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by Steve Hartman
Economics is a force that is likely to guide your destiny, regardless of your awareness of its existence or the power that it holds over you. Nine out of ten businesses fail, and rarely is there any comprehension of the powers that have prevented their success. The power of economics is generally an ally to those who understand its power and how to harness it. However, economics is often the adversary to those who believe that their abilities and desires will replace the need to understand "THE FORCE".
We have an advantage in this country that we are, for the most part, unregulated when it comes to starting our own businesses. There is no test to measure our competency. Even in municipalities where a business license is necessary, no knowledge of business is necessary to get the license. The main reason this unregulated situation is permitted, is that the most injured party when a business fails is usually the owner of the business. However an attorney's, doctor's or electrician's lack of knowledge can have an impact on others and therefore they are highly regulated. Because these groups are forced to obtain and maintain a higher standard/knowledge of their trade they have a much lower incidence of business failure.
Most breeders started with a few birds as a hobby, and grew into a business, in most cases without the prior goal of being in business. The line between a hobby and business is often clouded with a lifetime of accumulated misinformation from many sources. Many of the economic FORCES that affect a business have 'definitions of business' that are confusing because they are prejudiced in their favor to accomplish their specific goals. Some of the FORCES include Society in general, IRS, Insurance Industry, Zoning Boards and State and Local municipalities.
Making sound economic decisions as a hobbyist or business person requires knowledge of these different groups' definitions of what constitutes a business. Here are a few common concepts (definitions) of what is a business:
Professors who analyze and teach business, when contemplating its definition, will often define business activities with concepts such as:
It is important to understand these definitions, terms and concepts. Being uneducated and unprepared can have grave economic consequences.
The western concept of business as we know it was initially defined by Adam Smith in his book The Wealth of Nations in 1776. This business theory (Laissez-faire Capitalism) argues that business left to the endeavors of individuals without the interference of government will do the greatest good for the most people. A society benefits the most when there is the least interference with one's pursuit of economic self-interest. This is the business theory the United States has worshipped since its inception and thus we are left to succeed or succumb on our own initiative.
There are unlimited combinations of activities to be considered for inclusion within your aviary management program. Since there is no exactly right or wrong way to run a business or hobby, it is not easy to define all of the parameters that need consideration when developing a plan of action. An adequate understanding of as many factors as possible, allows the prudent observer the opportunity to develop an ability to "more consistently make the better choices" that will lead to success. Understanding the concepts that govern each topic will help determine what limits to place on one's activities. Lets look at a few of the most obvious concepts.
This paper's primary goal is to assist in business management and not the management of pets; therefore, it is geared more toward understanding business concepts.
First, let's explore the concept of managing a flock of parrots verses a single pet. Several activities come to mind when thinking of "flock management." Dedication of space, nutrition, medicine, degree of interaction with birds, record keeping, and production levels are just a few of the many activities associated with maximizing one's potential as a bird breeder.
Dedication of space
A pet bird interacts with the owner and other household members as a normal part of its daily routine. This activity is necessary for a pet to enjoy an active lifestyle. Breeding birds are involved in activities with their mates that make household interaction counter productive. As pairs are added to the flock social interaction of the pairs become more tenuous, making a more stable environment increasingly important. So as a pet owner, there will be a lot of interaction with the birds; but as a manager of a productive flock, there is very little.
Pet birds may have a smorgasbord every day and maintain health. The time involved in preparing this diet is negligible and over successive days the pet will consume a complete diet. As pairs are added to the collection the time involved in preparing a smorgasbord diet may become a burden. Parrots, like children, and most adults, are unable to consistently choose a proper diet. When two birds in the same cage share the same smorgasbord, the dominant bird will eat all the twinkies and the submissive will usually get the peas and carrots. This leads to a fat inactive male that can't breed and a skinny non-ovulating hen with lots of vitamins and no fat. As a prudent flock manager you may need to shift to a less labor intensive pelleted diet with periodic treats. Hopefully the healthier birds will learn to sacrifice an interesting diet to gain an exciting sex life.
