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Wednesday, June 10, 2009

Outside the Frame, June 10 show recap

On Wednesday’s Outside the Frame show in Part Two of Pricing Strategies: Factors and Formulas, we discussed “Competitive-based Pricing” and “Cost-based Pricing”. Any pricing strategy must pay attention to the Price – Value Relationship. Consumers expect gourmet food to cost more than fast food and for a luxury car to come with a higher sticker price than an economy car.

Competitive-based Pricing is a method of pricing your work based on the price your competitors are charging for similar products. It’s important when seeking comparables among competitors that you compare apples to apples and not apples to oranges. Base pricing on how much other artist charge that live in your geographic region, work in similar mediums, sell through similar venues, and create similar art – also take into account their career accomplishments, experience, and the quality of their work.

Cost-based Pricing is a method of pricing your work based on pricing factors such as materials and labor costs associated with producing the product. There are primarily five factors you need to take into consideration when utilizing cost-based pricing and they are:

Manufacturing Costs: The cost of materials used to produce an item. When factoring these costs make sure to take into account shipping & handling charges, delivery charges, and/or the gas required to pick up supplies.

Labor Costs: Determine how much time it takes you to produce an item. If an assistant is needed to keep up with the production, be sure to factor this in. Labor costs are usually calculated using an hourly formula. You should at the very least make minimum wage; the Federal minimum wage in the U. S. is currently $6.55 and will rise to $7.25 on July 24, 2009.

Overhead Costs: Overhead costs or fixed costs are the costs of products and services required to run your business such as studio rent, electric, phone, etc. These costs will remain the same month-to-month whether you manufacture under 10 items or over a hundred.

Selling and Marketing Costs: Costs that pertain directly to the selling of your product -- listed in the “Expenses” section of your monthly balance sheet -- such as advertising, show fees, samples, as well as, sales labor (such as the amount of time you are away from production) travel, meals, etc.

Profit Margin: Most people think of profit as all the money that is left over after expenses and make the mistake of confusing profit with “bonus” or “salary”. Profit is neither. Profit is not optional and is a necessary part of your operating expenses.

These five factors impact your pricing in this manner: labor & manufacturing costs together should equal 1/3 of your wholesale price; overhead & selling/marketing costs together should equal 1/3 of your wholesale price; profit alone should equal 1/3 of your wholesale price. Each third being in proper proportion is necessary to ensure a healthy business.

Hourly Rate Formula:
Productive Hours Per Week (PHW) x Weeks Per Year (WPY) = Productive Hours Per Year (PHY) --- Determine your Annual Income Target (AIT) based on your pricing factors. Divide your AIT by your PHY to arrive at your Hourly Rate (HR).

Your PHW is 75% of a 40 hour workweek or 40 x 75% = 30. There are 52 weeks in a year and you want to take 4 weeks vacation and 2 weeks for illness or 52-4-2=46. Lets say you need to make $50,000.00 (AIT) to cover your pricing factors. PHW (30 hours) x WPY (46) = WPY (1,380). AIT ($50,000.00) divided by WPY (1,380) = $36.23 (HR).

Bear in mind the more productive hours you tally per week and the more weeks per year you work generates more productive hours per year and thereby increases your annual income target or reduces the hourly rate you need to charge.

Square Inch Rate Formula:
Total Square Inches (TSI) x Cost Per Inch (CPI) = Square Inch Rate (SIR) x 3 = Wholesale Price (WP). You multiply by 3 to cover the other 2/3rds of the equation: 1/3 overhead & selling/marketing costs and the 1/3 profit margin.

For demonstration purposes, lets use an 8 by 10 graphite drawing. To determine TSI multiply the height x width or 8 x 10 = 80 TSI. A $5 pad of 8 x 10 inch paper has 20 sheets and a $2 graphite pencil will last for 50 drawings. To determine CPI divide $5 by 20 ($0.25) and $2 by 50 ($0.04) then add them together ($0.29). Multiply TSI (80) x CPI ($0.29) = SIR ($23.20) x 3 = WP ($69.60).

If it takes you 2 hours to create the 8 x 10 inch graphite drawing in our example, how many will you need to produce in a year to earn your Annual Income Target? Let’s say you can produce 3 drawings per day and work 5 days per week; you will have worked 30 (PHW) but will have only earned $1,044 (WP x 15) and at this rate, you would have an AIT of $48,024 (52 – 4 – 2 = 46 WPY). Additionally, you will need to produce and sell 690 – 8 by 10 inch graphite drawings per year.

To make your pricing fall in line with your positioning in the art community and your experience level; you will need to alter the variables to move your wholesale price into line with what is competitive in your particular market and stage of your career. This is where your balance sheet is extremely important as it enables you to account for all your monthly operating costs and expenses.

Be sure to tune in to Outside the Frame next week where we will discuss tips and techniques for selling art on the Fair and Festival Circuit. Don’t forget to about the Outside the Frame Listener Appreciation Drawing see My Blog for full details.

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