profit
Cockpit Arts Top tips: The Pricing Decision 2: Price and the Market
Ahead of this week’s Cockpit Arts Finance workshop with MyCake on Wedensday, 11th August 2010: Financial Planning for Growth we’re have some more Top Tips by Ellen O’Hara, Head of Business Development at Cockpit Arts.
There’s no doubt that getting your pricing right is a crucial part of your marketing and business strategy as a designer-maker.
As part of the Pricing Decision series I am looking at three key areas: Cost, Market and Value, as well as how different pricing strategies fit with the overall goals, for your practice and business.
My last post looked at the relationship between price and cost with cost-plus pricing. This week I will explain how the market affects the pricing decision.
Price and The Market
Market based pricing methods depend on having an accurate picture of what’s going on in your marketplace. For example: Are you selling to craft collectors? The mainstream gift market? Or high end fashion? And what are the current trends in these market sub-sections?
In the larger, mainstream markets, prices will tend to be dervied from two key factors:
- What competitors are charging
- What customers are willing to pay
Who are your compeitiors and what are they charging?
If you don’t feel there are any direct competitors out there, try and pick out a few other makers or brands that:
- Are making similar work
- Are aiming at a similar customer base
- Who are at a similar stage in their career and have a similar profile
How do your prices compare? Are you competitive, or potentially over or under pricing yourself?
What are customers willing to pay?
- Research other companies’ prices online, in stores and in galleries. Pick a broad range of products so that you can compare the going rate for different types of products in your field. For instance as a designer-maker jeweller, you could look at a combination of mass produced high-street designer jewellery and high end fashion jewellery, as well as other makers.
- Look at the overall price range that other companies offer (minimum and maximum), how different work is priced differently, whether discounts are offered etc.
Use all of this information together to inform your own pricing decisions.
The Advantages
The advantages of following a market-based approach are that it tends to keep you price competitive in the eyes of your customers, so it’s important to consider who you’d like to be compared with and sit alongside in terms of price.
The Disadvantages
The disadvantages of this method are that the market price may not provide you with the profit margin that you want (and need!). You may actually have a very different business model to the people you are comparing yourself with, who may be able to produce and sell work at very different costs.
New and Unique Work
Your work may be so new and unique that there is no solid market-based price to compare with. So you have be the price setter yourself. If this is the case, it’s likely that your operating at the niche end of your market, where the percieved value of your work bears more influence on price than what others might be producing and charging. We’ll explore this in more detail next week with The Pricing Decision # 3: Price and Perceived value.
Let us know how you get on by leaving a comment on your experiences in making your own pricing decisions.
See more top-tips on finance from Ellen and other industry experts.
Or check our resources section for a worksheet on Calculating Your Costs and Budgeting.
And if your doing some financial planning this summer, come along to our workshop: Financial Planning for Growth on 11 August.
Cockpit Arts Top tips: The pricing decision series
Ahead of Cockpit Arts Finance workshop with MyCake on 11th August 2010: Financial Planning for Growth we’re featuring Top Tips by Ellen O’Hara, Head of Business Development at Cockpit Arts.
The question that I’m asked more than any other in my role at Cockpit is ‘how should I price my work?!’
There’s no doubt that getting your pricing right is a crucial part of your marketing and business strategy. So what is there to consider when making the pricing decision?
In the workshop The Price is Right, which is part of our rolling programme of Making It Workshops, we look at three key areas: Cost, Market and Value, as well as how different pricing strategies fit with the overall goals for your practice and business.
Over the next few weeks, I’ll be posting a series of top tips, looking at pricing from these four different perspectives:
The Pricing Decision # 1: Price and Cost
Your first consideration when setting prices will usually involve looking at what costs are involved when producing your work. The ‘Cost-plus’ approach to pricing involves setting price by starting with the cost of creating a product, and then adding a mark-up. The mark-up provides you with your profit margin and so the cost-plus approach almost guarantees that you will not sell at a loss.
