Pricing Portrait & Wedding Photography, part 2
Pricing considerations for portrait and wedding photographers.
By Ann K. Monteith, M.Photog.Cr., Hon.M.Photog., A-AS
First published January 2001
We move on to understanding the mechanics and mathematics of pricing products according to photographic industry standards.
In last month’s installment, you learned how to identify the various costs that go into manufacturing your photographic products, the first step in the pricing process. Now we can move on to understanding the mechanics and mathematics of pricing products according to photographic industry standards.
Let’s assume that you have calculated the total of the various costs that go into one of your products. How do you decide how much to charge? You cannot answer this question until you know how much profit you intend to make, as well as your General Expenses costs, those everyday costs of running a business that must be paid—even if you don’t have any customers—such as your salary, your employees’ salaries, studio/office overhead, various administrative costs, and depreciation. In order to price for profit, you must understand the relationship between Cost of Sales, General Expenses, and Profit, which is expressed below in percentages:
Total Sales 100%- Cost of Sales 40% =Gross Profit 60% - Gen. Expenses 50% = Net Profit 10%
This relationship means that for every dollar (expressed as 100 percent) received from the customer, not more than 40 cents (40 percent) of that dollar should be spent to make the product. In determining that the maximum allowable Cost of Sales is 40 percent of Total Sales, you establish a discipline that affects not only your pricing, but also the rest of your business structure.
When you subtract the 40 percent Cost of Sales from your Total Sales, the resulting Gross Profit is 60 percent. Gross Profit is the amount remaining after your product is produced. If, as the figures above suggest, you are successful in limiting your General Expenses to 50 cents for every dollar received (50 percent of Total Sales), then you will realize a Net Profit of 10 cents (10 percent) for every dollar received.
These ratios help to pinpoint troublesome areas in your business. Should you experience a drop in profits that is not related to a decline in sales, you can determine where the problem lies by looking at your Cost of Sales and General Expenses percentages to see if either is out of line in relation to your desired ratio.
We suggest that your Cost of Sales should not exceed 40 percent of your Total Sales—for every dollar you take in, it shouldn’t cost more than 40 cents to manufacture your product. This is a maximum guideline. Industry experience shows that when Cost of Sales rises above 40 percent, only a business with exceptionally low General Expenses can survive. Studios with higher building overhead or salaries, for example, must operate at a lower Cost of Sales percentage in order to accommodate the high General Expenses without jeopardizing Profit. Most financially successful photographers, in fact, suggest that 30 percent is a more realistic Cost of Sales guideline.
As you become accustomed to monitoring your Cost of Sales percentage, you will learn, as the figures below reveal, that when you lower Cost of Sales to 35 percent from the original 40 percent relationship, with all the other factors being equal, Net Profit increases by 5 percent. If you lower your Cost of Sales to 30 percent of Total Sales, you can increase your General Expenses to 60 percent of Total Sales without changing the Net Profit of 10 percent.
Monitoring Cost of Sales
Monitoring your Cost of Sales percentage is one of the most important keys to business success, because it allows you to bring discipline to the manufacturing function of your business. If you observe a trend toward a higher Cost of Sales over a period of months, then you are alerted to the need to lower your manufacturing cost ratio. Otherwise, you jeopardize your “bottom line” or Net Profit. There are only three methods of lowering your
Cost of Sales ratio:
• Find less costly ways of producing the product.
• Use smaller amounts of goods (such as film) to produce the product.
• Raise the price of the product.
The Mechanics of Pricing
Setting prices, then, begins with the mechanical exercise of determining all of the goods and services that go into each product. (Remember that you do not include salaries of studio employees who are on your full-time or part-time payroll; only the costs of contract laborers are included when setting prices.) The next step is to multiply those costs by a mark-up factor that assures your prices will achieve the Cost of Sales (COS) you require, given the amount of your General Expenses and desired Profit.
The factor itself is determined by dividing the Cost of Sales percentage into 100. For example: To arrive at the mark-up factor for a COS of 40%, divide 40 into 100. The result is a COS factor of 2.5. To arrive at the mark-up factor for a COS of 35%, divide 35 into 100. The result is a COS factor of 2.9. To arrive at the mark-up factor for a COS of 30%, divide 30 into 100. The result is a COS factor of 3.3. Thus, if production of an item takes $100 worth of materials, its price would be:
At a 40% Cost of Sales: Multiply $100 by 2.5. The price would be $250.
At a 35% Cost of Sales: Multiply $100 by 2.9. The price would be $290.
At a 30% Cost of Sales: Multiply $100 by 3.3. The price would be $330.
Abridged excerpt from “The Professional Photographer’s Management Handbook” (Marathon Press), by Ann K. Monteith, M.Photog.Cr., Hon.M.Photog., A-ASP, CPP, a PPA-approved business instructor