In order to set the price of creative goods and services, you’ll need to know the costs involved. Obviously you cannot afford to sell things for less than they cost! It’s useful to know the break-even point, if only to set an absolute minimum price. As the price goes up from there, so does the profit.
But what are the costs of producing creative goods and services? The direct costs, for example materials, are usually quite obvious and relatively easy to calculate. Fixed costs or ‘overheads’ have to be covered too. These overheads have to be covered by generating income from sales. Each product sold or fee invoiced needs to ‘make a contribution to overheads’.
However it is often the case that one of the biggest costs involved in a creative enterprise is the cost of labour – in other words, the cost of your own time.
So we need to know this cost too, so that we can build it in to the price of products and services. Without this information we cannot know if we are breaking even, selling at a huge profit – or making a loss on every sale.
It would be crazy to sell products without knowing the cost of the raw materials used to make them. Not knowing the cost of labour – which is often greater than the materials involved – is an even bigger mistake.
I suggest that creative entrepreneurs keep a track of their time so that they can allocate this cost to particular products, projects and the general running of their businesses.
Ideally we would like to have precise details, but this is virtually impossible. But that doesn’t mean we shouldn’t do anything!! Even approximate information is really useful. Just having a pretty good idea of how much time is spent on different aspects of the business can be extremely enlightening. It will help you to understand the economics of your enterprise, which is crucial.
So this is what I suggest:
1. Decide your hourly rate. How much are you worth?
2. At the end of each day, jot down approximately how many hours you spent on particular products, projects.
3. Other stuff involved in running the business needs to be counted too: marketing, administration and tidying the studio.
4. Record time as precisely as possible, ideally in 15 minute chunks, though this doesn’t mean you have to stop every quarter of an hour! At the end of the day you should be able to look back and say you spent two hours on A, half an hour on B, and three hours on C, for example.
5. Then allocate a cost to that time invested in each product or project, based on your hourly rate. This will mount up and you can include the full cost when you are calculating prices.
6. The cost of time spent on admin etc needs to be counted as well. This is then added to the cost of your business overheads, alongside things like rent, phone, insurance etc.
Doing this will help you to understand how your business works financially. It can be very enlightening. It will probably mean you reconsider your prices. It might even mean you change your business more fundamentally.
In short, you cannot afford to ignore the cost of your time.
Further information about financial matters for creative entrepreneurs can be found in the T-Shirts and Suits blog.
Learn more about financial matters on the T-Shirts and Suits Creative Enterprise Network – a free international network of creative entrepreneurs sharing business ideas and information.
Finance is one of the business issues covered in the book ‘T-Shirts and Suits: A Guide to the Business of Creativity’, which is also available online as a free eBook.
Copyright © David Parrish 2010