Mark-ups can be based on industry standards, individual expert opinions, or widely accepted rules of thumb. I usually advise makers to try and double their cost price to arrive at their wholesale price. In other words, add a mark up of 100% or x 2. And then add a mark up of around 2.5 on the wholesale price to arrive at the retail price. This is equal to multiplying your cost price by 5 to arrive at your retail price, or adding a mark up of 400%. This should ensure that there’s enough profit to cover some of the other costs associated with running your business.
The disadvantage of this approach is that if costs increase, the price of the product must also increase. The price of each product is therefore dependent on how many costs it creates.
The key to using this approach effectively is to be as accurate as possible about actual costs. So what should you include?
- Firstly there are the costs that directly relate to the production of the work such as materials, the cost of outworkers and packaging. These costs will tend to vary as the volume of work you produce and sell changes and can be refered to as variable direct costs.
- Then there is the cost of your time (if you produce the work yourself) which will be based on your hourly rate.
- Finally you also need to think about making a contribution to the day to day running costs of your business, or overheads (also refered to as fixed costs). This will include things like studio rent, day to day administration costs, PAYE staff costs and marketing. Some makers build this into their hourly rate.
A cost-plus figure generally provides a basis for the lowest price acceptable, but should not be the only consideration. It takes into account the cost and profit side of buying and selling, but it neglects demand for your work and what is going on in your market.
Another way of using costs to determined price is ‘target pricing’ where are a target price is made, and then costs are adjusted so that that price can be achieved. However, this is often very difficult to achieve for designer-makers who produce in small batches because costs are less flexible.
Next we’ll be looking at Price and Market in The Pricing Decision # 2.
For guidance on calculating your costs, try our Calculaing Your Costs and Budgeting worksheet which can be found in the Resources section of the blog. Or see the other posts on the blog that advise on finance from me and other industry experts. Let us know how you get on!
And if you’d like to attend our next Finance workshop: Financial Planning for Growth see details and book here.
How to avoid the overworked stereotype
and bring a sense of playfulness and fun to your work life ~ 8 reasons rich people hate their lives:
A young woman discovers in college that she is driven by a burning desire to succeed. She starts a business, struggles, goes through some lean years.
Eventually her hard work begins to pay off. She has a good year. Then, a great year. The year after that blows the doors off.
She gets everything she’s worked so hard for. The prestigious client list. The Armani wardrobe. The BMW. The gorgeous house in the most expensive part of town. The money pours in, almost effortlessly. More money than she ever dreamed she could have.
How do you fill in the end of this story?
Most of us end this one with:
But the more she succeeded, the less fulfilled she became. She shortchanged all of her personal relationships. The harder she worked, the less happy she became. Finally, she realized that her success was hollow. But by now she was addicted to the high income, and it was too late to turn back.
But what if we could write a better ending?
Early on, she refused to become a captive of her business. Even in the tough times, she took six weeks of vacation a year, knowing that when she made time for herself, she became an ever-sharper businessperson.
As the business became more successful, she traveled the world with her family and friends. She was profoundly grateful never to have had a “normal” job, which would have made it hard to spend serious time with her family.
The harder she worked, the happier she became. She launched a foundation to help kids from poor backgrounds create businesses of their own. She became a serious painter. She went back to school and earned a master’s in philosophy.
Everything she did to nurture her life seemed to strengthen her business. She was terribly grateful to have caught that initial spark early, and to have acted on it.
The first story makes a better made-for-TV movie
It feeds our stereotypes. It reinforces our fear of success. It reassures us that we were right never to act on those dreams we had.
The second story is a lot more enjoyable to live.
Both stories are realistic.
If you choose to create a business, large or small, you get to write the story. You decide where you’ll put your focus, what you’ll spend your time and attention on.
I’d love to help you write a better story
These two stories fascinate me. I’ve known both of these women. I’ve watched them work, watched what they struggle with and what seems to come easily to them.
I’ve made an obsessive study of what makes some successful people love their lives, and what makes some utterly miserable.
This obsession, like most of my obsessions, ended up as a piece of writing, which I’d like to share with you. It’s called The Eight Reasons Rich People Hate Their Lives.
The report explores some questions that fascinate me:
- Why taking ethical shortcuts won’t just make you hate yourself, it can also tank your business.
- Why improving your weaknesses is a loser’s game.
- How being driven by your ideals can wreck your life, and what to focus on instead.
