How many of you would describe yourself as being in a particular creative business? Graphic designer? Florist? Photographer? Caterer? All of you I presume. Now how many of you would subcategorize yourself – Commercial Interior Designer? Wedding Photographer? Invitationer? Still probably most of you. Now how many would subcategorize the subcategory (just had to say it)? Wedding Photographer who only works in ballrooms? Caterer who only works in tents? Interior Designer who only works on fine dining concepts with 250+ seats? Not many.
Red Lobster and Le Bernadin are both seafood restaurants. Anthony Bourdain wrote about Justo Thomas in his new book, Medium Raw (awesome book btw). Justo’s job is to cut fish (700 to 1000 pounds of it) each day for Le Bernadin. It takes him five hours and he is treated like a God at the restaurant. When he is not there it takes three people seven hours to do what he does. Cutting fish to Le Bernadin’s standards is that hard. I suspect Red Lobster does not have a whole lot of Justo’s working for it. Then again, you do not pay for Justo’s craftsmanship (not to mention Eric Ripert’s brilliance) at Red Lobster. And yet when I look around at creative businesses and their underlying structure – I see a sea of sameness regardless of whether they are closer to Red Lobster or Le Bernadin. Usually, there is not even a hint of understanding that Red Lobster and Le Bernadin, even though they are both seafood restaurants, are in entirely different businesses. Scale, margin and volume are all that matter to Red Lobster. Precision, quality and creativity is the lifeblood of Le Bernadin. That is why you pay $9.99 for lobster at Red Lobster and $75.00 at Le Bernadin.
For those of you who think the Red Lobster/Le Bernadin example does not apply to you, ask yourself how you price a $15,000 project vs. a $150,000 one? If you provide products (flowers, food, invitations, lighting), my guess is you “mark-up” your costs by the same (or very close) percentage – most times 100% so you can get to 50% gross margin. Or if you provide services, the same flat fee and/or percentage. Then you wonder where all the money went. Simple – you were in two businesses at the same time, doing ok in one area and getting crushed in another. Then when the economy slowed you did more business in the area you were getting crushed in to begin with. Voila – no more money.
Specific example, if you are florist specializing in events (i.e., no retail) from $5,000 to $50,000, you probably experienced (and are experiencing) growth in the $5,000 to $10,000 business and slowing in the $30,000+ business. You price at three times your cost of flowers and hope to make 50% before overhead. The problem is your mistakes are actual regardless of the size of event, where profit is a percentage. So if you make a $1,000 mistake on a $5,000 job you just lost 40% of your profit. The same mistake on a $50,000 job cost you 4% of your profit. Still think you should price the smaller jobs at 3 times the cost of flowers? Better said, are you willing to risk 40% of what you can ever hope to make on a simple mistake? Even more, what is the difference in the amount of work between the $5,000 and $50,000. My guess is it is not ten times more. So if you feel like you are just doing ok on the $50,000 jobs, imagine how much you are losing on the $5,000 ones? And now you are doing far more of those than the $50,000.
Yes, markets and pricing have adjusted because of the recession. But you cannot look at every piece of business in the same way. If you do, you will send yourself down a road you did not know you were on. The road will erode the further you drive. Before you drive yourself off a cliff, better to stop and ask yourself what business you are actually in and then act accordingly. My guess is that you will not be able to turn around fast enough.
{ 4 comments }
I was just discussing this (with myself!) last night. It takes almost as much effort to do the small jobs as it does to do the large ones. You still go through the same steps to be successful! It’s frustrating to come to the end of the process and realize that your profit margin is severely diminished. If the budget on the job is $5000, then you really only have $2500 to spend on goods if you build in the 50% margin that you need. That usually makes it even more difficult and time consuming because you have to shop so much more judiciously. Is my thinking correct here, or do you approach it differently? I’d love to know how you come to a pricing strategy.
sean….flashback of our conversations……always on point! thanks for the reminder everytime. We need to talk soon! after valentines day – lots to catch up on! – amy
On point, as usual. Add to it the fact that many artists are fanatical about the perfection of their art, which leads to the desire to or acceptance of spending extra hours on the small job in order to do a thorough job that meets one’s tough standards. Add this to what you’ve listed and what Sally spelled out and like you said-I’m turning around fast, only thing is I need is a Maserati, because as you said it, “I can’t get turn around fast enough!”
Brilliant blog post. “Know your audience.” Any business owner must know who their customers are, and price/market themselves accordingly. Obviously, for a newcomer (such as myself), who I serve right now will differ to whom I wish to be my clients 5 years down the track.
As important as pricing is (and it is), in the grander scheme of things, many other factors influence a potential client’s decision to hire a professional. A lot of newcomers get too caught up in ‘how much to charge’.
Know your enemies. Know your friends.