Learning how to run a business is no easy task. Figuring out how to price for profit is a challenge in itself. The first step is realizing that profit is not a dirty word. Every business, small shops, corporations, and even not-for-profit companies need to do the exact same calculations to know what it costs them to run their company, and find that magic number where the surplus becomes profit. Profit simply means that all your expenses have been paid, your employees’ salaries have been covered (including yourself!), and you have a surplus which is typically reinvested into the business. For example, if your daily-use business equipment has a 5 year suggested lifetime, you need to account for the purchase of new equipment in 5 years into your profit margin (technically accounted for as an annual expense, but requires an up-front purchase so you need to have the funds set aside–more on this later). And we all know there are surprises in business, good and bad, so we need to be prepared. Let’s learn how to price for profit!
Get the Business Details Figured Out
First things first, you need to do a few things to ensure you are a legal, licensed/registered, tax-paying business BEFORE you even take on a client (paying or not) or figure out how to price for profit.
- Pick a business name (check the internet to make sure the website is still available for a unique url –domain name– and to avoid confusion or legal implications with another company).
- Get all of the social media accounts for your business. Yes, all of them! Facebook, Twitter, Instagram, Pinterest, Google+, Flikr, Tumblr, Snapchat, etc. You want to be everywhere for marketing later and you want to make sure you reserve your business name. You don’t have to set them up just yet though because you don’t really have any content to put on them.
- Register the domain name for your company [url: www.mycompanyname.com] and get hosting to build your website (and email). Get help with SEO.
- Call up your local town, county, state, province, etc. and get whatever licences you need to run a business in the area. Plan to travel to the next county/state/province? Get one for there too.
- Call up the state/provincial AND national agencies to register your business and get your tax ID numbers.
- GET COMMERCIAL INSURANCE! This is one of the most important things in business. you need to be able to protect your clients, your business, and keep them separate from your personal assets. Doesn’t matter if you only work in public places, or if you don’t have a specific business space,. You need the liability coverage. Get covered. No excuses! Equipment and content insurance are another thing to add to your list, and often come together. Just make sure it is a separate policy from your home coverage as they are mutually exclusive. Home insurance policies do NOT cover business assets or accidents.
- Get your contracts drawn up, or at least reviewed, by a lawyer. Without contracts, you might as well be running an illegal business. Contracts state EVERY SINGLE DETAIL about the business transaction: who is the client, who is the business, what the client gets, when the client gets it, how they get it, how much the client pays, when they have to pay by, and most of all WHAT HAPPENS IF THEY DON’T PAY (at all or by specified date) (SHOW up at all or at the specified time) (COOPERATE at all or with a portion of the duration) (etc.). Also, your contract should have all the details about anything else you care about such as rescheduling, publishing, payments, copyrights, etc. It’s better to have too many things that to have forgotten some. Sure you could DIY but if something goes wrong, your insurance may not cover you if something is inappropriate or ‘wonky’ in your contract.
- Get all the proper equipment and software required to do your job. At bare minimum. Doesn’t have to be top-of-the-line stuff, but enough to get the job done, professionally. Upgrades come later. But don’t cheap out on something that will need to be upgraded too soon and end up costing you more than if you had gone one model up in the first place.
- Research to find professional suppliers that carry the products you want to offer your clients. [see step 12 for follow up on this]
- Not completely business details, but absolutely necessary: PRACTICE, practice, practice. Start small to make sure your skills are consistent and at a professional level. Then you can graduate to practicing on clients (start with friends and family) but don’t forget those contracts you have.
Evenespecially friends and family need to fill them out so that everything is clear about the exchange (to avoid drama or guilt-trippingconfusion) and for insurance purposes.
- Once you’ve got your skills to a professional level and CONSISTENT, you can graduate to actual selling. “Isn’t that was all that practice was?” Nope. That was practice. Now that you’ve got skills and consistency, you can start to build your client portfolio. This step is usually where most go wrong: PORTFOLIO BUILDING DOESN’T MEAN FREE! You may not be able to charge full price because you have no work to display, but it doesn’t mean you cannot charge for the end-product or service. The best thing to do is calculate the price you SHOULD be charging for a ‘real client’ and then discount it to at minimum the ‘break even’ amount (never below that!). BUT don’t forget to advertise the fact that it’s discounted because it is a opening-price, and that once you have enough to fill a gallery on your website, your price will return to profitability. Remember: NEVER FREE if you are pricing for profit. Once you’ve gotten your portfolio started, you may find yourself not quite liking some of your earlier work or offering certain services/products. Don’t be afraid to stop offering them any more and to stick with what you love doing. Not every style or product is for every business.