- Why some multi-millionaires are still poor, and how you can become wealthy no matter what your income.
- The reason so many smart and talented people are miserable, and the simple mindset shift that would make them happy again.
- How to deal with the loneliness that success can bring.
- Why a wise entrepreneur puts family and friends first.
- The self-destructive behavior that’s as dangerous as driving drunk, and why it can destroy your business and your life.
The report could just as easily be called The Eight Reasons (Some) Rich People Love Their Lives. Because that’s the part that really interests me.
How to play the whole game to win — not just the financial part, but the living part as well.
If this is a topic that interests you, I hope you’ll download the 8 Reasons Report
About the Author: Sonia Simone is Senior Editor of Copyblogger and co-founder of Inside the Third Tribe.
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MyCake reader offer
We’re excited to bring you a special offer to Lateral Action’s Entrepreneur Roadmap Course “How to have a great life and a great business”.
Delivered by a poet, a cartoonist, and a writer, the course is based on their experience of having built a multi-million dollar business online with no payroll and practically no overheads. This course is for Creative freelancers and anyone who wants to the freedom of running your own very small, very profitable business.
- MyCake readers will get 20% discount if you sign up as one of the first 300 attendees
- Registration is open until 6pm BST on Monday 14th June 2010
- The special price is around £270 ($395 to be exact) instead of £338 ($495)
- There is an option to make two payments of $210 over two months instead of the special single payment price
Still not sure? Take a look around the blog for more articles from Lateral Action giving insights into the content for this course.
The Cost of Time
In order to set the price of creative goods and services, you’ll need to know the costs involved. Obviously you cannot afford to sell things for less than they cost! It’s useful to know the break-even point, if only to set an absolute minimum price. As the price goes up from there, so does the profit.
But what are the costs of producing creative goods and services? The direct costs, for example materials, are usually quite obvious and relatively easy to calculate. Fixed costs or ‘overheads’ have to be covered too. These overheads have to be covered by generating income from sales. Each product sold or fee invoiced needs to ‘make a contribution to overheads’.
However it is often the case that one of the biggest costs involved in a creative enterprise is the cost of labour – in other words, the cost of your own time.
So we need to know this cost too, so that we can build it in to the price of products and services. Without this information we cannot know if we are breaking even, selling at a huge profit – or making a loss on every sale.
It would be crazy to sell products without knowing the cost of the raw materials used to make them. Not knowing the cost of labour – which is often greater than the materials involved – is an even bigger mistake.
I suggest that creative entrepreneurs keep a track of their time so that they can allocate this cost to particular products, projects and the general running of their businesses.
Ideally we would like to have precise details, but this is virtually impossible. But that doesn’t mean we shouldn’t do anything!! Even approximate information is really useful. Just having a pretty good idea of how much time is spent on different aspects of the business can be extremely enlightening. It will help you to understand the economics of your enterprise, which is crucial.
So this is what I suggest:
1. Decide your hourly rate. How much are you worth?
2. At the end of each day, jot down approximately how many hours you spent on particular products, projects.
3. Other stuff involved in running the business needs to be counted too: marketing, administration and tidying the studio.
4. Record time as precisely as possible, ideally in 15 minute chunks, though this doesn’t mean you have to stop every quarter of an hour! At the end of the day you should be able to look back and say you spent two hours on A, half an hour on B, and three hours on C, for example.
5. Then allocate a cost to that time invested in each product or project, based on your hourly rate. This will mount up and you can include the full cost when you are calculating prices.
6. The cost of time spent on admin etc needs to be counted as well. This is then added to the cost of your business overheads, alongside things like rent, phone, insurance etc.
Doing this will help you to understand how your business works financially. It can be very enlightening. It will probably mean you reconsider your prices. It might even mean you change your business more fundamentally.
In short, you cannot afford to ignore the cost of your time.
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Further information about financial matters for creative entrepreneurs can be found in the T-Shirts and Suits blog.
Learn more about financial matters on the T-Shirts and Suits Creative Enterprise Network – a free international network of creative entrepreneurs sharing business ideas and information.
Finance is one of the business issues covered in the book ‘T-Shirts and Suits: A Guide to the Business of Creativity’, which is also available online as a free eBook.
