Nancy Liu Chin wrote a fascinating post on Weddingbee Pro this week about how hard it is to make money in the wedding business. She goes through a terrific explanation of how she prices her work and how narrow her profit margins are. I have met Nancy several times and am a huge fan. The woman knows her stuff and all brides, existing vendors and those thinking about getting into the business should pay very close attention to her. I do have a few observations though.
The first is that if you are pricing at margin, scale is what matters. Using Nancy’s example, she generates approximately $180,000 per year in revenue and maintains a 25% margin, meaning she makes approximately $45,000 per year, with overhead of $45,000 per year. But overhead is static so, given consistent pricing of say 2x cost of goods sold, she will break even at $90,000 in sales and each dollar generated after that will put her creative business in the black. If Nancy generates $250,000 in revenue, her profit will be one half of $160,000 or $80,000, bringing her profit margin to a little more than 30%. The profit percentage can’t grow to the moon because, at a certain point, Nancy will have to add overhead to compensate for the bigger business, but my guess is that Nancy can go a long way before she has to do that.
What does scale mean to smaller or new creative businesses? You can’t compete by pricing on margin. If Nancy is happy with a 25% return, she can get cheaper as she gets bigger and still make money where you will lose.
Next, pricing on margin inherently creates distrust between a vendor and client. Very simply – the vendor is incented to use the most expensive or inexpensive materials as opposed to the best materials for the design. As Nancy said, clients don’t understand why they have to pay more than $5 for a single flower worn on a lapel as a boutonnière. Well, if that flower is a carnation that costs $0.50 or a rose that costs $3.00, which one would should Nancy choose? And, if clients know the cost of the hard good and will not accept a mark up of say more than 3 times cost, then using 10 carnations for a centerpiece would give Nancy a $10.00 profit, while using 10 roses would give her a $30.00 profit. Either way, if the rose is right for the boutonnière and the carnations are right for the centerpiece, Nancy will have to compromise her creative business for the sake of her art.
My last observation inferred from what Nancy describes is that clients today know the cost of materials. As practice, I wanted to know how long it would take me to find out the wholesale price of 100 Leonidas Roses (@$110.00). About 30 seconds Googling “Wholesale Price of Leonidas Roses” from rosesource.com. Of course, this would not have been possible 20 years ago, but it is the world we live in today. Pricing on margin when your clients know your costs completely devalues your art.
It all leads back to my fundamental presumption: the value of any creative business is in the creation of the art, not its production. This is not to say that production is not valuable or should not be valued, just that clients will not pay for it as Nancy so eloquently lays out. My answer: be transparent and sell your art. That is why your clients are hiring you and what they will pay for. Whether that means a design fee, more outsourcing, a longer life cycle for your clients, I do not know. But I do know that pricing from the bottom up (i.e., on margin) is a game only available to the biggest players in the market whose focus is on volume more than the creation of original art. If design is paramount to your creative business, pricing on margin has no place.
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I also read Nancy’s post and it was definitely a good one for the books. As a planner I strongly feel that I have to educate my clients on the cost of not only flowers but also catering and even delivery costs! As Nancy said “Planners don’t get it, editor’s don’t get it” Neither did I. Not until I took a floral class and realized how labor intensive it is to create a bouquet and how much product it is involved to do it properly. Although pricing correctly is important to stay in business (and of course make a profit) I feel that we need to start educating our clients better and remind them that “profit” is not a dirty word.
Thank you for this post! Especially this year, when I didn’t feel like I could trust the business cycle to be what it has in the past, how we price our product has been on my mind almost constantly. I think you nailed it when you said it takes a customer 5 seconds to Google supplies, and without the customer understanding what else goes into the finished product, it feels like the perspective is off. Nancy Liu Chin’s post was a great start of the conversation I’ve been waiting to listen in on, and Sean, thank you for taking it to the next level.
Another great post Sean! Your presentation in DC got me thinking a lot about how we sell ourselves to our clients, and I totally agree with your presumption about the charging for your art/craft and not goods. To me, it’s much easier to make a “value” argument for higher pricing when a propect understands and respects that artistic aspect of what we do. Thanks for another thought-provoking post, and keep up the great work!
I loved Nancy’s post and this one. It is hard to charge a design fee when your peers are not doing it, but you have to stand firm. Educating the client does help, but takes time and effort. It is easier to sell when you are not the producer. Example: A client came to me to design her reception – linens, lounge, cake table, draping, etc. She already had a florist and a coordinator but wanted me to lay it out. She did not expect me to do this for free. When I am the florist and/or coordinator, the expectation is that it is somehow included. Au contraire, mon frere.
I have lost clients because of it, but I am more profitable….
Thanks for a great post Sean!
Here’s a similar scenario: other photographers are often surprised to find that I charge the same for all my different album types even when the costs are different. If you tell a client that you charge $4,000.00+ for an album because they are paying for the imagery (i.e. the art and artistry) and not the paper (the physical album), it seems somewhat disingenuous to try to explain why the retail cost of some “other album” is $500 less and why a 5×7 is only $14. There is a huge disconnect unless you are able to demonstrate the portions of the retail cost that are creative- vs product-based — almost nobody does that, at least not in wedding photography.
The trick of course is to either a) maintain a sufficient product price points to sustain the swing in costs or b) simply pass on costs to the client and charge sufficiently for your talent to make up for the lost profit on product margins. The one caveat in the case of “b” is that sometimes you give up some of the profits associated with the client who orders a lot of “product”.
Whatever the case, whether you decide to operate on margins or creative fees, your branding and pricing need to be sending a consistent message to your clients about what they are actually paying for.
I look forward to meeting you when you are in Atlanta.
–Ben
Ben Vigil Photographers
While margin based pricing is at odds with most creative businesses, the notion of “educating” your clients is a bit of a misnomer as well- most use it as a euphemism for convincing another to one’s opinion and that generally falls flat.
Clients {generally} couldn’t care less about you or how much time your craft requires and their eyes bulge wide when faced with design or service fees, especially when it’s at odds with most of the market.
And that’s where the root of the problem lies- take away the supporting spouse or day job and perhaps upwards of 70% of the creative businesses would crash and burn. We are all too often in a subsidized market and the pricing effects are glaring. The days of talented artist-poor businessman are calling their last numbers.
Dear Sean
You are a business mind reader. Wow – I am impressed with how well you know my business without looking at my books. Are you and my accountant friends? I’m truly smiling when I say that!
Still have so much to learn….
For 2010, I am taking that leap of faith and changing my approach. Thank you for sharing and inspiring. I’ll keep you posted!!! Stay tuned.
Nancy
Nancy’s post was such a great illustration on what you’ve been preaching to designers and creative businesses. Sean, thanks for doing a post to take Nancy’s point to another level.
sean. nancy turned me onto your blog after our email chat today about her post. and after an hour or two reading your blog i am astounded at my need for you and this blog. thank you thank you thank you … for the perspective that i so long for and need in order to make my creative business successful. you now have yet another faithful follower!
The wedding bee pro post along with your post was very informative and interesting. I think this post is important for clients esp. because they only see the bottom line….the cost on their proposal. They forget that tulips flown in from Holland cost $$$ and so does the prep for their florals. I took a floral design class to better understand that part of the wedding industry. Pretty expensive and very time consuming.
Nice…I got to your article from David Burke’s site. Thank you for writing about this topic! It’s definitely something that deserves a lot of thinking! Thank you!
I’ve bookmarked and constantly referred back to this post and Nancy’s post over at WeddingBee Pro. Thought you’d like to read something she posted recently: http://nancyliuchin.blogspot.com/2010/04/inspirations-from-trash.html