an employee will be partially to mostly clueless about the establishment’s finances.

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