Medical care is usually one of the most difficult categories to shift into a "flock management" attitude. Pet birds are often part of the family, and therefore cost is not usually a factor. With a flock of birds, cost can be a major portion of your budget; and a primary reason many breeders do not make a profit. Careful screening and appropriate medical attention when adding a bird to the flock is the most cost effective tool you have. Education is the factor that will allow you to choose an appropriate cost effective process to maintain a healthy flock and turn over healthy birds to your clients. A pet bird would most likely have all possible tests and vaccines available. Breeders however, can forego many of these tests with proper flock management. A quarantine program of at least 90 days will allow a breeder to observe a new arrival and determine which of the available tests, checks and vaccines to utilize. Careful observation of eating habits, activity level and stools will alert an educated breeder to potential symptoms and narrow the number of tests necessary to competently add a member to the flock. In most cases, a good quarantine program and well designed aviary can limit the procedures necessary for a new arrival to a minimum of: 1.) Surgical sexing, 2.) Thorough physical examination and, 3.) A Chlamydia test. (Properly housed, a parrot with Chlamydia is easily treated and would potentially affect only a few birds. Since the accuracy of the available tests is also in question this could fall into the category of an unwise expenditure; however, Chlamydia testing is necessary from a product liability standpoint and can not be passed up.)
Documentation of medical records is generally the extent of a pet bird's records. An aviary will over a long term be concerned with several different types of records. This will include at least business and production information. Business information will consist of all financial transactions, inventory and depreciation schedules for property, equipment and producing pairs. Production information can cover many more areas depending upon how closely you scrutinize your aviary and desire to increase production. Minimum requirements will include date of egg laying and hatching for all eggs and babies, and could be as complicated as molting schedules, food consumption, lighting schedules and where feces are deposited throughout the production cycle.
These four areas: dedication of space, nutrition, medicine and record keeping should be adequate to convey the concept of FLOCK MANAGEMENT. As a pet owner it is not always easy to evolve your passion from a "I can't do enough for my baby" to an "It's not economically sound to devote funds to that activity" mentality. Economically successful breeders will always find the happy medium and learn to understand that breeding pairs have different needs than pets.
Diminishing Returns and Economy of Scale
Diminishing Returns and Economy of Scale are two terms commonly used by business analysts. These concepts are necessary to come to terms with what can we get by with and how much is enough.
Cleaning the aviary comes to mind as an area where the aviary may reach diminishing returns very quickly. In most properly designed aviaries the cages are suspended and the fecal material and dropped food fall through the cage bottom to the floor. It would be nice if the aviary remained spotless all times but that may be counter productive and unnecessary. Cleaning is necessary to keep fungal and bacterial levels below a level that is harmful to the birds. Research demonstrates that when the floor is kept dry, the droppings and food contribute very little to disease problems; therefore several days may go by without cleaning. It is also known that disinfectants in the environment, as well as disturbing the birds, can pose a significant threat to the health of the birds and to production levels. It is every breeder's challenge to find that point where keeping the aviary too clean may lead to diminishing returns by disturbing the birds and inhibiting production.
Economy of scale will help to define limits on how many pairs of birds a facility will have and how much production one can maintain. In other words, how much can we have, and do, with the time and money available. Aviary size can be used as an example of economy of scale at work. If an aviary has 100 pairs of birds and produces 200 babies a year, one person can probably handle the work load. If 10 more cages were added to this aviary the work load may necessitate additional help. It is probably not cost effective to hire an employee to work part time to take care of the extra work since there is also work involved in having an employee. The business now has to deal with payroll, taxes, no shows, security, etc. If the aviary is to grow it may be more cost effective to increase the size to 150 pairs to adequately utilize the additional help.
