Before we get into the meat of things, you must learn a little bit about accounting. As much as we want to think, “I’m worth $X,” it’s not that simple. There are competitive forces, consumer demand, and production costs to consider.
COGS, also referred to as “cost of sales,” appears on your Income Statement. It’s an accounting term that covers all direct costs involved in the production of your goods, including your wage as an employee for your company, raw materials, and rent overhead if you have a studio space. This expense is factored into your operating costs.
This is important to understand because, in the end, you need to know your bottom line. You can manipulate prices all you want, but if you are losing money on every shoot, your business will not last long.
Figuring Out Minimum Costs
What you decide to charge depends partially on what your competition is charging. You need to be competitive. But you also need to make a profit in order to stay in business. To do this, we’ll figure out overhead costs, set a profit goal, and set a pricing structure (based on a set of package options).
Overhead and direct costs for photography are less complicated than for inventory-based businesses. But these costs can still add up and are probably more expensive than you think they are.
In other words, think about how much you spend on average each month to maintain your equipment, buy supplies, fill up your gas tank to get to shoots, maintain reasonable insurance coverage, procure Internet access and cell phone service, promote your business, etc.
It’s critical for you to keep track of your expenses and the time you spend working on and in your business. Be diligent about this. Most creative soloists underestimate how much it truly costs to be in business.
The cost of running your creative business most likely includes expenses for the following items:
- Meals and Entertainment (client meetings, drinks, dinners)
- Auto (vehicular fees e.g., leased cars, gas mileage)
- Equipment (cameras, lenses)
- Supplies (prints, albums, film, pens, paper)
- Travel (airline tickets, taxi fees)
- Online Services (website hosting)
- Advertising Costs (online ads, business cards, brochures, thank you cards)
- Telephone / Internet (cell phone, business internet)
- Rent (retail or dedicated home space)
- Rights — Amortization
- Taxes (income, SUTA, FUTA)
- Deferred Tax Retirement Savings
- Insurance (equipment and professional/public liability)
- Networking Costs (membership fee, meetings)
Let’s set aside your business costs for a second. Now think about how much you want to work. After all, a big reason that many people go into business for themselves is to improve work/life balance and have more control over their time and attention.
How many hours do you hope to work each week? That is, how much time do you expect to spend on consulting clients, shooting, and editing? Do the math to determine your hourly rate based on your desired workweek (40 hours, 20 hours, 15 hours).
Then, know how much time you actually spend on administrative activities, such as promoting your work through a blog or other means and invoicing, filing, and handling other “housekeeping” tasks. Until you know differently, allocate 50% for billable hours; the other half of your working time to internal items.
How much do you want to make each year as a salary? If you’re just getting started and want to keep it conservative, let’s say $40,000 of disposable income – be sure to add 30% to that to cover your income taxes — you are projected to have to generate a gross of roughly $57,000, not including the other business expenses.
Now, how much profit do you want to earn for your business each year? This is an important but often overlooked aspect to self-employment. Your business profit is different and separate from your salary. It goes into a sum total called Retained Earnings.
The business itself needs to make money to cover things like new equipment, better space, etc. A standard profit margin ranges from 10% to 20%. Add this to your total gross—multiply your gross by 110% or 120% (1.1 or 1.2 respectively). That’s how much you’ll need to generate a profit for your company.
To determine your hourly rate, use your desired personal income (after company expenses are paid off) and divide that by the number of hours you want to work. That gives you a number that represents the minimum amount of money you need to make per billable hour. This is the minimum amount of money you need to make to make it worth it for you to pick up your camera.
Keeping all this in mind, avoid pricing yourself by the hour. Sometimes there are opportunities where you need to shoot for free or less than your billable hour to build business connections or future referrals. Everything is relative.
Your minimum hourly rate is for your information only … to help you ensure that you actually break even on your business and maintain a healthy profit margin to stay in business. As you get better at your job, you’ll be quicker and more efficient. And you should be paid more, not less, as you get better. This minimum rate reflects what you must make on a job per hour you spend working on it (and unable to work on something else or do something else).
In the end, most small business owners work more than 40 hours a week, but they are willing to do so because the work is fulfilling. You will eventually understand the bare minimum to operate your business by sorting things around.
I don’t mean to simplify the accounting process with a few paragraphs, but this book isn’t about accounting. And don’t be fooled into thinking that a single Excel spreadsheet can do the job – it’ll help monitor a particular aspect of the business – but the big picture is much more complicated. In reality, there are four parts to accounting financial statements.
- Income Statement
- Balance Sheet(s)
- Statement of Cash Flows
- Statement of Retained Earnings
Your CPA can help better explain these items.
Depending on your goals, adjust your business accordingly. There is not a single solution for everyone’s challenges, which is why you have to make the tough calls yourself. What’s most important is to understand the reasons behind your decisions. There will be a time when your business grows and you will be forced to consider making changes.
- What are You Worth?
- Psychology of Choosing
- Choosing is Painful
- Create Photographer Packages that Sell – New
- Secrets on How to Handle Discounters
- How to Make Discounting Work – New
- How to be Fearless in Pricing
- How to Name Your Packages
- Increase Your Perceived Value Easily – Coming Soon
P.S. Cheri De Haro attended my pricing seminar a few weeks ago and sent me a lovely note.
Lawrence – Thank you. Been routinely using the [pricing and packaging strategies] this last week with 100% success thus far ; )
Read more about this rewritten 2nd edition pricing e-book HERE.
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