- [follow up from step 9] If you plan on selling pre-made or customizable products, order samples to make sure the quality is up to your personal/business standards. Once you’ve picked a supplier or two that represents your business style, then you can begin to price those products for profitability. See below for pricing help.
- KEEP TRACK OF EVERYTHING. Anything you buy for your business, anything you do for your business, any client or portfolio gig you have, everything. Keep receipts, keep a journal, keep records of everything. Your bookkeeper/accountant will be happy at the end of the year if you’ve done your due diligence. Make sure you have an organized records system, perhaps a filing cabinet with folders (contracts, model release forms, liability release forms, purchase order forms, important documents like licensing, important emails, etc.).
**A great way I was taught was to keep a notebook (minimum 400 pages) and everyday write what you did (one day per page & a few extras for those busy days & notes). Bought something? Photocopy the receipt, file the original away in the respective folder, and tape the copy to the page in the notebook (or put it in a folder at the back of the book) AND take a picture of what you bought and keep it in an electronic folder. Bonus if you print it and tape it into the notebook along with the receipt (inventory trick). New client? Take note of their names, birth dates, what they liked, etc. for future reference and to keep track of what they said about wanting to order something or liking a particular product. This is more for you than a manager or bookkeeper, but it’s a lifesaver when inputting info into your databases later for newsletters etc. Didn’t do anything that day? Write it down “Day off”. Edited or worked on behind the scenes stuff? Write it down (you never know if you need to refer back to it). For income-expenses tracking, my favourite app is VirtualBudget, and I use it for my businesses and for my personal accounting. It is literally an electronic version of my notebook and I love it!**
How to Price for Profit
“Now for the good stuff” I can hear through the screen.. Yes, here it is. Pricing seems like such a simple thing, but in reality it is quite complicated if you have no idea what you are doing. There is actually an easy formula to remember to find out what you should be charging. Though it might be because I love math that it seems easy..? For purposes of calculations, all numbers will be in annual amounts.
Cost Of Doing Business (CODB) is the total cost of expenses you need to cover costs whether you have 1 client, 1000 clients, or none at all. There is also technically a second type of CODB, which is determined on sliding scale. That means it changes by the number of clients you have, but exists even if you have zero clients. For example, your internet & phone bill will go up by having more clients, same goes for your utilities (hydro, heat, etc.)if you have a space that you would use more with more clients. Things like advertising and marketing also fall into this category since they fluctuate based on the number of clients you have or need.
CODB = Rent & Utilities + Licencing + Equipment/Useful Life (in years) + Insurance + Advertising&Marketing + Lawyer Duties + Internet & Phone + Office Supplies + Office Manager + Bookkeeper + etc.
Cost of Goods Sold (COGS) is the total cost of things you are selling, which technically means if you have no clients, you incur no fees/expenses/etc. Since photography is a service, there is a secondary equation while considering the service as “goods”. Lets call it Cost of Services Sold (COSS).
COGS = product + time to order + shipping + delivery time&cost
COSS = prep time + photography time + editing time + gallery creation time
The thing is, the most important thing missing from the above equations: PROFIT. That is the one thing that will ensure your business thrives and continues to grow and exist. Don’t forget to keep in mind vacation time and retirement funds contributions. This should technically be included in your salary. Yes, you get a salary! To calculate your pricing you need to consider the following equations:
Price = CODB + COGS + COSS + Salary + PROFIT
PROFIT= Price – CODB – COGS – COSS – Salary
You’re probably wondering what the heck you are supposed to do with the formulas. Well, this is where it gets complicated because every single business is different. It depends on what type of product or service you offer, who your target clients are, how many clients you intend to have annually, how much time you have to devote to your business, and how much you want to make (aka profit) at the end of the year. It also changes based on how much your time is worth; is it a specialized service, is it a unique/rare product or talent, is it a commodity? Let this guide you on how much you should be charging for your salary, but don’t let anyone tell you it is directly related to your worth. And don’t forget that you are reinvesting that profit in order to keep upgrading your business and helping it grow without putting your business into debt (ex: advertising and equipment are typically purchased upfront and not as you go).
Read more for a real-life example of pricing for profit.
[coming soon–comment below to be updated when it becomes available]