Understanding The Foundations of Pricing Bridging Treacherous Waters
The Pricing Questions <ul><li>How Much? </li></ul><ul><li>Is It Too Much? </li></ul><ul><li>Is It Enough? </li></ul><ul><l...
Success Factor Terminology <ul><li>Cost of Sales (COS):  For every dollar received from the customer, not more than 40 cen...
Business/Pricing Models Film Based <ul><li>Home Based </li></ul><ul><li>Total Sales: 100% </li></ul><ul><li>-Cost of Sales...
Business/Pricing Models Digital Model <ul><li>Home Based </li></ul><ul><li>Total Sales: 100% </li></ul><ul><li>-Cost of Sa...
Price Changes Over The Years <ul><li>1995/Home Based Film Model/40% COS with physical costs of $60/unit to produce one (1)...
Cost of Sales Expenses <ul><li>Imaging media </li></ul><ul><li>Job Specific Costs </li></ul><ul><li>Processing / Storage M...
Cost of Sales:  Capital Expenses (Investments) <ul><li>Real Estate </li></ul><ul><li>Leasehold Improvements </li></ul><ul>...
General Expenses: The 7 Managerial Functions <ul><li>Owner’s Compensation </li></ul><ul><li>Employee Expense (Salary and B...
General Expenses: Line Items <ul><li>Owner’s Compensation </li></ul><ul><ul><li>Owner’s salary/benefits </li></ul></ul><ul...
General Expenses: Line Items <ul><li>Building Overhead </li></ul><ul><ul><li>Postage – general </li></ul></ul><ul><ul><li>...
General Expenses: Line Items <ul><li>Administrative Costs </li></ul><ul><ul><li>Postage – general </li></ul></ul><ul><ul><...
The Key Benchmark <ul><li>Owner’s Compensation + Net Profit (loss) </li></ul><ul><ul><li>Business Case: Owner is drawing a...
The Bottom Line…. <ul><li>Research and experience reveal a well managed photography business has an Owner’s Compensation +...
Calculating Your CODB <ul><li>What goes into the CODB? </li></ul><ul><ul><li>In short, the CODB contains  business related...
Calculating Your CODB Annual Accounting Method
Do The Math… <ul><li>Let’s assume you were  REALLY BUSY   and managed to get in 75 shooting days for revenue generation </...
Remember… <ul><li>Your CODB  is not  your day rate & you should not bill based on your day rate. </li></ul><ul><li>A day n...
Your Assignment <ul><li>Due Monday – Week 7 </li></ul><ul><li>Has a weight of  10% of your total grade </li></ul><ul><li>W...
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Pricing fundamentals

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Far too many small businesses fail to make money. In fact, many business owners (particularly small "mom & pop" operations) have no idea of the cost of sales they incur.

While this presentation is geared to the Photographic Industry, it's lessons apply to all industries!

I encourage each viewer to complete the exercise at the end of the session. It is, in most cases, an "eye-opening experience!"