Future Evolution of Industry
A successful aviculturist will need to plan in advance for the future evolution of the parrot market. The parrot industry has been rapidly changing over the past 15 years. Initially, importation of wild babies was the main business. High incidence of disease and limited numbers of species were a common theme. As captive breeding became popular domestic babies were available with old diseases like Pacheco's disappearing and new ones like polyoma virus becoming popular. The current phase seems to be dominated by few large and many small operations breeding mostly ex-pet parrots. The majority of these ex-pets are possibly genetically predisposed to abhorrent behavior problems that make them poor candidates for the process of domestication.
With 15 years of experience many excellent aviculturists have begun unraveling the production secrets and have taken the time to begin selectively producing the better pet parrots of the future. This knowledge of a higher quality product is filtering down to the future parrot owners and creating a much more informed buyer. It is the mission of the successful, educated, long term breeders to determine market trends in advance and direct the market into the future.
Many possible potential markets will develop over the next 10 years. The most likely common denominator of the successful markets will be the concept of a "perceived higher quality". This is the factor which educated clients always look for. Car dealers use this concept to its fullest extent. Every Ford dealer in the country has the same cars to sell, but the dealer with the most inventory, the cleanest dealership, the fastest service and the lowest prices may still lose out to the guy with 10 cars and door to door service. These factors are part of that extra mile and are what economist call the "intangibles". It is always difficult to decide which intangibles to offer, but the person with the more carefully thought out plan and research, will be most able to "consistently make the better choices".
With all of the parrot inventory being produced in many small factories instead of a large plant, we find a great variability in the "quality control" of the product. The road to domestication will be a long one with many substandard pet birds being produced along the way. In a well designed parrot factory of the future, the attention should be focused on speeding up the domestication process while producing as few undesirable units (Parrots) and models (species) as possible.
Larger, healthier birds with consistently better color, tame demeanor and less need to vocalize every thought and concern will be showing up with each new model year. Some of the newer options will be genetically driven, while veterinarians may play a role in leveling the temper of an aggressive bird through yet to be developed spaying and neutering techniques. Perhaps a historical retrospective of other pet species will shed light on the future direction of the parrot industry.
Research and Development
Research and development has four components for the aviculturists. We will be looking at short and long term results in areas addressed both in and out of the aviary. Funding for this research will be born by both the individual aviculturist and the industry. In-house, careful attention and detailed observation, combined with creative record keeping will give birth to new concepts in parrot husbandry and production. Always there should be areas where new techniques are practiced, for long enough intervals, to produce useful knowledge. More often than not these new techniques will be counter productive. If it was easy to improve the process, anyone could do it.
Short term trials may include trying new products like formulas, incubators and brooders. Long term trials will likely include less tangible and recordable results. Examples include beneficial light frequencies and intensities, and which is the best time of day to offer food. Long term trials are harder to quantify and qualify due to the possibility of other environmental factors slowly confounding results. Slowly shifting confounding factors can be environmental and as simple as increased traffic on a nearby highway.
Current industry-wide research and development is in the form of existing non profit organizations promoting funding for medical research and in the future, a limited amount of conservation. Conservation work does not have a direct correlation to domestic parrot production but can often produce anecdotal information that can be used to assess the hows and whys of basic production behaviors. However, as the domestication process moves forward, we will be less in need of non-domestic comparisons.
The organization of parrot producers in America will probably, as other similar industries have, move toward a professional paid organization. This professional organization for the benefit of commercial members will: collect data, organize legislative movements, set minimum standards, and in general, support a professional level of ethics. Already there is a trend under way to provide these services; but until they are combined into a for profit organization, the consistent motivation of economic reward will not be present and aviculture will stagnate at the hobby and volunteer stage of evolution.
Marketing, not to be confused with advertising, concerns what is to be sold, to whom it's to be sold, and how it is to be sold. Once these areas are addressed a "position in the market" will have been established.
