Up your mark-up value and increase your bottom line instantly
By Glen Gray, Cr.Photog., CPP
First published January 2003
Whether you’re capturing images with pixels or film, the key to your success as a business is profitability.
Are you digital yet? The question echoes throughout every event where two or more photographers gather. I have a better question: Are you profitable yet? Whether you’re capturing images with pixels or film, the key to your success as a business is profitability.
You can be profitable in digital capture, traditional film photography or a hybrid of both. The only difference is where you account for your expenditures. This article is based on a traditional film studio, with sidelights about using the information if you’re shooting with a digital camera in place of film.
What we’re presenting is a kind of universal formula, a starting point for the analysis of your own pricing policies. The figures you use in the formula, and therefore your price list, will be unique to your studio, because they’re based on factors specific to your business.
The first factors in the pricing formula are your Cost of Sales (COS), General Expenses (GE) and Net Profit (NP), which are discussed in detail below. Other factors you’ll consider when determining your prices include the studio’s reputation, your marketing skills, the demographics of your target clientele, the demand for your product, and your self-esteem. Yes, even in the most unlikely of places self-esteem controls your destiny—for good or bad.
Photographers can argue over demographics, reputation and self-esteem, but the numbers don’t lie. The foundation of your pricing is to separate your expenses into two broad categories:
Cost of Sales and General Expenses. Both must be subtracted from your Gross Sales amount to arrive at your Net Profit. Cost of sales includes items like film, processing, albums, folios, and folders. If it’s money spent to produce your product, then it’s part of the Cost of Sales.
Many a studio owner has been lulled into a false sense of profitability by looking only at the COS in relation to the amount of sales. You must also account for your GE, the money spent on operating of your business, such as rent, repairs, maintenance, office supplies, salaries, and depreciation on your equipment. Yes, the owner’s salary should be included in general expenses. This factor allows you to figure the profitability of your studio as a true representation of the Return on Investment (ROI).
In a typical full-time studio, 30 percent of every dollar the studio brings in goes to Cost of Sales, although I’ve seen it range from 20 percent to 50 percent, depending on the studio. General Expenses typically take up 60 percent, leaving a net profit of 10 percent. Instead of using percentages, you can make this comparison by considering how much of each dollar is allocated to each category (see diagram, below).
So, you see the relationship between your COS, GE, and NP as percentages, now what? Once you know your COS percentage, you can determine a markup factor (multiplier) to arrive at the minimum price you can ask for your products. Simply divide 100 (percent) by your COS (as a percentage of your GS) to arrive at this factor. The studio described above has a 30 percent COS: markup factor = 100 ÷ 30 percent = 3.3.
Multiply the markup factor by the sum of all the costs associated with the product. For a basic 8x10 print, for example, you would include the cost of the print, any retouching or artwork, coating or spray, mounting, packaging and handling, presentation folder or box, and any other expenses that go into producing your basic 8x10 finished print. Multiply the total cost of the print by your markup factor. This is the minimum amount you should charge for that product to yield a 10 percent profit.
Once you know the minimum price you need to charge, apply all the other market factors to determine what you will actually charge. Keep in mind that this applies to both the session fee and the final prints. This relationship between your session fee (or lack thereof) and the price of the final prints is so critical that I recommend looking at your COS for a given product as a combination of the session fee expenses and the average final order expenses. If you overshoot, that factor must be included in your COS for your session fee. If you find that your session fee is too high for your market area, consider shifting some of the profit and general expenses to the average final order by increasing the markup multiplier in calculating your final print prices.
How can I become more profitable?
There are two ways to increase your studio’s Gross Sales: 1) increase the number of sessions you shoot, or 2) increase the average sale per customer. The more powerful of the two is increasing the average sale—no single factor has the ability to increase profits more dramatically.
We’ll call this concept Power Profit because it takes advantage of your General Expenses, which are, for the most part, fixed expenses (rent stays the same whether you photograph three children or 100 children per month).
As an example, say a studio photographed 120 children’s sessions one year at an average sale of $450, resulting in Gross Sales of $54,000. This produced a profit of $5,400.00 (10 percent). Along with the studio’s other product lines, it paid the studio’s General Expenses. Now here’s where it gets exciting:
any sales exceeding the average—as an average increase for that product line— incurs only the expenses of COS.
The amount of the average sale paid all of the General Expenses.
So, if we increase the average sale by $100, we’d make an additional $12,000 (120 sessions x $100 = $12,000). When you account for the 30 percent COS ($3,600), you’re left with an $8,400 Power Profit! Yes, there would be minor increases in General Expenses, but so minimal they’re not even a factor.
Any way you can sell more than the average order will have a huge impact on your bottom line. These general pricing concepts are meant to give you direction in generating a profitable price list for your studio. Some of the concepts have been simplified to help you understand the main ideas. For example, we combined Capital Expenditures with General Expenses for this article. The main point is that every studio has a different set of specifics to factor into its pricing. Use this as a guideline, but it’s up to you, the studio owner, to determine your own prices.
Glen Gray, a PPA-Approved Business Instructor, owned and operated Gray’s Mountain Studio in Jonestown, Pa., for 12 years before joining Burrell Colour as a marketing sales representative. Currently president of the Northeastern Pennsylvania Professional Photographers Association, Gray is the director of the Burrell Education Center of Pennsylvania. Reach him at firstname.lastname@example.org. Burrell Professional Labs: www.burrellprolabs.com/powerprofit.