Copyright © David Parrish 2010
www.davidparrish.com
Financial support for your business
Naturally, most people are interested in any financial support for their business.
As a creative business adviser, I have helped hundreds of creative entrepreneurs over the years. Often, their enterprises are receiving financial support – from themselves !
This is because they are not taking into account the cost of things like use of a family computer, personal mobile phone, a back-bedroom office, or car. By ignoring the cost of these essential resources, they become ‘hidden subsidies’ to the business.
Ironically, as a result, these businesses lose money.
One effect is that they pay more tax because they seem to be making more money than they really are as a consequence of not including all their business costs.
More seriously, they often lose money because they charge customers too little. By ignoring these hidden costs, they kid themselves that the price they charge customers creates a profit. But when I help them to calculate and understand the full costs of their business, we often find that the price charged is too low to cover all the true costs of the enterprise.
This problem comes to a head when they need to buy new equipment and there isn’t enough money in the bank account – because they haven’t put money aside to acknowledge the depreciation of computers, cameras or other equipment.
As the business grows, its unprofitability becomes clearer. The true costs come out of the woodwork as the creative entrepreneur has to write cheques for office space, software, transport etc – things that were previously provided free by family, friends or themselves.
So the main reason I urge people to calculate all these hidden costs is so that they fully understand the economics of their business.
I find that those creative entrepreneurs who do this are the ones that charge their customers the right prices/fees – and consequently generate enough income to make their creative enterprise profitable and sustainable.
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There’s more about making your creative enterprise even more successful in my book ‘T-Shirts and Suits: A Guide to the Business of Creativity’ (also available as a free eBook) and further ideas and information on the T-Shirts and Suits blog.
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Copyright © David Parrish 2010.
www.davidparrish.com
Unravelling the mystery of profit margins
BBC’s Evan Davis discusses profit margins and the skill in pricing products and services with Robert Polet of Gucci Group, Paula Bell of engineering group Ricardo and Gary Watts of SSL International (Durex, Scholl).
It is interesting to hear how little difference there is between the three business models ~ selling the dream in luxury consumer goods; selling as a consultancy; selling FMG products.
Listen to The Bottom Line (the discussion starts around 20:46 minutes into the programme)
Starting the year by putting your business in good shape
No gym required (though this post might provide food for thought as you pound that treadmill) instead some wise words from the mandarins (sorry still on the Christmas puns).
How can you keep your profit high in a tough market whilst improving customer service and managing your cost base? Well there’s a sentence full of business jargon, lets illustrate that in terms that make more sense for a small business….
The tendency in a tough climate is for new projects from clients to get delayed whilst you still have to keep spending the same amount of money on staff and overheads. That’s not great for cashflow or profit but there are a number of things you can do to help the company through it:
- review the processes by which you manage the business
- review your client base and the things they buy from you … what trends can you see over a 2-3 year period? has there been a radical shift in the recessionary climate (ie what was true in terms of customer behaviour in boom years may well not be true in lean times)
- have a look at the market and your pipeline and work out whether you need to set up new products & services and perhaps stop some of the old ones … or even consider a more radical reinvention of the business
- learn from sectors who’ve adopted what are called ‘lean manufacturing principles’ … kinda like ‘just in time’ production (works for services as well as product based businesses).
Why think about this now?
Well quite apart from it being a good idea to review the business annually, ideally in one of your quieter patches in the year it’s also a sensible idea to set some goals for the year ahead and review the mechanisms by which you’ll achieve them. In a tough climate the rules may well be different so you shouldn’t assume that the things that used to work for the past few years will still hold true. For example do you?
- meet regularly as a team e.g. weekly teleconferences or meetings either for the company as a whole or by team or project … in these meetings you should be reporting on progress of main business activities, any delays or overachievements vs. forecast & deadlines
- track the orders you receive, projects you pitch for (and who wins them if you don’t) and the accuracy with which you meet delivery deadlines and customer satisfaction?
- have mechanisms for maintaining quality of output?
- manage expenditures against a budget (or do you just spend money as projects or areas of the business demand it) ie are you proactive or reactive when it comes to managing costs?