Simple plans work best. The more complicated the chosen market, the less likely it will be successfully conquered. A wholesale parrot producer who sells only macaws to established retail outlets has very limited exposure. It is relatively easy to sell one product to one type of customer. To the contrary, a producer selling forty species of parrots to wholesale and retail clients, must develop a very complicated pricing and delivery program to keep everyone happy.
Positive advertising is important in a new industry. Negative advertising can confuse buyers and cause them to question the quality and motives of even the best supplier. It is more important to distribute positive information about the best parts of the industry. By educating clients to the advantages of buying from you, without much criticism of the competition, the bar has been raised, and the buyers will self-screen other sources of the product. Very few businesses have enough knowledge base to operate at the highest levels; and very little competition is found at the top.
It is necessary to educate buyers about some negative parts of the industry. This can usually be done without singling out individual suppliers. If a producer comes across as a complainer, their status will automatically be lowered in the eyes of the buyer. It is more productive to deliver criticism directly to the other bird breeders, who are holding the industry back.
An educated business person will have an easy time advertising his product to the market. The basics of an advertising strategy include:
Regardless of which advertising techniques are used, the important information transferred to customers will fall into just a few categories.
The least expensive and most important advertising is the "goodwill" generated when a mission, with vision, results in a successful sale.
Methods of advertising are limited only by creativity. Some free advertising can be realized by promoting your product while helping others through:
Examples of paid advertising are:
Correct product pricing is always a tricky matter and can be the difference between wealth and the other alternative. Pricing is a combination of all the factors presented in this paper and a bit of intuition. A good economist can always find the optimal pricing of a product on paper, but a thorough emotional knowledge of the product and the client is the caveat that makes the difference. Supply, demand, and competition are synergistic factors which continually impact each other and pressure producers to become cost conscious and innovative. It is important to notice that cost of production and sale price is not the same. Cost of production is the least amount you need to charge per unit sold to break even. The price at which a unit is sold is determined by supply, demand, and competition. The examples later in this section will show how to find your cost of production.
Aviculture in the United States is still in its infancy as far as developing a quantitative and qualitative approach to pricing is concerned. Most hobbyists price their birds similar to the wholesale farm price set by larger breeders. This in turn, limits the wholesalers to a price that is similar to the highest price charged by hobbyists. As a consequence, very few parrot producers make a profit. Another limiting factor to developing a sound pricing structure is the lack of a truly better product. As time passes and a genetically higher quality parrot is produced we will have situations where the true cost of production can be determined.
Determining the true value of a parrot requires an economically viable industry. In a viable aviary, the economy of scale is determined by applying the rules of diminishing returns in all areas to establish a sustainable production level. Once established, and with a few years of fine tuning underway, it is possible to assess the actual cost of production. Let's take, for example, an umbrella cockatoo: Aviary A has 20 pairs of umbrella cockatoos, Aviary B has 60 pairs of umbrella cockatoos.
Aviary A, once well established, with a high quality sustainable habitat, can produce 60 babies per year. The yearly overhead to run the business including all items such as phone, insurance, electric, medical and feed is $15,000.00. During the year all labor is worked by the owner which averages 20 hours per week, or about 1000 per year. At a rate of $20.00 per hour this totals $20,000.00. The cost of building the aviary, which will last 20 years, is $50,000.00. Since the building will last 20 years, the cost of construction can be divided over the useful life, and the cost will be $2,500.00 per year.
Aviary B, once well established, with a high quality sustainable habitat, can produce 180 babies per year. The yearly overhead to run the business including all items, such as phone, insurance, electric, medical and feed is $35,000.00. Due to economy of scale the larger aviary will not incur increases in cost directly proportional to the increased size. The basic phone service still cost the same and the larger quantity of feed will be purchased at a discount.
