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Understanding the TOTAL Cost

Lesson 25 from: Value Pricing & Business Models for Creative Entrepreneurs

Tara McMullin

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Lesson Info

25. Understanding the TOTAL Cost

Lesson Info

Understanding the TOTAL Cost

Let's move on to the cost question, alright? We're gonna talk about this more in the next segment. But as I said, in order to determine price, in order to be able to put a price tag on anything, you really need to understand the total cost for your product or service. The total cost. And that's way more than how much your web host cost, or how much or office rent is, or what the price of silver is right now, alright? So the ultimate cost question in this case is what do I have to expend to create and deliver this value? What do I have to expend in order to create and deliver this value? Is it money? Is it time? Is it energy? Is it mental bandwidth? Is it relationships? What does this cost to be able to create and deliver this value? So here's some questions to consider. First, what are the final costs? You do need to know the price of silver. You do need to know how much that yard of upholstery fabric cost. You do need to know how much the labor to produce it costs. You do need to know...

what your overhead is, just the amount of money it takes to keep your business running, your web hosting fees, your office rent, your office supplies, your electricity, your other utilities, your internet service. What are the financial cost associated with each product in your business model. So you've got those kind of big overall overhead expenses that you can kind of parse and parcel out to your, within your business model. And then you have product specific costs. You have the cost of this program. So for instance, 10,000 Feet, I just got all the audio recordings transcribed. That cost, oh my gosh, I don't even remember off the type of my head, but that was a cost that I'm not going to work that out for the rest of my model. It's just associated with that program, which is a very small cost, but it's a cost nonetheless. So what are the financial cost associated with this? Are those financial cost one time, or are they reoccurring? Thursday, day one, I talked about how I set up a new e-commerce solution for Kickstart Labs over the summer. That was a one-time cost. That cost me $400 for the software. It cost me $300 to get it set up by someone else. That was a one-time cost, I do not have to keep paying that. That said, I do have recurring cost every time someone pays their subscription fee. I have to pay Paypal fees. I have to pay Stripe fees. I have to pay certain fees to keep that website up. I have to pay a certain amount every month for the security certificate for that website, because that's where the e-commerce stuff is now. That's recurring fees or recurring expenses. So make sure you keep that in mind. Don't forget those things. Yes, those Paypal fees are not a lot one at a time, but they add up to a lot. I'm always shocked. I shouldn't tell you this. I'm always shock on my schedule to see at the end of the year how much money Paypal has taken, which is a cost of doing business. It's not that I have a problem with it. It's the cost of doing business. But if I don't take that into account, $100,000 very quickly becomes $97,000. Well, that's $3,000 I could've done something with, right? Yeah, okay. Somebody had a questions. It was me. Susan. For the one-time fees, what I'm thinking of is my manufacturing, like to do model work, and certain things. It's a one-time fee, and that fee might be for multiple pieces. Do you break that down to into each peace or do you just... That's the whole pricing thing that confuses me. Yeah, so, we probably have to sit down in a little bit more detail to figure it out exactly. But I think in terms of how you are going to ultimately use your pricing formula, or how you're pricing from the pricing formula, yes, in terms of the pricing formula, you would break that overall, that's almost an overhead cost, down per piece. And so, let's say you figured you will make 100 pieces from one mold, you divide that initial setup fee by a hundred. I'm gonna have to guess at first. Oh, absolutely, you're gonna have to guess. Oh my gosh. Does anyone think pricing is not about guessing? It's all about guessing. Okay, yes, you're gonna have to guess. The way you might set it up in your business model though is say you've got that earrings line for instance and you know you've got five pairs of earrings that have all been cast, you can put that big overall this is how much it cost to set up the five pairs of earrings, and then this is how much it cost to actually manufacture each pair of earrings. And then that's just a way of you kind of holding onto that information so that then when you go to do a pricing formula, you've got it right there. In your business model, I'm not so much concerned about the fine detail work on pricing as I am about you making you're recording the information you need to be able to do that. Okay? Great question, I'm sure that apply to a lot of people online as well. Alright, what are the energetic costs? Remember yesterday when I was talking about when you get a sale and you resent it, like, "Oh gosh, not that again. "Really?" (grunts) That's an energetic cost. (laughs) Not only it of course is the stress and the resentment of just getting the sale, but there's a tip off to you that there's a very high energetic cost relative to the value of that service, both to you and to your customer. Your customer doesn't want you to be in that head space either. They don't want the service that they're buying from you to be so energetically involved or so energetically costly to you that you can't deliver on what you've promised or even that you're just delivering on what you promised. They want you to show up and have that energy for them, whether it's virtually