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Pricing fundamentals

  1. 1. Understanding The Foundations of Pricing Bridging Treacherous Waters
  2. 2. The Pricing Questions <ul><li>How Much? </li></ul><ul><li>Is It Too Much? </li></ul><ul><li>Is It Enough? </li></ul><ul><li>What Is My Markup? </li></ul><ul><li>Priced For Profitability? </li></ul><ul><li>Pricing In My Market? </li></ul><ul><li>Positioning And Price In Line? </li></ul><ul><li>Thousands Of Other Concerns… </li></ul>
  3. 3. Success Factor Terminology <ul><li>Cost of Sales (COS): For every dollar received from the customer, not more than 40 cents (40%) should be spent to created the product. </li></ul><ul><li>Gross Profit Margin (GPM): Amount remaining after the products (images and their presentations) are produced. </li></ul><ul><li>Owner’s Compensation (OC): Included in General Expenses as the reward for day-to-day work in the business </li></ul><ul><li>Net Profit Before Taxes (NPBT): “Return” the owner earns on the capital invested in the business. </li></ul><ul><li>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 $$! </li></ul><ul><li>Markup: The difference between your production (purchase) cost and your sale price. Typically expressed in percentage (%) form. </li></ul>
  4. 4. Business/Pricing Models Film Based <ul><li>Home Based </li></ul><ul><li>Total Sales: 100% </li></ul><ul><li>-Cost of Sales: 40% </li></ul><ul><li>= Gross Profit: 60% </li></ul><ul><li>-General Expenses: 50% </li></ul><ul><li>=Net Profit Before Taxes: 10% </li></ul><ul><li>Retail Location </li></ul><ul><li>100% </li></ul><ul><li>30% </li></ul><ul><li>70% </li></ul><ul><li>60% </li></ul><ul><li>10% </li></ul>
  5. 5. Business/Pricing Models Digital Model <ul><li>Home Based </li></ul><ul><li>Total Sales: 100% </li></ul><ul><li>-Cost of Sales: 35% </li></ul><ul><li>= Gross Profit: 65% </li></ul><ul><li>-General Expenses: 55% </li></ul><ul><li>=Net Profit Before Taxes: 10% </li></ul><ul><li>Retail Location </li></ul><ul><li>100% </li></ul><ul><li>25% </li></ul><ul><li>75% </li></ul><ul><li>65% </li></ul><ul><li>10% </li></ul>Digital model adjusts COS downward by 5% to compensate for the increased reinvestment cost showing up in General Expenses through Depreciation.
  6. 6. Price Changes Over The Years <ul><li>1995/Home Based Film Model/40% COS with physical costs of $60/unit to produce one (1) 11X14 retouched & mounted image. </li></ul><ul><ul><li>$60 x 2.4(COS Factor) = $144 </li></ul></ul><ul><li>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 </li></ul><ul><ul><li>$65 x 3.3 = $214.50 </li></ul></ul><ul><li>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: </li></ul><ul><ul><li>$70 x 4 = $280 </li></ul></ul>
  7. 7. Cost of Sales Expenses <ul><li>Imaging media </li></ul><ul><li>Job Specific Costs </li></ul><ul><li>Processing / Storage Media </li></ul><ul><li>Frames / Accessories / Packaging </li></ul><ul><li>Retouching / Print Finishing </li></ul><ul><li>Sales Commissions </li></ul><ul><li>Production Labor </li></ul><ul><li>Credit Card Transaction Fees </li></ul><ul><li>Contract Labor </li></ul><ul><li>Online Sales Transaction Fees </li></ul>
  8. 8. Cost of Sales: Capital Expenses (Investments) <ul><li>Real Estate </li></ul><ul><li>Leasehold Improvements </li></ul><ul><li>Vehicles </li></ul><ul><li>Furnishings </li></ul><ul><li>Fixtures </li></ul><ul><li>Equipment / Props (over $500) </li></ul>
  9. 9. General Expenses: The 7 Managerial Functions <ul><li>Owner’s Compensation </li></ul><ul><li>Employee Expense (Salary and Benefits) </li></ul><ul><li>Outside Services </li></ul><ul><li>Building Overhead </li></ul><ul><li>Advertising </li></ul><ul><li>Administration Costs </li></ul><ul><li>Depreciation </li></ul>
  10. 10. General Expenses: Line Items <ul><li>Owner’s Compensation </li></ul><ul><ul><li>Owner’s salary/benefits </li></ul></ul><ul><li>Employee Expense </li></ul><ul><ul><li>Employee salary/benefits </li></ul></ul><ul><li>Outside Services </li></ul><ul><ul><li>Janitorial </li></ul></ul><ul><ul><li>Trash </li></ul></ul><ul><ul><li>Snow Removal </li></ul></ul><ul><ul><li>Lawn Service </li></ul></ul>