During the year all labor is worked by the owner which averages 40 hours per week, or about 2000 hours per year. At a rate of $20.00 per hour this totals $40,000.00. Once again, economy of scale will reduce the hours per bird necessary to maintain the aviary. Example: When feeding small babies the preparation time to set up for feeding and prepare the formula is significantly longer then the actual feeding of a baby. Once feeding begins, many babies can be fed in a short period of time.
The cost of building aviary B, which will last 20 years, is $100,000.00. And again the larger building will benefit from a greater economy of scale and cost less per square foot than the smaller one. Since the building will last 20 years, the cost of construction can be divided over its useful life, and the cost is $5,000.00 per year.
Obviously not all costs have been included in this example, but the concept can be used just the same when incorporating all of your numbers into the equation. Assuming that Aviary B is truly sustainable on a long term basis, then the actual value of the product should be $444.00 per unit. If there are not enough Aviary B's in existence, then there will be a market for Aviary A's product, and the price will rise to meet the production cost of the smaller producer. But as this happens it becomes attractive for more larger aviaries to begin production, and the price will go down again. All other things being equal, this situation will bounce back and forth until the market reaches a point where there is a combination of enough large and small aviaries to meet the market demand. Small aviaries will always have a niche, because they tend to work harder at providing the items which are valued as perceived higher quality.
Never sell your babies at the same price as the competition just because that is the going price. Every breeder supplies a different combination of quality of product and service at each sale. Know your business and maximize the profit potential of the efforts you put forth.
Zoning regulations help insure that land maintains integrity of character. Most of the land in the United States has been divided into land use categories. Some of the categories include: farm, commercial, light business and residential. State, county, township and city zoning boards are in charge of determining what land use is appropriate for each area. They also have an obligation to all land owners to enforce the rules within their jurisdiction. Sometimes these classifications overlap and enforcement decisions become complicated. An example would be farm/residential or multi-family/single family residential use. Enforcement of these regulations safeguard an investment made in a specific piece of property. It also insures a cohesive community development plan.
Each type of land use carries a different value based on its utility. Example: Land generally designated for commercial businesses increases in value with closer proximity to downtown areas; and land designated for single family residential is valued higher than mixed business/residential. Supply and demand in each area dictates their relative value to each other.
Insurance is sold as a safeguard against loss of a specific item that can not easily be replaced. It is sold by companies who are betting that the combined total losses of all policy holders will not exceed the premiums they charge. Insurance products provide risk management opportunities for most aspects of managing a business.
Proper risk management allows continuous management of a business with as little interruption as possible after a loss. If you can afford the loss, it is not necessary to have insurance coverage.
Although there are insurance products available to cover many of types of business related losses, we do not have to know about all of them. Insurance companies with past experience have learned to package policies with most of the basic coverages in just a few products. Policies tailored to business are often called "Business operators policies", or "BOP policies". Within these policies there are usually many modifications available to tailor coverage to meet individual business needs.
For most small businesses, coverage required will be:
Business and product liability are two important coverages for businesses, and these coverages are standard in a BOP.
Business liability coverage is more necessary than new owners of a business often think. A business owner can be held to higher degree of responsibility when an injury occurs to a customer, as opposed to a friend visiting your home.
Example: Injuries sustained by a friend, while climbing your icy stairs, do not usually result in a finding of negligence. The reason is, not everyone in a residential setting cleans their stairs, and a friend is taking a similar risk as would be found at home. In a business setting there is a higher standard. When a customer comes to a place of business and an injury occurs there is a more liberal interpretation of what constitutes negligence.
Product liability is important whenever one is selling something. Businesses have a responsibility to know the product they sell, and all possible problems that can occur related to the product. Warnings are even necessary when seemingly obvious hazards exist. Why are cigarette companies required to put warning labels on a known health hazard? Parrots can be very hazardous to own; the bird could bite, irritate allergies and even pass zoonotic diseases. So far, the parrot industry has not been held accountable for parrots biting, but they are being held responsible for transmitting diseases. Several cases of humans contracting chlamydia from a parrot have been settled in favor of the customer, at great monetary expense to the breeder. It may be just a matter of time before an owner will sue a breeder for damaged hearing.
