Mark Up Factors On Products
Cost- based pricing. This is where there's a right or wrong, yes or no answer. So this one's the easiest way to start. It's based on the relationship between pricing and the cost of running a business. So whatever your cost of running a business dictates, how much you have to charge for your products. So, the higher your cost, the higher your prices have to be. It's very simple, it's cut and dry, and sometimes when you know this information, you can charge into that sales room and say, "This is what you should do," and it works, sometimes. Most of the time. So here's how it works. You have something called a markup factor. This is probably something you guys have seen in a retail market somewhere. So your markup factor is a number by which you multiply your COGS, your cost of goods sold, to determine what your price should be. So what your COG is, your cost of goods sold, is how much it costs you to make your product. So if you're talking about an 8 x 10, let's just say, for easy math,...
it costs you $10. By the time it's shipped and all of those things. So if your 8 x 10 costs you $10, you multiply it by a specific number that's relevant to your business, and that tells you how much your price should be. We typically see in retail, everything doubles. You multiply your cost of good by two. So, in the photography industry, there is a magic number. And it is typically at least four. So you want your cost of goods sold to be about 25% of your gross sales, the total amount of money that you bring into your business. So as you're thinking about calculating the price of your products, how much it costs you when you buy them, you take that number, and you multiply it by a markup factor, which I recommend to be four, and that's the minimum that you have to charge for that product. Did you hear the minimum part? That's really important. Because, remember when we talked about demand-based pricing? That's when you can multiply by bigger numbers. So as you set yourself apart, you can start multiplying by bigger numbers. So, let's go through this cost of goods. For an 8 x 10. Let's say that you have print, mount, finish. We're gonna make a really nice 8 x 10. It costs us $7, it costs us $2 for shipping, and $1 to put it in a pretty package. You guys will see as we go through this workshop, I like to have happy math, so that we can have easy numbers to work with. So we're gonna say that an 8 x 10 costs us $10. Alright, so, now this guy, right? How much does this one cost? Cost of goods, what is it? Where do you go with this one? We're gonna just draw a line here. We're gonna say that you're gonna put it on some kind of disc or jump drive that costs you about $4. You're gonna put it in something pretty that costs you $1, so your total cost of goods is $5. You might have a $40, beautiful disc that you get from a custom lab. That's all up to you. We're gonna go with happy numbers here. So we're gonna say that that digital file costs you $5. So when we go to cost-based pricing, what should we do for an 8 x 10? $10 times the magic number, four, so we have to charge $40 for an 8 x 10. Same thing. Cost of good for a digital file. Cost is $5, we multiply it by four, $20, right? I hope all of you are pulling out your hair right now at home. What? You can't charge $20 for an 8 x 10. So digital files should be half as much as 8 x 10s, right? (gasps) I hope all of you are cringing right now. Remember that life cycle of an image that I told you about. When you sell a digital file, that sale is done. Period. Forever. When you sell an 8 x 10, they might need four 8 x 10s. One for the grandparents, one's for you, one for the office. So when you sell an 8 x 10, you're selling one unique thing. When you sell a digital file, you're giving away the farm. Okay? So how do you deal with all this? This is where it gets so complicated. So there's our numbers. This is our starting point. But then, what do you do with this? Can you make a sustainable living like this? If you did a portrait session and you created 30 images, and you charge $20 each, and that was the whole sale? Wow, that would be really hard. You wouldn't be in business very long. So, there's this other thing called work. Labor. There are all these other things that go into creating these things, it's not just your hard costs. And this is where things get really tricky when you're both a manufacturer and a retailer. So when you think about these things, for either one of these, you've got phone calls, you've got meetings, you've got driving, you've got shooting, you've got editing, selling, processing, all of these things. Archiving, production. Time-wise, they take the same amount of time per image. So we've got to figure out a way to deal with this whole time thing. Because it's a big deal as a manufacturer.