  11. 11. General Expenses: Line Items <ul><li>Building Overhead </li></ul><ul><ul><li>Postage – general </li></ul></ul><ul><ul><li>Mortgage Interest </li></ul></ul><ul><ul><li>Utilities </li></ul></ul><ul><ul><li>Maintenance (building) </li></ul></ul><ul><ul><li>Insurance (building & liability) </li></ul></ul><ul><ul><li>Property tax </li></ul></ul><ul><li>Advertising </li></ul>
  12. 12. General Expenses: Line Items <ul><li>Administrative Costs </li></ul><ul><ul><li>Postage – general </li></ul></ul><ul><ul><li>Telephone </li></ul></ul><ul><ul><li>Props & Camera Costs (including camera maintenance, insurance) </li></ul></ul><ul><ul><li>Office Expense </li></ul></ul><ul><ul><li>Education Expense (does not apply to student loan) </li></ul></ul><ul><ul><li>Interest Expense </li></ul></ul><ul><ul><li>Auto Expense (including automobile insurance) </li></ul></ul><ul><ul><li>Accounting/legal (including use taxes & licenses) </li></ul></ul><ul><ul><li>Miscellaneous </li></ul></ul><ul><li>Depreciation </li></ul>
  13. 13. The Key Benchmark <ul><li>Owner’s Compensation + Net Profit (loss) </li></ul><ul><ul><li>Business Case: Owner is drawing a salary from the business of $80,000/yr. </li></ul></ul><ul><ul><li>Business is carrying a loss of $60,000 </li></ul></ul><ul><ul><li>What are the financial results? </li></ul></ul><ul><ul><ul><li>Owner’s Compensation: $80,000 </li></ul></ul></ul><ul><ul><ul><li>Net Business Profit (loss): ($60,000) </li></ul></ul></ul><ul><ul><ul><li>Financial Result: $20,000 </li></ul></ul></ul><ul><li>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. </li></ul>
  14. 14. The Bottom Line…. <ul><li>Research and experience reveal a well managed photography business has an Owner’s Compensation + Net Profit of 38% of Gross Sales. </li></ul><ul><li>Home –based studios (2005) with an average Gross Sales of $129, 394 achieved financial results of $32,977 (25.5% of Gross Sales). </li></ul><ul><li>Brick & Mortar (2005) with average Gross Sales of $238,689 achieved annual financial results of $46,036 (19.3% of Gross Sales). </li></ul><ul><li>Best-performing studios (home-based & retail) are achieving financial results of 40.7% and 37% respectively, of gross sales. </li></ul>Source: 2005 Studio Financial Benchmark Survey Analysis
  15. 15. Calculating Your CODB <ul><li>What goes into the CODB? </li></ul><ul><ul><li>In short, the CODB contains business related only expenses/costs you cannot directly bill to the client. </li></ul></ul><ul><ul><li>The CODB does not include personal expenses and costs such as: </li></ul></ul><ul><ul><ul><li>You can not charge for your student loan </li></ul></ul></ul><ul><ul><ul><li>Reimbursed meals </li></ul></ul></ul><ul><ul><ul><li>House rent (non-business portion), non-business related magazines, home utilities, groceries, entertainment, car expenses (personal use),etc. </li></ul></ul></ul>
  16. 16. Calculating Your CODB Annual Accounting Method
  17. 17. Do The Math… <ul><li>Let’s assume you were REALLY BUSY and managed to get in 75 shooting days for revenue generation </li></ul><ul><li>Your CODB is: </li></ul><ul><ul><li>$99,920 ÷ 75 = $1,332.27 per working day </li></ul></ul><ul><li>What does this mean? </li></ul><ul><ul><li>Your CODB can be reduced by increasing Gross Revenue or decreasing costs </li></ul></ul>
  18. 18. Remember… <ul><li>Your CODB is not your day rate & you should not bill based on your day rate. </li></ul><ul><li>A day not shooting is not a day wasted… a lot to do: </li></ul><ul><ul><li>Paperwork  Repairs </li></ul></ul><ul><ul><li>Taxes  Back-end work </li></ul></ul><ul><ul><li>Studying  Marketing </li></ul></ul><ul><ul><li>R & D  More Marketing </li></ul></ul><ul><ul><li>Testing  Even More Marketing </li></ul></ul>
  19. 19. Your Assignment <ul><li>Due Monday – Week 7 </li></ul><ul><li>Has a weight of 10% of your total grade </li></ul><ul><li>Will mean the difference between running a successful or unsuccessful business/career </li></ul><ul><li>This is not a one-time exercise: you need to do this calculation at least 2Xs per year </li></ul><ul><li>Calculate YOUR Cost of Doing Business </li></ul><ul><ul><li>Be realistic </li></ul></ul><ul><ul><li>Keep the numbers conservative </li></ul></ul><ul><ul><li>This is for real, folks… KEEP IT REAL for YOU! </li></ul></ul>

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