Parrot life insurance is available to cover pet birds. In most cases this coverage is not necessary. In a business setting however, the loss of part of a flock will be devastating. Within a general business policy it is possible to cover, not an individual bird, but a group of birds. This coverage can cover many different causes of death; but are usually limited to death from a peril, such as fire, tornado or electrical outage; but not because they were not fed properly. If the aviary has 100 pairs of birds valued at $100,000.00, you can elect to insure a realistic portion that may be lost in an accident, say $30,000.00. If a disaster occurs, the losses are rarely total, and the business would be covered up to the amount of $30,000.00 worth of stock. The policy would also cover the building, and in most cases income loss due to the disaster.
The premium for business automobile coverage is usually higher than that for personal automobiles. Vehicles used for business generally drive more miles, and often with different drivers. These conditions among others, increase the exposure to hazards, and are correspondingly more expensive. Many small business owners get by with personal automobile coverage. This however, can be disastrous if a large claim occurs, the insurance company investigates, and the vehicle was being used for business purposes at the time. A personal policy will not cover a business related accident. This is also true of a homeowner's casualty and liability policy.
Term limits on most policies are generally one or three years. An insurance company is taking a risk when a new client is added to their list of policy holders, so it is in their best interest to eliminate a poor risk as soon as it is found. For this reason, many insurance policies are termed one year renewable. This limit allows an insurer to purge a bad risk quickly. Because most policies are for one year, very few policy holders are canceled. They are simply non-renewed.
Many insurance agents receive a commission on the sale of an insurance policy in two payments. The first is a small percentage of the sale paid at the time of the sale. The second is a payment at the end of the year, based upon the claims against all of the policies this agent has sold. The greater the total claims, the less of the held back percentage is paid to the agent. In this way an insurance company encourages their agent to carefully assess the risks involved with each new client. If a higher risk level, like a business being run out of a home, comes to the attention of the sales agent, after the policy is sold, he will likely not renew this policy on its anniversary. This situation occurs regularly with parrot breeders, piano teachers, and other home based businesses.
Homeowner insurance policies exclude most business activities, yet when a business related claim does occur the insurance company may end up spending their resources in court fighting the claim at great expense. Make sure there is adequate and appropriate coverage for all items necessary to insure the business properly. Once non-renewed it may be very difficult to gain future coverage from any company. Because of the increasing popularity of home based business, there are many companies specializing in insurance for these situations.
Unfortunately, space does not permit comprehensive discussion of this topic. In most cases, a much greater understanding of insurance will develop after a few years are spent in court arguing with an insurance company, and creditors are negotiating with you in bankruptcy court. Find a knowledgeable agent and do not hide anything from him. When needed, you want your agent on your side.
An implied or express contract exists, if two or more individuals agree on a course of action, and have "A meeting of the minds". In order for a contract to be valid and legally enforceable it must meet five specific criteria:
Contracts do not have to be in writing. All contracts are binding, it is just easier to enforce a well written contract.
Express contracts can be oral or written. A deal to purchase a parrot for a designated price, at a certain age is an express contract. Even if not written, it is an implied contract that the parrot will be alive.
If you're not having fun, you're not doing it right.
Time, money and energy are the resources that build a business. Of the three, time is the only non-renewable resource; don't waste it. If you do the research necessary to succeed, you will end up in a very select group. Only two percent of business last long enough for the next generation to take over.
Steve Hartman (USA)
Mr. Hartman obtained a B.S. degree from the College of Agriculture at Ohio State University in 1977. He became involved in psittacine aviculture in 1987 and now profitable produces baby parrots for the wholesale pet industry. His fields of interest include medical and husbandry research and legitimizing the pet bird industry.