Understanding The Foundations

of PricingBridging Treacherous

Waters

The Pricing Questions How Much? Is It Too Much? Is It Enough? What Is My Markup? Priced For Profitability? Pricing In My Market? Positioning And Price In Line? Thousands Of Other

Concerns…

Success Factor Terminology

• Cost of Sales (COS): For every dollar received from the customer, not more than 40 cents (40%) should be spent to created the product.

• Gross Profit Margin (GPM): Amount remaining after the products (images and their presentations) are produced.

• Owner’s Compensation (OC): Included in General Expenses as the reward for day-to-day work in the business

• Net Profit Before Taxes (NPBT): “Return” the owner earns on the capital invested in the business.

• Cost of Doing Business (CODB): Mission critical calculation for your financial success. Every day you work for a client for less than your daily CODB… YOU LOSE $$!

• Markup: The difference between your production (purchase) cost and your sale price. Typically expressed in percentage (%) form.

Business/Pricing ModelsFilm Based

Home BasedTotal Sales: 100%

-Cost of Sales: 40%= Gross Profit: 60%

-General Expenses: 50%=Net Profit Before Taxes: 10%

Retail Location100%

30%70%60%10%

Business/Pricing ModelsDigital Model

Home BasedTotal Sales: 100%

-Cost of Sales: 35%= Gross Profit: 65%

-General Expenses: 55%=Net Profit Before Taxes: 10%

Retail Location100%

25%75%65%10%

Digital model adjusts COS downward by 5% to compensate Digital model adjusts COS downward by 5% to compensate for the increased reinvestment cost showing up in General for the increased reinvestment cost showing up in General Expenses through Depreciation.Expenses through Depreciation.

Price Changes Over The Years

1995/Home Based Film Model/40% COS with physical costs of $60/unit to produce one (1) 11X14 retouched & mounted image. $60 x 2.4(COS Factor) = $144

1999/Retail Location Film Model/New COS at 30% due to an increase in film & processing by $5 to $65 total/New COS factor of 3.3 to reflect the 30% COS $65 x 3.3 = $214.50

2009/Fully digital capture, retail storefront/COS adjusted downward to 25% to offset the cost of digital equipment/Increased workflow costs push COS to $70 per unit/mark-up the per unit price by the 25% COS factor of 4: $70 x 4 = $280

Cost of Sales Expenses

• Imaging media • Job Specific Costs

• Processing / Storage Media • Frames / Accessories / Packaging

• Retouching / Print Finishing • Sales Commissions

• Production Labor • Credit Card Transaction Fees

• Contract Labor • Online Sales Transaction Fees

Cost of Sales: Capital Expenses

(Investments)• Real Estate• Leasehold Improvements• Vehicles• Furnishings• Fixtures• Equipment / Props (over $500)

General Expenses:The 7 Managerial

FunctionsI. Owner’s CompensationII. Employee Expense (Salary and Benefits)III. Outside ServicesIV. Building OverheadV. AdvertisingVI. Administration CostsVII. Depreciation

General Expenses: Line Items

I. Owner’s Compensation Owner’s salary/benefits

II. Employee Expense Employee salary/benefits

III. Outside Services Janitorial Trash Snow Removal Lawn Service

General Expenses: Line Items

IV. Building Overhead Postage – general Mortgage Interest Utilities Maintenance (building) Insurance (building & liability) Property tax

V. Advertising

General Expenses: Line Items

VI. Administrative Costs Postage – general Telephone Props & Camera Costs (including camera maintenance,

insurance) Office Expense Education Expense (does not apply to student loan) Interest Expense Auto Expense (including automobile insurance) Accounting/legal (including use taxes & licenses) Miscellaneous

VII. Depreciation

The Key BenchmarkOwner’s Compensation + Net Profit (loss)

Business Case: Owner is drawing a salary from the business of $80,000/yr.

Business is carrying a loss of $60,000 What are the financial results?

Owner’s Compensation: $80,000Net Business Profit (loss): ($60,000) Financial Result: $20,000

In this case, the photographer/owner has a net financial result of $20,000 based on the $80,000 salary checks cashed and the $60,000 he/she had to put back into the business to cover its losses.

The Bottom Line…. Research and experience reveal a well managed

photography business has an Owner’s Compensation + Net Profit of 38% of Gross Sales.

Home –based studios (2005) with an average Gross Sales of $129, 394 achieved financial results of $32,977 (25.5% of Gross Sales).

Brick & Mortar (2005) with average Gross Sales of $238,689 achieved annual financial results of $46,036 (19.3% of Gross Sales).

Best-performing studios (home-based & retail) are achieving financial results of 40.7% and 37% respectively, of gross sales.

Source: 2005 Studio Financial Benchmark Survey Analysis

Calculating Your CODB What goes into the CODB?

In short, the CODB contains business related only expenses/costs you cannot directly bill to the client.

The CODB does not include personal expenses and costs such as:You can not charge for your student loanReimbursed mealsHouse rent (non-business portion), non-

business related magazines, home utilities, groceries, entertainment, car expenses (personal use),etc.

Calculating Your CODBAnnual Accounting Method

Do The Math… Let’s assume you were REALLY BUSY

and managed to get in 75 shooting days for revenue generation

Your CODB is: $99,920 ÷ 75 = $1,332.27 per working

day What does this mean?

Your CODB can be reduced by increasing Gross Revenue or decreasing costs

Remember… Your CODB is not your day rate & you

should not bill based on your day rate. A day not shooting is not a day

wasted… a lot to do: Paperwork Repairs Taxes Back-end work Studying Marketing R & D More Marketing Testing Even More Marketing

Your Assignment Due Monday – Week 7 Has a weight of 10% of your total grade Will mean the difference between running

a successful or unsuccessful business/career

This is not a one-time exercise: you need to do this calculation at least 2Xs per year

Calculate YOUR Cost of Doing Business Be realistic Keep the numbers conservative This is for real, folks… KEEP IT REAL for YOU!