- have a mechanism for charging project costs to your client as appropriate?
- have a process for reviewing outstanding invoices and chasing for payment as required
Looking at the way you do things:
- look at which of your products and services sell best and look for common factors in these – are they new products or well respected older ones. What do customers value – quality, speed, price etc? Now look at the cost of these key products and work out the profitability of each one … there’s no point selling large quantities of things that take lots of energy but don’t make enough profit, that’s just running to stand still
- mapping out the way you make products & services and the other processes you employ for running your business is one way to visualise the way you do things. It also helps you spot ways to do things more efficiently … there may be processes you can combine or key components that you could use in more products or services
- once you’ve looked internally look externally … who are the leaders in your sector and how do they do things? What can you learn from them?
Review can lead to reinvention … this is a good thing … don’t get sentimental about the way you do things but do retain the things that make you unique (and that customers value!).
That said you don’t want to squeeze all the ideosyncrasies out of your company … you’ll reduce the chances of serendipity leading you into new places. Our favourite antidote to excess efficiency is The Salaried Masses – it’ll remind you why you like being an entrepreneur rather than an employee and with luck will stop you boring your workforce!
Finally, one more thing. Don’t cut your marketing budget … it’s often one of the first victims of cost cutting exercises but it only works in the short term. If you’re not marketing your goods you’ll struggle to acquire new clients or even to remind existing clients of why they prefer you to the competition. Those who invest in marketing in a tough climate tend to emerge ahead of those who don’t when the market picks up … there are lots of studies that prove this!
Ellen’s views on the 2008-9 benchmark data
Ellen O’Hara, Head of Business Development, Cockpit Arts and Sarah Thelwall, Founder, MyCake had a long chat about this year’s benchmark data over lunch this week and Ellen kindly agreed to pitch in with a contribution based on a comparison of the MyCake post on jeweller’s and her own experience with the data they gather from Cockpit members. The post below can also be read as a commentary on this post which compares the finances of designer makers and artists.
Some interesting observations here – many of which are supported by Cockpit’s own research into the business models employed by its studio holders. Jewellers actually make up the biggest percentage of studio holders at Cockpit (22%), followed by textiles (16%) and ceramics (14%), so I’ve had a look at how each of these are doing and what we can learn:
Jewellers
We hold data on a similar group of jewelers to mycake – all sole traders, a mixture of precious and semi-precious, representing businesses at all stages of their career, including some part time businesses. The main difference seems to be that a higher percentage of our guys outsource manufacture – nearly half.
Our figures also show that, generally speaking, those with relatively high production costs are either gem and/or gold based jewelers. Or they are jewellers with relatively low levels of turnover (below £20k), but who are still investing in stock. These tend to be either part-time business (and have an income from elsewhere), or start ups.
Textiles
Our research shows that textile businesses, along with jewelers, are among the best performing businesses at Cockpit in terms of overall levels of turnover and profit, and growth. Our sample includes sole traders and partnerships, again ranging from start ups to established businesses.
The model here tends to be slightly lower gross margins, but higher volume of sales generated through a combination of wholesale orders, and direct sales via e-shops and selling events to the public. The majority of these businesses fall under the printed textiles banner, producing homeware and stationary, and tend to outsource a large percentage of production.
Ceramicists
All of our ceramicists are sole traders with some catering for the fine market, some for the craft collectors market, and others the high end gift and interiors markets.
We’re afraid to say that these guys seem to be facing the biggest challenges in terms of sustainability and growth.
Despite the lower absolute cost of materials, direct costs are up to 60% of turnover for some start ups and up to 36% for some more established businesses. This means that profitability and productivity tend to be lowest within this discipline.
What do the best performers have in common?
What’s clear is that the most successful makers are employing a diversity of business models and strategies. 84% have a strategic business plan, which includes detailed financial forecasts and budgets, and their business model is fit for purpose.
All have a strong USP, good profile in their chosen market place (however niche), and robust business processes.
The most profitable businesses are split between:
1. Those with higher gross margins, who tend to sell smaller volumes at higher prices and generate sales through a mix of private commissions, direct sales (with Open Studios and other high profile shows such as Origin and Goldsmiths), supported by some gallery / retail outlet sales. For this group, direct costs are a lower percentage of turnover (no higher than 26%), with the mode being just 15%. They become sustainable at around the £60K turnover mark.
