It costs how much?! Some things to think about when thinking about pricing by: George Pariseau The subject of pricing is often complicated, frustrating, and confusing. When starting out, the first question most people have, especially in the creative services world, is one of how much to charge. Graphic designers, photographers, videographers and writers can all have similar approaches to pricing / billing, however they diverge at certain points. When starting out as an entrepreneur, this is one of the most challenging issues to deal with and isn t always as clear cut as people wish it was. I can t tell you what you should be charging for your service, only you can determine that. What I can do is offer you tips, information and other thinking on the topic that has helped me determine my rates along the way; your mileage may vary and I hope that some of this helps you on your journey. Your relationship to money Money s great. It buys stuff, feeds us, pays bills and in theory, can solve a lot of problems. If you re anything like me, you learned some good habits and some bad habits involving money as you grew into adulthood. These habits will help and haunt you as you go through your journey as an entrepreneur. So, in no particular order, these are some things you should learn about, or improve upon going forward: 1. Creating a budget. There are several articles on the internet on how to do this. 2. Paying off and avoiding debt, when possible. 3. Hire a financial advisor/planner: there are several different flavors out there, the best ones (when starting out) will help you develop a budget, educate you on saving for retirement and will give you good, practical advice on how to manage money. The bad ones will try to sell you on a variety of financial instruments (insurance policies, mutual funds, etc.) that you might not be ready for at this time. 4. Learn how to set financial goals. 5. No one likes the idea of living below one s means, but it s good advice, except when that means not buying food, etc. The point is, save more and give up some luxuries until you can build it into a budget. Some of the wealthiest people have lived modestly all their lives. 6. You have value. Your work has value. Own it. 7. You will be judged on how you price (good and bad). 8. Be honest with yourself about your emotional views on money. The point is, whatever it is you think you understand about money, be aware that there are habits, prejudices, beliefs (false and true) that are influencing your relationship to it and learn to identify those and start challenging them, as uncomfortable as it s going to be. As the saying goes, it s the love of money that s the root of all evil, not money itself. The most important rule: You really need to give thought about how you re serving your customers, making their lives easier, solving their problems otherwise all the pricing strategies in the world won t help you. If you re not focusing on creating value for your customers, they have little reason to be thinking about you. 2016 Brainstream Creative, LLC
Disclaimer: George Pariseau & Brainstream Creative, LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction or becoming self employed. Establishing a baseline Personal Expenses Before you even begin to determine your rate, you need to think about developing a budget. You absolutely need to know, as clearly as possible, how much you re spending just to survive and how much you will need to have in order to live a life that you want (including the cost of that private jet, if that s what you want). Some things that might be useful is knowing how much to save for retirement, medical insurance, dental insurance, prescription costs, clothing, groceries, rent, utilities, spending cash, emergency funds. If you aren t in the practice of doing this now, figure this out before you start a business. This number represents your salary. Resources for determining a target salary in a market. If you re having trouble determining a salary, it might be helpful to visit: https://www.onetonline.org/, to determine your job description / code and then cross-reference that number with the Bureau of Labor Statistics, http://www.bls.gov/, to determine salary ranges for your profession in the market you operate (a designer in California earns more than a designer in Michigan.). It might not be the most elegant way, but it certainly doesn t hurt to start here. Business Expenses The next part of this equation is determining all of the expenses that you will incur doing business, such as advertising, professional fees, equipment, insurance, marketing, contract help, etc. This is your aggregate expense for running a business. Add your Salary to your Business Expenses and now you have a good estimate of your break even point (some people define break even points differently). Profit Your profit is everything your business earns above your break even point. Profits are good because they indicate the overall financial health of your organization and allow you to do things such as invest in new tools, hire employees, go on expensive vacations, etc. Profit is usually examined in percentages, so if you target a 20% profit and your business earns $200,000 in revenue then your profit is $40,000 if you re doing things right. This is an oversimplified example. You will often hear people talk about revenue vs. profits, what s helpful to know at this stage is that revenues are your overall earnings/sales in dollar amount and that your profit (or net income) is your Revenues, less your expenses. This is a basic accounting formula to keep in mind. Revenues - Expenses = Net Income (you re taxed on net income)
