More on Pricing — Nuts and Bolts

My general approach to pricing is to start from the top down as opposed to cost plus markup.  This is really spelled out in Blue Ocean Strategy — one of my absolute fave business books.  Basically, it is the difference between what do you want to make (top down) vs. what can you make (cost plus).  

Creative businesses either 1) provide goods (florists, stationers, lighting professionals, rental companies, bakers, etc.), 2) services (event planners, musicians, makeup artists, hairdressers, etc.) or 3) both (event designers, interior designers, graphic designers, photographers, etc.).  

Those that provide goods typically command the lion share of the budget for any particular project, BUT they also have the most risk associated with them (ask any florist whose flowers died the day before the event) and the highest fixed overhead (need a workspace, machines and staff).  Those that provide services don't usually have a lot of fixed overhead (most only need a phone and a computer), BUT have to manage their and their staff's time effectively to earn a proper return.

So my rule of thumb is that those providing goods need to have net margins of between 15% and 25% depending on the size of the business.  Those providing services between 45% and 65%.  If your business has been around a while and you are not achieving these numbers, time to take a look at your pricing.  Practically, if you are a florist and you are doing $500,000/yr. in business, you should be profiting at least $75,000 after all is said and done (including your salary).  An event planner doing $200,000/yr. should be making at least $90,000.  For those with goods and services, the rule is the same and the percentages should shift based on the composition of goods and services in your business (hopefully, you are working to make more of your business about services).

I love multiple revenue streams and vertical integration of a business (an event planner owning a rental business) and it should be the goal of every business, creative or not.  The more diverse your revenue streams the easier it is make it through the tough times we are in.  If you don't have multiple streams yet, no time like now.  However, I would only be looking to add a service business to any existing creative business.  The reason is simple — if it works, it will be very helpful to your bottom line and, if not, it won't hurt the existing business that much.  I don't like adding a goods business unless it can IMMEDIATELY be profitable to you.  The drag on cash flow will often overwhelm your core business before it gets a chance to help your bottom line.

Lastly, in today's economy, the temptation to find volume through referral agreements, set rate contracts and the like is enormous.  Please resist.  You will only wind up adding to your fixed overhead and will probably not make any more money.  More important, these deals will also divert your focus from your core business (and brand) and the new (and far more profitable) opportunities that await you.  Start a new service instead.