2. Those who rely on a higher volume of sales tend to outsource production, and reach their market via trade shows, have a greater dependence on wholesale orders and on-line sales, and take on fewer private commissions. Evidence suggests that turnover needs to higher in order to be sustainable at around the £100k+ mark.
So in addition to Sarah’s sound advice, I would add:
1. Consider gross margins when developing your new pieces and collections. Be aware of which products (or services) offer the most profitability and use this to inform your sales plan.
2. If you can’t increase your margins and need to go for volume sales, ensure you have the production capacity to cope with this level of activity. Explore different options – outworkers and batch production, outsourcing to a factory, collaborating with a partner who does have the production set up, or licensing. Efficient production also means you are more likely to cut down your lead times, which will help encourage repeat orders and respond to those retailers who are employing a ‘just in time’ approach to placing orders at the moment.
3. Being visible is important, but don’t fill galleries with SOR stock at the expenses of your cash flow unless you know from experience the work will sell and you’ll be paid in a timely fashion. If you are a precious metal or gem based jeweler – consider SOR as a pr activity as opposed to relying on it as income – and be discerning about the outlets you choose to stock. Do keep regular stock takes and pull your work out of outlets that aren’t shifting your work within 3 months (6 months max).
4. Introducing a less precious range, or using a mixture of materials, may be a way of increasing overall profitability. Similarly, you may be able to add value by introducing more ‘precious’ materials, or introducing optional product pricing and offering additional extras to bump up the value of each sale.
5. Marketing budgets are interesting one. On the one hand, if profits are being squeezed then you may need to shave costs. However, this should not be at the expenses of sales. Use a system like Mycake to conduct a cost / benefit analysis of the different marketing activities you engage in – how does the investment compare with the sales (and pr) gained, and under what timescale (in other words, what is the return on this investment and how long does it take to reap rewards?) Could some, or all, of your limited budget be put to better use?
Overall improving you financial literacy needn’t be scary and crunching the numbers can actually be really satisfying once you know what you’re looking at.
Cockpit will be providing plenty of financial related support in 2010, so keep an eye out for our business and professional development events programme.
Benchmarking artists vs. designer-makers (2008-9 data)
We’ve been comparing MyCake data for 2008-9 between artist users and designer-maker users.
This makes for some really interesting comparisons between two types of object/product based practice.
- In both cases we are looking at sole traders (some have a ltd company others just registered as self employed).
- In both cases there are sets of figures for folks with less than five years experience and people with 10-20 years developing their practice.
- As two clusters of MyCake users both have an average turnover of <£50,000 … it’s worth noting that MyCake has two distinct groups of users … individual makers of various types who tend to turnover <£100,000 vs. small creative firms with 2-10 employees who turnover £250,00-£2m per annum
- Artists tend to charge a higher hourly or daily rate for their work than designer makers .. there are more artists in the >£50/hr range whereas there are all too many designer-makers in the <£20/hr or worse still <£10/hr range
- Designer-makers tend to have a higher total turnover than artists
- Artists don’t tend to use bank debt or supplier credit ie they use the income they generate but don’t borrow
- Designer-makers on the other hand do use loans
- Whilst Designer-makers may have a higher turnover they are also more likely to make a loss … they are taking more financial risk (borrowing, sale or return, expensive materials) and thus there is a greater impact if they get it wrong.
- None of the artist data we have indicates a loss (though there are times when there ain’t much profit!)
- Very few are making payments into a pension
- Artists tend to pay themselves a higher proportion of the income they generate, Designer-makers less so (due in part to higher costs but also because more designer-makers run a limited company so leave the profit in the company … we suspect that fewer artists have a business bank account and run everything through their personal bank account … if so is a bit harder to leave the profit lying around, is more likely to get spent)
- Both show examples where the income streams have diversified … sub-letting studio space and doing teaching are both fairly common
- Designer-makers tend to spend a higher proportion of their income on the cost of materials than artists do
- Neither spend much on ‘research’ or ‘development’, nor much on training … partly because there’s not a lot of profit to spend on these items … there’s not always much to pay yourself a wage either!