Taxes You really need to establish a relationship with a CPA from the outset of your business, because as an entrepreneur, you re taxed differently than an employee. Not handling your taxes properly can result in stiff penalties and other headaches. It s not worth the trouble to wing it. Based on your earnings, you may have to pay taxes quarterly. The higher your net income, the more taxes you will owe, so you have to constantly monitor this and set money aside lest you find yourself in a cash crunch. With a net income of $100,000, you will pay $14,130 (FICA & Medicare Tax) leaving you with about $92,935 (half of your fica/medicare is deductible) of taxable income resulting in about $74,165 after Federal & State are calculated; $5,000 put into a retirement account leaves $69,165 cash on hand to cover everything else. (Using 2016 tax table/rates, late at night, with crude online tax calculators, calculating as a sole proprietor, single filer, no dependent status. I am not taking into account additional deductions that might be considered in a tax return.) Common Billing / Pricing Conventions for Commercial Artists I will not be writing about royalties, retail art sales, or fine art commissions because this is not an area that I have a great deal of knowledge about. What I can write about are common billing conventions that freelancers and small firms use in order to classify their billable activities. There are variations and more advanced ways of establishing price which are more appropriate to large commercial agencies; certainly freelancers can learn from them, but my intent here is to lay out some basic principles to use when starting out. What work is billable, what work isn t While you re working 40+ hours a week, you re not likely going to be billing for all of them. Sales calls, administrative paperwork, errands, training, etc. are hours you can t directly bill anyone for (unless you lack ethics and are really good at sales). Working on a project, concept development, traveling to a location, meeting a client, editing a document could all be tasks that are billable (for example, some people charge for travel, some don t; that s your call). People who work on a project, but don t bill for the hours are called volunteers. You have to figure out for yourself what tasks you are charging a client for and stick with it. You might find scenarios where you have to negotiate billable tasks, so be prepared for that. Why we bill what we bill and how we bill what we bill Most of the conventions of billing, including rates, how we bill, invoices, deposits, kill fees, etc. are all carried over from how our particular industries have evolved over time which is why it makes sense to bill in a fashion similar to industry standards; another reason being there s a familiarity on the client s side as to what to expect. There are also some smart reasons for doing so, which I will not be covering in this document. With that said, your journey in establishing all of this will be determining what makes sense for your business and whom you re working with. Hourly rate / also known as time & materials basis Usually, this is a starting point for most creative entrepreneurs & creative firms. The thinking behind this is that invoicing is transparent, you are only charging for your time and your expenses (contractors, equipment rental, etc.). It s a pretty straightforward and common practice that most people feel comfortable using and most clients are used to seeing. Some freelancers and firms will markup material costs by 10%-25% in order to cover administrative tasks of acquiring something, hiring additional labor, etc.
Flat Rate / Packaged Rate / Value Rate The above terms are used interchangeably and are usually adopted by experienced freelancers or firms when they have a good estimate of how long a common project takes. An example would be selling all logo designs for $750 or a logo / social media / business card design package for $2250; rather than tell them it might take you 30 hours at $75/hr to accomplish all these tasks. This is a really good way to go when you have a firm grasp of your process & have benchmarked how long it takes to create a project. Some experienced freelancers & firms use this pricing to reach their profit target (but that s not why you should be using flat rate pricing). One take on Value pricing is that you re charging a client based on their Return On Investment, which means that a $10,000 bill on a logo/social media/business card design package might seem like a good deal to a client, for the same 30 hours of work, especially since their clients might be spending $50k/year with them. (this is an oversimplified example). Two dangers of flat rate pricing: 1. You could very well spend more time on a project than you built into the pricing. 2. You have to be crystal clear as to what you are providing to the client, otherwise you might end up in conflict. Sliding Scale This is for advanced level creative entrepreneurs. I m not even there yet. The theory behind this is you charge more or less for the same service depending on the size of the client. In some ways, it makes sense: Larger organizations expect to spend more on a service and have more complex requirements, but the smaller businesses can t pay the same rate as a larger organization. I m skeptical of this model, but there are companies out there that seem to have adopted this and are able to make it work. I would caution not to jump into this, as there are many pitfalls that can arise. So what about that hourly rate? Yeah, I m going to get to that, I think. Using an earlier example, take your creative firm that earned $200,000 in it s first year (it probably won t). We established that you earned a $40,000 profit (you probably won t) and your expenses are $100,000 (they probably won t be) which leaves you with a $60,000 salary (You ll owe tax on $100,000, in theory). If you worked 40 billable hours in a week, and worked 48 weeks in a 12 month period, this means you were billing around $104/hr. But you won t be billing 40 hours a week unless you have a dedicated sales agent, bookkeeper, etc. and if you pay those people, your expenses will rise and your profit won t be that high. So when thinking about pricing, you really have to think about all the hours you WON T be billing. But if you price too high, you will hit a ceiling as to what clients are able & willing to pay. In other words, there is a huge element of trial and error, as well as time spent NOT billing that is going to happen in the first year or two of your business and you have to be prepared to make little or no money right off the bat. But that s ok. All of you are going to have different experiences when it comes to determining an optimal rate for your work.