or in person, or whether it's a transactional relationship. So, think about the energetic cost of everything that you have to offer. What are the temporal costs? I like the world temporal because it makes me think of Star Trek. (laughs) So I'm not even sure it's the right word here. In other words, what are the time cost? How much time does this take you? And not only what's the labor, how much does it take to make or ship a piece to to deliver service, but how much time do you need to prepare? How much time do you need to recover afterwards? For instance, Creative Live has a very temporal cost for me and that I need to go home and sleep for two days after this. Alright, that's part of this. That's part of this. I have to say though that Creative Live has a much lower temporal cost for me and energetic cost in terms of sleep and recovery for me than many other things that I have done, and so I love them. This is something for me that doesn't feel very costly. I like putting the time in, in the beginning, and I don't have to recover that much at the end. So this opportunity, being able to do this makes a lot of sense for me and my business model in a lot of different ways. So what are the temporal cost? What is the full time it takes you? And of course you can think about the time it'll take you to market and sell this thing as well? And are there other soft cost involved? Does selling thing sell your brand reputation? I see that happen. I see that happen too frequently, where someone is really working hard on coming up with a great brand story on getting their reputation out there and getting a great reputation out there, and then they put out something that either feels cheap or it feels a little quick fixy, or that it's just not that valuable, it doesn't make sense with the rest of their story. There's a soft cost there, and that's a very real cost. You can have a cost to your brand. If you're a maker and you make really high-end things and you come out with a really low-end thing that's not well-intentioned or that's not really thoughtful, that can do damage to your high-end brand. Right? Yes. How do you put a number on a soft cost like that? You don't, it's a gut check. Okay. Yes, it goes back to guessing. But I think, yeah. I think the point here, just like we talked about on day one where you need to have all the information to be able to price, this is information you need to have to be able to price. And then if your soft cost, your temporal cost, your energetic cost are too high, and the price tag that you have to put on something to make it make sense for you is a price tag that's not gonna work in the market or that you've tried and you can't sell it at that, then that's the time when you know, well, I need to change something here or I just need to get this out of my business model, okay? Yeah. But no, you don't have to try and quantify this. Alright. Alright, so consider the products that you've outlined so far. So if you've been using that spreadsheet that's in the middle of your workbook to outline either your current business model or a new business model, new products, use that now to consider the products you've outlined so far and rank them from least costly to most costly to you. Not necessarily what the price is, but what is the least costly thing in your business model, what's the easiest for you to create, what's the easiest for you to deliver, and what's the most costly thing to you, what's most difficult for you to create, most different for you to deliver, what requires the most money, the most time, the most energy. What requires the most time, the most energy, the most financial cost. So, I would say in my own business model... Yesterday I talked about Kickstart Labs and I talked about 10,000 Feet, but the least costly things to me are my e-books. I've got two e-books that sell really well. They sell well off my own site. They sell well off of Amazon. I literally do not think about them unless they sell. The only thing I need to think about, "Oh Paypal." I'm like, "Oh, great. "Thank you, that's awesome." They are by far the least costly. They have no brand cost to me because they have all brand profit essentially. They've only done wonderful things for my brand. They take no time. They took time to write obviously. I think both of them took about two weeks of solid writing to write. There was some design cost. There was proof reading cost. There is a small recurring fee obviously when I get paid through something like Paypal, and there's a fee when Amazon sells them as well. So those are the small recurring fees. But because there is no time and no energy involved on a regular basis with those products now, those fees don't matter at all to me. I can price those products really simply. The thing that is the most costly to me and my business model is 10,000 Feet. It takes the most time. It takes a lot of energy. It takes a lot of mental bandwidth to be able to hold 15 people's business in my mind all the time, but it's worth it to me. It's priced appropriately for that cost. So Robin, what's the least costly thing in your business model and what's the most costly thing in your business model? I kept thinking while we're talking. I was thinking of the energy and the amount of work to do, to put together these programs, which is just unbelievable. And we have a program that's getting ready to go evergreen. So, that one I would say is probably the least now that it's done. And then I put all of the courses, our mastermind as the most, but all of our other courses take a lot of time and they're kind of all in tie for the second. And so, it's really hard. Even with a course that we were trying to scale back and just have it be like an accountability course and not as, not as involved as other courses, we still spent so much time on it. So, that's the hard part. I was just thinking, I was like we really didn't think it was gonna take as much time, and it took just as much