- Designer-makers do spend on marketing, artists less so
What do we learn from this?
Designer-makers
Instinct says that neither group uses their financial information to help them make decisions about their future. We’d love to be wrong on this … please do vehemently & publicly disagree (and tell us how you use such information!). In the main we see designer-makers logging in to MyCake more often than artists so we’d say that they probably have better processes for inputting their data. Even so we don’t think that either artists or designer-makers are using that information for their own benefit, it’s really just a one way feed of data to the tax man. We’d really, really like to help change this!
The profitability issue is one we’d like to look at further. It’s one thing not to make much money from your practice if you’re investing in long term development or if you have an income from elsewhere (after all these are your choices to make) but if you’re trying to grow the business and your patchy cashflow is hiding a profitability problem then there is more here that needs looking at.
We’ve done a few in depth 1:1′s recently and a couple of things have emerged from these that we think are relevant more broadly. If as a maker you led an innovation or a design trend a few years ago but since then it has become fairly mainstream and other designers or even larger production houses have followed suit you may well now struggle to keep pricing competitive unless you’re selling in volume and achieving reductions in the cost of production. If you’re still making the work yourself or producing in small batches (00′s rather than o00′s) then whilst you’re competitors are bringing down prices because they’ve brought down production cost any reductions in wholesale or retail prices are just eating away at your profitability. This is a very real problem and not one you have a great deal of control over unless you can magically increase your sales volume.
That said there are ways to focus attention on a smaller percentage of your overall range so that you raise volumes of sales of key items. Plus if you plan new products differently so that there are fewer items in a range or product then instead of making 6 different plates for a set you’ll have three pairs of two in a set and thus automatically increase the order volumes as it will be spread across three items not six when manufacturing.
Ultimately if you’re making your own work you have two choices
- stay at the forefront of innovation in your sector, stick to small volumes and high prices and complement this with undertaking design commissions for larger manufacturers where you achieve a royalty but they do all the production and selling
- build up the volume of sales and as you do so outsource production and seek cost efficiencies. This model requires you to focus heavily on sales as you will need a lot of outlets (by which we mean hundreds and with an international spread)
Artists
Looking at the artists who use MyCake most frequently I’d describe them as folks whose main goal is to make a living from the sales of their work as early in their careers as possible. Based on a decade’s experience of working with artists of all types I’d therefore make a clear distinction between this cluster of what I’d call ‘retail’ oriented artists vs. those who are aspiring to be a Turner Prize winner ten years from now. This distinction is important because the latter crowd tend to be judged as ‘selling out’ if their work sells too soon or too easily (there was greater flexibility when the contemporary art market was booming but in tough times it is back to it’s old ways) whereas the ‘retail’ folks are applauded by buyers, peer artists and commercial galleries for being business savvy enough to recognise market forces at work and play to their strengths. We’re making no comment on the pros and cons of these two career paths but instead just separating them.
The rest of this commentary is therefore focussed on ‘retail’ artists and is aimed to help them make the most of their market.
The good news is that artists don’ t tend to get themselves into debt as a result of their practice and its development. Instead they work with the cash resources they have. The flip side of this coin is that this can be a limiting factor in the growth of sales in so far as the ability to invest in the business is limited by the money you have to hand. This is low risk but potentially low return also. Are there times when you would benefit from producing a catalogue about your work (perhaps with the assistance of a gallery you work with?), would your website benefit from development, would hiring an assistant or someone do to marketing/PR be likely to increase your sales volume or your prices? Might you benefit from hiring a gallery and making sales direct rather than going through an established commercial gallery? The trouble is that if you never have the resources to experiement on a few of these things you will not be able to reap the rewards from them.
If you could make a few more sales would it give you some extra cash to invest in your growth and development?
Over the longer term what are your pension plans??? Make no mistake, you’re no worse off than most creatives but we’re pretty perturbed by the overall lack of pension provision amongst creative entrepreneurs so it is a drum we are going to bang more loudly in the coming months and we’re starting here, we’re starting now!
