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This business makes its margins at 58% off

Each week, Grid does a deep dive on the economics of running an everyday business, from a tattoo parlor to a dog-walker. This week, we examine how Urban Kayaks makes ends meet.

Aaron Gershenzon, Asher Gershenzon and James Morro opened Urban Kayaks in 2011, a rental and tour operation located at 260 E. Riverwalk South. In June, they signed a one-year contract with the city to operate as the sole contractor for the Chinatown boathouse at Ping Tom Memorial Park, at 300 W. 19th St.

Origins: Morro and the Gershenzon brothers go back more than a decade, to Francis Parker High School, where they were classmates. During college, Aaron Gershenzon parlayed a lifetime of experience kayaking—he’s earned American Canoe Association certification on Lake Superior—into a management role at Wateriders, now one of Urban Kayaks’ primary competitors. James tagged along in the summers. Before long, the trio got to dreaming, and things moved quickly from there. “It went from me crashing on their couch trying to write a business plan—to spiraling into a business,” says Morro.

Start-up costs: $30,000 in kayaks, paddles, life vests and other equipment. $25,000 in dock and infrastructure. $10,000 in permits and licenses, $5,000 in mobile office and storage space, $5,000 in motor boat safety craft, $2,500 in website costs, $2,000 in marketing items and about $15,000 in other miscellaneous expenses (including covering any mistakes made along the way, says Morro). Add in dog food for Joni, a chocolate lab and Urban Kayaks’ mascot, and startup costs ran to a little less than $100,000.

The team raised $30,000 to finance the initial stages, and paid off all debts within the first two months of operation. “Groupon was a big help,” says Morro. “We sold 1600 tours in the first 8 hours we were open for business.”

Expenses: Payroll constitutes the most significant expense. Urban Kayaks employs 16, six of whom are full-time, at a range of $10-$20 per hour. Property and liability insurance are “very expensive” says Morro, though he declined to go into specifics. Workers compensation takes a big bite. This year, it’s paid $40,000 in workers compensation.

To operate on the Chicago River, Urban Kayaks must pay the Chicago Park District concession fees – 10 percent of its gross, which was about $400,000 in 2012.

Efficiency gain: Instead of repairing older kayaks, they sell them off individually. By buying in bulk, they can get boats new for around $400 — about the same as what they get for selling them used.

Seasonality: Urban Kayaks only operates about half the year, what with the frigid winters and frozen river. Come October, they throw their equipment in storage, pack their bags and head to Colorado, where they work as ski instructors. Tough life.

Pricing: The most popular tours are $60/single or $120/tandem, but the majority of customers don’t pay the full rate. Its latest Groupon offer, which more than 490 people have bought, is for 58 percent off that price.

Marketing: Morro and company make hay with variable pricing. Most of their customers come through deals websites Groupons and LivingSocial. These deals put “volume on the water.” And because Urban Kayaks’ marginal costs are low, the firm is happy to get anyone in a boat at 3 PM on a Wednesday.

They also place brochures in a number of area hotels to attract out-of-towners, who constitute about 40 percent of their business.

The bottom line: Morro won’t disclose specifics, but he says the venture is already in the black and continues to grow year-over-year: “We expect to be substantially more profitable this season than last.”

Photo by Sara Mays