time as the other courses we do. But now that we have kind of that outline that we've done before, even the emails, we can go back and adjust things so it's not gonna take us as much time as the first time. So they're almost like one-time energetic cost or one-time temporal cost? For some of it, yes. For some of them, yeah. Gotcha, gotcha. And it also sounds like you have a plan to make these things lest costly over time. Like you said, some of these things are guided now, even if they're not involving a lot of interaction from you. But as you go on, they'll become more and more self-study so that they require very, very little time or energy from you. So you'll be able to make up for that big investment that you put in, in the beginning. Absolutely. And we do have a couple of manuals that we've written, that we still have to go in and revamp them every year, just for the knowledge that we're getting and wanna keep them up to date. But the initial, it's not gonna be like what we initially had to do. So, it all seems like a lot to me. (laughs) That's the kind of business model that you have, and I think you priced appropriately based on that. So, great work. Tiffany, what's the lowest or least costly part of your business model? What's the most costly part of your business model? That's funny, because the least costly is also the one thing that's killing me. Oh interesting. Tell us about this. So I've decided that maybe that's not my least. I have one item that I'm actually comfortable with churning out, that I... When somebody orders it, I go yes, and I know that it's priced properly and I can make it the way I do it. But what I would consider my least are my hoop earrings. They're basic everyday hoops. They're not a lot in material costs. I can pound them out pretty quickly, but I'm also... I mean they're like crack to women. I'm selling them like hotcakes, and so I'm literally just pounding out these hoops all day long. Okay, so what are the cost here? It's almost like a creative cost to you. Yes. I means it's physically just, yeah, taking away any time to do anything else. So I have to consider it kind of expensive. If I do the math on the price, cool, and I'm definitely making what I wanna make making those, but, yeah, I never get to do anything else. No, that is definitely your most costly product then. Absolutely, absolutely. Because I would imagine there's probably some brand cost there as well. Are you just stones jewelry or Tiffany and Studios that does hoop earrings? Or do you make time for that bigger stuff like we were talking about on day one? No, see, I'm not happy with selection on my website, because I can't create like, I'm sitting there sketching. It's all in my head, I wanna make these things, I get so excited. This is such a great example. And I'm making the one thing all day long. Okay, so this is your most costly item. This is not your least costly item. I don't care if they're priced appropriately. I don't care if you're making profit on them. That's great, but that means it's time to hire a production assistant. Yeah, so, and then I started looking into it and the laws... So here's the funny thing. I was approached by two designers to purchase those hoops from me for wholesale to sell in their line, under their name. So all of a sudden, I was actually looking for a production assistant when this happened. And they're like, "Well, we really like yours. "will you make that product first? "We've been looking for it. "We wanna make it. "But will you churn them out for our line?" Gotcha. And then I'm on their website and they're selling those hoops for twice what I'm selling them for, and they're churning them out like hotcakes too. I mean they're my hoops that I'm selling on my website. Right, so, they're essentially thinking of you as a production assistant. Yeah, so I became, I accidentally became a production assistant. Okay, so sweetie, I know the laws are hard here. They are hard. I know the labor laws are very hard here. I was shocked, yeah. And it's going to be worth it. Okay. Get yourself a lawyer, get yourself an accountant if you don't already have one who can help you set up all the systems you need in QuickBooks and all of that, and get yourself a production assistant. It's really what I need. I mean I've been thinking in my head over. I'm like, "If somebody else was doing this, "my gosh, what could I be doing?" Could you be out of the micro business earning plateau? I could, I believe I could. I'm just really scared to take that leap because it is such a huge... And the laws here are super hard and I'm in a... I think the... We are here to-- The insurance is probably gonna be insane. I know. We are here to help support you, okay, but these are the kinds of things you realize when you really examine your business models, that can change the way you do business, and change your life. What would your life be like if you weren't banging out hoop earrings all the time? Yeah. I would love my business again. It would allow me creative freedom. I could go on my website and post. I don't feel like my brand represents me. Maybe that's where I get a lot of my disconnect, because I'm kind of like, "Well, those are great and people like it, "and I'm making money, "but I'm not fully representing "what I think I could be representing "had I freed up that time to do that." Absolutely. Alright, well, you know what your homework is. You better be emailing me and let me know when you got it done. Alright, so, which leads us to our last question. Do you notice any product that cost more than it should relative to the price you charge for it? I did plan that. No, I didn't plan that with Tiffany. I did plan this question. Do you notice any product that cost most than it should relative to the price you charge for it or that you can charge for it? In Tiffany's case, it's the price she does charge for it. This question is designed more to get you thinking about is this a viable product or