Final point – we’re already being asked if we’ll analyse other sectors … architects, designers, glass artists, software and games folks, media freelancers, graphic designers etc etc. The answer is we’re planning to. You can help us get to this quicker by advocating that individuals and companies alike start to use MyCake for book-keeping and/or benchmarking of their financial data. If you do your books on other software you can of course just use MyCake for benchmarking.
So, sign up for a two month free trial and put in last years figures!!
A benchmark just for jewellers (2008-9 data)
As we have quite a cluster of jewellers using MyCake we thought we’d do a brief benchmark just for this sector. Here are some of the highlights:
- All the jewellers are sole traders with two thirds making all their own work (the other third subcontract some of their production either to other jewellers or to manufacturers).
- There is quite a variety between those who use a lot of gems vs. those whose work is mainly silver based or made from non-precious items.
- Those who use a lot of gems unsurprisingly show a very high cost of production … up to 73% of turnover is spent on materials … In all honesty we think this is too high because it means that the income for the jeweller is a pretty small percentage of turnover ie a lot of risk for very little return particularly if you’re working on a sale or return basis
- By contrast those using less precious materials may spend as little as 10% of turnover on materials giving a high gross profit … averaging around 80% in this subset. This model offers better profitability i.e. the design value is a higher proportion of the total value of the piece whereas in gem jewellery the design value is smaller and the gem value is what is driving the prices
- Cashflow is very sporadic in both sets as you’re making an outlay on materials that is often not directly connected to the fulfilment of an order (also true for many/most batch production oriented designer makers). Equally your income is lumpy either due to the way orders are placed or because SoR retailers only summarise their sales and make payments monthly or quarterly so there is often quite a delay between a sale by them and payment to you
What does this mean for the way you run your business i.e. what can you do about it?
- The greatest risk of lumpy cashflow is that, particularly in a tough economic climate, you end up making a loss when you look at the year as a whole but it is hard to see at the time due to the up and down cashflow. There are a clutch of designer makers who suffered from this in 2008-9. The good news is that you can offset your losses in one year against profits in another in terms of your tax return. DO THIS!
- Analyse where the money is being held – do a stock take and make sure that you’re not tieing up too much money in stock (raw materials in the studio, finished product in the studio, finished product with SoR retailers). Aim to sell off your excess stock to release some funds and work out which of your SoR retailers are actually worth holding stock with i.e. if they demand a lot of stock but sell little are they worth it?
- If the greater value is in the design rather than the gems (only you can tell this for your business) then consider having a less precious range e.g. silver not gold and aim to make this a steady earner so that the high value gem based work becomes the glittery piece that catches peoples eye but if it’s out of bounds for many then they walk away with a silver something.
- Remember that you see a greater proportion of the sales price in private commissions than in sales through retailers so if you’re gem based then growing your private client base will help improve the profitability of this work. Plus you can make to order rather than speculate on SoR work.
- Be careful with your ‘marketing’ budget … I’ve seen makers who’ve had a bad couple of years borrow against their personal assets e.g. mortgage in order to use the money to pay for trade fair stands. You might do this at a push for one year but the risk here is that you are increasing your debt but putting it into a business that has a reducing ability to pay the debt off. Long term this spells trouble! It is awfully tempting to think that ‘if I could just go to X I’d make enough orders to put me back on track’ … this is getting all to close to the gambler on a losing streak betting larger to bring themselves back to zero! The tough alternative is to cut your cost base and work your way out of tough times by taking the work that you’d shun when all is going swimmingly … for some that’s pieces of teaching, a part time job, less interesting commissions, selling off stock at retail (rather than trade) fairs.
Ultimately you need to keep better track of your finances. MyCake is of course one way to help you do this but software alone is not enough … you need to be looking at your figures on a monthly or quarterly basis, not just looking at your income but at the profitability and the cashflow. This is predicated on the idea that you’re entering data regularly (weekly or monthly) so that you can look at up to date information … so the message here is that the process matters as much as the software. If you’d like a hand looking at your business, your profitability and your cashflow then do drop us a line to marion at mycake dot org. See also our current offer whereby new and renewing users who sign up for an annual payment by the end of Jan are eligible for a free 1:1 session.
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