We recently asked Courtney Zerizef of Homeroom what she thought about how to price your products and services. This is what she had to say…
Last week, we dissected the problems with a market-based pricing model in the creative industry. Now we’re addressing HOW to come up with pricing that works for you and your business. What are some steps that you should take to get your pricing set on the right foot? How do you stop guessing and create an actual pricing strategy?
Firstly, know your margin for each and every job.
If it weren’t weird to scream this from the rooftops, I would. No joke. IMO, margin is the single most important piece of financial information to know when running a business.
Essentially, you need to know how much it costs you to deliver the service that your client is purchasing. Start by listing your expenses for the job. Examples of per job expenses (in accounting terms this is known as variable expenses) are gear rental (for photographers), client marketing material, delivery material, new font (for designers), shipping, travel, or assistant payment. Below is a very simple example of margin for one job.
Margin is important to consider when you’re setting your pricing because this is the number that your business is actually making per job. No longer should you be saying “I just booked an 8hr wedding, I have $3,600 to buy a new camera body”. Now you will be saying “I rock! I just booked an 8hr wedding. I have $2,665 to go towards paying my business’ overhead, paying myself, and my taxes. Only 1 more wedding to go before I can buy that new lens I’ve been wanting, and have budgeted and strategized for. I’m sooooooo AWESOME!” 😉
One job is great, but
how does margin turn into a
budget for the whole year?
How does revenue and margin morph into a pricing strategy? This is sometimes a hard transition. At Homeroom, we often work with creatives to help them solve their per job pricing challenges and also translate that into annual goals and bringing home that sweet, green cheddar.
As discussed above, margin per job contributes towards being able to pay (1) overhead expenses (aka fixed expenses or CODB), (2) salary, and (3) taxes. Now that we’ve done the first couple steps, we need to think bigger. We need to think about the year as a whole.
(1) What are your annual expenses for your business? Do you pay for any annual subscriptions? What about office space? We all need a computer (and a cell phone). How much will it cost to replace your hunk-a-junk laptop next year? What about advertising? How are customers going to find you?
In the example below I assumed $10,000 of overhead. This is likely pretty realistic (or low) for a photography business, but may be high for a designer or florist. You’ll need to create a line item budget for your own business. If you’re creating one for the first time, it’s a good idea to use last year’s expenses as a general guide. If there was no last year, you’re going to need to do some research and make your best estimates.
(2) What about personal expenses? How much do you need to make in order to live? How much more do you need to have a good quality of life? If you want to pay yourself regularly instead of just during the high season, you’ll need to create a “salary” based on your projected work and personal need.
(3) And then there are taxes. Uncle Sam isn’t forgiving when it comes to getting paid. In the example below I estimated taxes by assuming 30% of a salary. This will change based on the number of exemptions, how you file, and how much you actually end up paying yourself. There are calculators online that can help you to individually estimate taxes, but it’s a good idea to consult a professional based on your own personal filing.
Now that we have a dollar amount to shoot for we need to translate that into actual jobs. How many weddings do you need to shoot in order to create the $62,000? This is where your per job margin comes back. For the sake of this example, I’m going to pretend that the only service being offered is the previously calculated 8hr wedding coverage.
And now we’re getting somewhere! 24 weddings is an actual number that you can use to create goals for your business. If 24 isn’t a realistic goal, you can tweak the numbers that you entered into your equation: lower your expenses, raise your price, pay yourself less, spend less time per job, etc. Numbers don’t lie, but we can change the numbers to make your end result more realistic and attainable.
Obviously, most creatives offer various levels of service or product. Florists offer various sizes and arrangements. Photographers sell different packages or shoot different subjects. Various products and services will have different cost and different time. It’s a juggling act and the more you offer, the more balls you have in the air. My advice is to start simple and then expand. As a florist, start by only offering two sizes and two arrangements (i.e. bouquet vs. tabletop). As you grow and feel confident in your pricing strategy, add a second line. Mastering one system at a time will help you in your juggling act; soon enough you’ll be the one tossing flaming knives.
You can see how pricing is much more extensive than just making sure your list price fits into current market trends. That’s just a cog in the wheel. In our workshops, creatives walk away with their own, comprehensive pricing & financial strategy from start to finish. Give me some dedicated time and a little brainpower, and we’ll lay the foundation to enable you and your business to be more successful year after year. Keep in mind that while it’s sometimes overwhelming, by taking the time to do the work and create a unique pricing strategy for your own business, you’re putting yourself and your business in a much more sustainable position.
As the founder of Homeroom, Courtney works with creatives all over the country to help them build a sustainable business.
Breaking the association between ARTIST and STARVING, that’s Homeroom’s sole mission. After running her own photography business for half a decade, Courtney decided to hit the books and get her MBA, and that’s where Homeroom was born. Homeroom (and Courtney) are based out of Portland, OR, but offer workshops and one-on-one consultation for creatives all over the country. Bridging the gap between the business world and the creative industry; with each service, they not only provide unparalleled content, but they also make sure each attendee is able to tailor that content to their own unique business.