not? Can I actually charge what I need to charge to make it make sense in my business? Sometimes you'll be able to say absolutely yes. Sometimes those absolutely yeses are based on assumptions, and what you really need to do is experiment. You need to say, "What if I do ask "the price I need to charge, what happens then?" Again, this is an invitation to experimentation, but this is a really important question. Susan. I think in Tiffany's case, there is no price high enough that would be high enough for the cost that, what she's losing by having to make these. Yes, right, exactly. So, but we know price-wise, you said, these other studios are charging twice as much for these earrings. They're essentially-- They have celebrity following on their jewelry though. Why don't you celebrity following? You know what I mean. It's like I look at them and I get why they can. Well, that's a good question. I don't know why I don't have celebrity following. (speaks of microphone) Yes, please, I had a similar product as Tiffany. I decided to raise the price instead to see that only the people who really wanted it would buy it. So, it's something interesting to think about. Then maybe it'll free up more time for other things. Yes, exactly. Because if you double the price on something, you make twice as much money with half as much work. Or you make the same amount of money with half as much work, which is that's your problem, you need more time. More time, yeah. Alright, so, as we start to wrap up this segment, let's get that share in. Fire up Twitter. Fire up the chatroom. You can use the #taraLIVE. What type of cost is most costly to you? What type of cost is most costly to you? In other words, is it money? Is it financial cost? Is it making a financial investment in your own business? From any of us, that is the case. That's why we bootstrap, that's why we DIY so much. For others of us, it's energy. The energy I put into my business is what's most costly for me. For others of us, it's the time. We're the stay-at-home parents who are building these businesses on the side, and we've got... Time is a commodity for us. Time is, yeah, is a scarce commodity for us. Maybe it's the soft cost right now. Maybe you feel like you have to do things that you couldn't do... Maybe you have to do things to get sales that you wouldn't otherwise wanna do, that don't otherwise makes sense with your brand. So maybe there's a reputational cost there, or a relationship cost there for you. For you guys, what kind of cost is most costly to you? Sasha. I think that has been the cost of feeling like I'm writing all this stuff that's marketing-oriented as opposed to going deep and doing the writing that I really wanna do. So there's like a spiritual. It's similar that I'm not producing the depth that I really wanna produce and that will attract more people because I've been caught in this cycle of, I mean I have a lot of story in my mind that marketing is manipulation. Not marketing, but sales. So I was like, "Oh, I've written this blog post "to get people to sign up for this class." It will be great for them, but I don't enjoy the process of writing that stuff. Yeah, gotcha. Great answer. Susan, what's most costly? What kind of cost is most costly to you? I think for me it's my time in terms of assembly, because I enjoy the time I take to design and the whole process. But I definitely think I'm gonna have my manufacturer assemble for me too, because... At first, I was like, "I wanna save money so I'll do that part." But just doing a few pieces, either a day or like one to calm myself. That's really good to know. That's true, that's true. It's probably way less than your manufacturer. Right, yes, thank you. So, that's really good to know. That what happens when you take a look at your business model, when you got this information, when you're really thinking about all the different costs that are associated with each kind of product. You can make those kind of decisions. Yes, you hate to see the money go out the door, I get that, but you figured it out, you hate the idea of spending that time, and especially since you're gonna be running two businesses at least for a while. That's huge. There is an actual financial cost on that time for you. So that's huge, that's great. Do we have any answers from online? We do, and it's all about time. Greg D. in the UK says time. Energy. Taylor Stone says time. Energy is another that's come up. Time and energy. (mumbles) is saying boredom. They're saying boredom is very costly to them. Oh yeah, so that's kind of similar to Tiffany's answer, banging the hoop earrings out. You don't wanna be bored. Oh gosh, I hate being bored. I very much designed my business to always keep me learning, always keep me engaged, so I really identify with that. A girl named Michael gave us a very detailed response saying the biggest cost, number one is financial, it's investing in a lawyer, an accountant, more training, et cetera. Number two is time again, working from home, accepting labor-intensive projects that don't bring in enough income. They're saying their photo book's pricing is the same as a logo pricing with much different time investment, so probably exactly what Tiffany is saying here. Mary says large projects take a lot of time as opposed to smaller projects for her because she works slowly. Yeah. That's a case when you need to make sure that the way you're pricing those large projects relatively to the smaller projects. You gotta make sure that makes sense. Or does it make sense for you to take on big projects? Maybe your niche is in small projects, getting things done quickly for people with a smaller container. Fantastic. Well, thank you for all your comments. Thanks for all your contributions. Tiffany, I think you're gonna see a huge boost in your sales because people are getting in there now to say they're buying before the price goes up. (all laughs)

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