Final Thoughts On Prices & Billing Pricing influences the perceived value of a product or service (to an extent) Some companies won t do business because you aren t charging a high enough dollar amount. This doesn t mean you can charge a high rate and expect people to flock to the door; you have to demonstrate the value to the customer first. This is a marketing fact. Always get a deposit A good way to screen good clients from the bad are to obtain a deposit before the project begins. Some people charge 50% in advance, 50% on completion. Some charge 25%/25%/50% at certain phases. If you have a project that has longer duration (3 mos.), it s common to set milestones and charge a percentage at each one. A red flag is a client that refuses a deposit, but you will have to weigh that in with other factors. Avoid Net 30 like the plague In some cases you won t be able to avoid this (large corporations can have 30, 60 and 120 day terms); this is your judgement call. See the above on getting a deposit. Sometimes offering a discount like 10% Net 15 (10% off final invoice if paid in 15 days) can be negotiated. Build a cash reserve Cool, you just collected on several projects and there s cash in the bank. Don t go buy that shiny new sparkly thing: set aside cash in a bank account. This is because there will be days, weeks, months you might not have any work. Having $10,000-$20,000 set aside would be a comfortable number for a single, freelance business owner. Find a lawyer, accountant and insurance agent These fine people will be able to help you structure the legal & financial matters before they become an issue. Some clients require you to have commercial or professional liability insurance, so you might want to know someone who can help you obtain that. If you end up hiring employees, workers comp laws & unemployment tax issues become more complex than Google Search can solve. Forget about how competitors are pricing You should be focusing on providing value to your client and differentiating yourself in the marketplace instead of your competitors prices. But you should pay some attention. Be organized If you re like me, you get distracted by any shiny object that finds it s way into your path. If you don t stay on top of your billing, you won t have cash when you need it. If you don t keep track of every single penny, come tax time, you re going to hate life. Bill immediately If you listened to me and got a deposit, with payment on completion, this won t be a problem. The point is to get the contract, invoice, etc. in the client s hands ASAP so you aren t waiting a month wondering where your money is. Always ask for the budget As early as possible. Why? If their budget isn t big enough, you can move on and spend time focusing on prospects with larger budgets. As harsh as that seems, think about it this way: how will you feel, after spending 2 hours talking to them, that they won t be able to pay for your time. Conversely, if they have a substantial budget, you might be able to provide more service/bring additional help, etc.
Additional Resources: The Freelancers Union - Great tips for freelancers of all persuasions https://www.freelancersunion.org The Creative Business Newsletter - Primarily geared towards graphic artists, lots of practical business information here. https://www.creativebusiness.com/ Beewits Hourly Rate Calculator - Good tool to get started. https://hourlyrate.beewits.com/ 17hats - Immensely useful project/business management app that s reasonably priced and geared for the creative professional. http://www.17hats.com Graphic Artists Guild - Handbook: Pricing & Ethical Guidelines https://graphicartistsguild.org/handbook Adrian Shaughnessy, How to Be a Graphic Designer without Losing Your Soul Great book, you don t have to be a designer to learn from or appreciate it. About the author: George Pariseau is Founder and Managing Director of Brainstream Creative, LLC, a full-service provider of smart video content strategy and production services to Michigan businesses and multi-channel marketing agencies. The company also serves several departments at the University of Michigan as needed. Mr. Pariseau formed Brainstream Creative in 2014 as a platform for serving a growing demand for highquality video communications over the internet. The company s mission to create video that educates and entertains is supported by a corporate culture that values fiercely inquisitive and creative thinking. The recipient of the National Academy of Television Arts and Sciences Crystal Pillar award in 2013 (and a finalist for the same award in 2012), Mr. Pariseau has a broad range of expertise developed over nearly two decades of professional experience. His deep understanding of graphic design, project management, and digital marketing has supported organizations in the medical, educational, publishing, broadcast television, and legal sectors. George holds a Bachelor of Science degree in art (with a minor in marketing) from Eastern Michigan University. He currently lives in Plymouth, Michigan. Website: http://www.brainstreamcreative.com e-mail: info@brainstreamcreative.com phone: 734.707.9149