Ahead of Cockpit Arts Finance workshop with MyCake on 11th August 2010: Financial Planning for Growth we’re featuring Top Tips by Ellen O’Hara, Head of Business Development at Cockpit Arts.
The question that I’m asked more than any other in my role at Cockpit is ‘how should I price my work?!’
There’s no doubt that getting your pricing right is a crucial part of your marketing and business strategy. So what is there to consider when making the pricing decision?
In the workshop The Price is Right, which is part of our rolling programme of Making It Workshops, we look at three key areas: Cost, Market and Value, as well as how different pricing strategies fit with the overall goals for your practice and business.
Over the next few weeks, I’ll be posting a series of top tips, looking at pricing from these four different perspectives:
The Pricing Decision # 1: Price and Cost
Your first consideration when setting prices will usually involve looking at what costs are involved when producing your work. The ‘Cost-plus’ approach to pricing involves setting price by starting with the cost of creating a product, and then adding a mark-up. The mark-up provides you with your profit margin and so the cost-plus approach almost guarantees that you will not sell at a loss.
Mark-ups can be based on industry standards, individual expert opinions, or widely accepted rules of thumb. I usually advise makers to try and double their cost price to arrive at their wholesale price. In other words, add a mark up of 100% or x 2. And then add a mark up of around 2.5 on the wholesale price to arrive at the retail price. This is equal to multiplying your cost price by 5 to arrive at your retail price, or adding a mark up of 400%. This should ensure that there’s enough profit to cover some of the other costs associated with running your business.
The disadvantage of this approach is that if costs increase, the price of the product must also increase. The price of each product is therefore dependent on how many costs it creates.
The key to using this approach effectively is to be as accurate as possible about actual costs. So what should you include?
- Firstly there are the costs that directly relate to the production of the work such as materials, the cost of outworkers and packaging. These costs will tend to vary as the volume of work you produce and sell changes and can be refered to as variable direct costs.
- Then there is the cost of your time (if you produce the work yourself) which will be based on your hourly rate.
- Finally you also need to think about making a contribution to the day to day running costs of your business, or overheads (also refered to as fixed costs). This will include things like studio rent, day to day administration costs, PAYE staff costs and marketing. Some makers build this into their hourly rate.
A cost-plus figure generally provides a basis for the lowest price acceptable, but should not be the only consideration. It takes into account the cost and profit side of buying and selling, but it neglects demand for your work and what is going on in your market.
Another way of using costs to determined price is ‘target pricing’ where are a target price is made, and then costs are adjusted so that that price can be achieved. However, this is often very difficult to achieve for designer-makers who produce in small batches because costs are less flexible.
Next we’ll be looking at Price and Market in The Pricing Decision # 2.
For guidance on calculating your costs, try our Calculaing Your Costs and Budgeting worksheet which can be found in the Resources section of the blog. Or see the other posts on the blog that advise on finance from me and other industry experts. Let us know how you get on!
And if you’d like to attend our next Finance workshop: Financial Planning for Growth see details and book here.