Cockpit Arts
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.
Tax doesn’t have to be taxing…Part Two
from Cockpit Arts Making It Blog:
By Dean Shepherd
This is the second part of two posts by Dean Shepherd. Click here to see part one
If you are attempting to complete your own tax return then it really is imperative that you use HMRC’s online filing system to do so. There are a number of reasons why. Firstly, there are many built in checks to ensure that you do not inadvertently enter incorrect information into any of the boxes. This may be as simple as checking your columns all add up or maybe something more intricate such as the ability to make certain claims and elections relevant to your circumstances.
Secondly, your tax bill will be calculated instantly on screen so you immediately know how much has to be paid and by when. No need to wait for a paper return to be processed and a tax calculation to be sent to you. Finally, you get longer to submit your return. The filing deadline for paper tax returns is 31st October whereas online returns do not have to be filed until three months later on 31st January. Further point: In order to use the online filing system you need to register your details and HMRC will provide you with an activation code through the post. It may therefore take a couple of weeks to set up and cannot be done the night before the filing deadline!
Business Payment Support Service
In the November 2008 pre-budget report the government announced a new Business Payment Support Service whereby businesses experiencing cash-flow difficulties could postpone certain payments of tax and set up instalment plans to spread the cost. This service is still in operation and is very useful for businesses wanting to pay their various tax bills via instalments. Most taxes are covered: Self Assessment, VAT, PAYE and Corporation Tax. All you need to do is call the helpline (0845 302 1435) prior to the tax liability falling due and agree an instalment plan over the phone. This service has been used very successfully by many of my clients.
Further point: You must call prior to the due date and if you go to them with an instalment plan in mind (e.g. tax to be paid in equal instalments over the next six months) then they are more likely to give you an immediate decision over the phone.
About the author:
Dean is an accountant and founder of Tax By Design, a firm specialising in helping small businesses in the creative sector. He is a member of the Chartered Institute of Taxation and holds a 1st class honours degree in Multimedia Design. He will be running Free Tax Surgeries over the summer in both Holborn and Deptford studios and will be giving a Tax Return Made Easy seminar in January for anybody that has left their Tax Return to the last minute! To find out about our workshops and the other events and services we offer join our mailing list.
I hope you find the above links useful. If you have any of your own to add then please leave a comment for others to read below.
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.
Financial planning for growth workshop
MyCake is giving advice at Cockpit Arts’ financial planning for growth workshop on Wednesday 11th August 2010. We invite you to come and explore how to use your own financial information to make more informed decisions about your business.
You’ll look at the pros and cons of different record- keeping systems and which approach is best suited to you and your business. Through practical group exercises, you’ll cover budgeting, financial planning and how to improve your cash flow on a day-to-day basis.
You will also look at improving profitability and using designer-maker case studies, you’ll be taken through a profit and loss forecast and show you how to interpret your own figures to make better decisions about your business.
What you’ll get:
- Guidance on setting up a record system that works for you
- Improved financial literacy and confidence in financial planning
- A clearer understanding of your own business model and how to develop this to improve cash flow and profitability
Wednesday, 11th August 2010 from 10:00am to 12:00 noon.
The cost is £10 and open to studio and non-studio members. Book here
Tax doesn’t have to be taxing… part one
from Cockpit Arts Making It Blog:
….unless of course you have better things to do with your time than read through the pages and pages of manuals, help sheets, leaflets and guidance notes on the HM Revenue & Customs website. The help sheets on completing your tax return alone stand at more than a thousand pages and they include nothing about VAT, National Insurance, PAYE or any of the other tax issues that small businesses face. That said, if you know where to look, there can be some very useful gems on the website and I have outlined some of the better ones below:
Working from Home:
Just because you rent a studio it does not mean that you cannot claim for business use of your own home. Many studios are not suitable for storing all the important financial paperwork which means the business is effectively operated from home. In the good old days accountants, like myself, used to advise clients to estimate the additional costs they incur from having to operate their businesses from home. This may have been an extra £5 or £10 per week, depending on the type of business, but relatively small amounts in terms of tax savings. However, when HMRC were forced to publish all their internal guidance manuals, we discovered a list of examples that are much more generous. HMRC have inadvertently confirmed that all businesses operating from home should claim a proportion of their rent, rates, service charges, mortgage interest, council tax, gas, electric, repairs and insurances. Some accountants to this day argue over whether council tax should be included but it is listed in black and white within HMRC’s own guidance and anyone not claiming is paying too much tax. Make sure you make that claim.
The Employment Status Indicator Tool:
Rather than take on members of staff and deal with the administrative burden that comes with being an employer, many small businesses will use freelancers and sub-contractors to take up the slack when things are busy. This is all well and good but what happens if HMRC come along and say that you should have put them on the books and deducted tax and national insurance contributions at source. Well, if you are unsure whether someone should be treated as an employee or a freelancer then use HMRC’s Employment Status Indicator Tool. You work through a series of questions and the tool then tells you whether they should be an employee or whether they can be paid as a freelancer. Nothing gets sent to HMRC and you do not give any personal details. However, a reference number is generated so if HMRC ever question your decision then you can state that you used their ESI Tool and present them with the reference number as evidence. Further point: The ESI Tool is not 100% accurate so if you disagree with its outcome then it is best to discuss your concerns with an accountant.
Read more tax advice in part two published soon…
About the author: Dean is an accountant and founder of Tax By Design, a firm specialising in helping small businesses in the creative sector. He is a member of the Chartered Institute of Taxation and holds a 1st class honours degree in Multimedia Design. He will be running Free Tax Surgeries over the summer in both Holborn and Deptford studios and will be giving a Tax Return Made Easy seminar in January for anybody that has left their Tax Return to the last minute!
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How to Motivate Creative People (Including Yourself) workshop
Mark McGuinnness is hosting his popular How to Motivate Creative People (Including Yourself) workshop at Cockpit Arts Holborn on evening of Wednesday 14 July 2010.
He will be giving advice to designer-makers and creatives on how to motivate yourself to overcome obstacles and create amazing work – and a sustainable career.
Topics covered include:
- Why motivation is crucial to creative success
- The four fundamental types of motivation
- What Iggy Pop can teach you about work
- Why focusing on rewards can harm creative performance
- How to write 47 novels before breakfast
- Why some people seem so weird — and how to deal with them
- The positive side of peer pressure
The numbers are limited to 25 places, so book early.
There is an special offer price if you purchase the Time Management for Creative People workshop at the same time.
Cockpit Arts / NADFAS Award 2010
Applications are invited for the Cockpit Arts / NADFAS Award which aims to help a talented designer-maker craftsperson to set up in business for the first time. The award is for a designer-maker practising a traditional craft requiring skills at risk of dying out. This might include such crafts as paper conservation, building crafts, or conservation of textiles, books or other items. This Award is worth £3,000 and will contribute towards the cost of studio at a Cockpit Arts creative business incubator and all the related benefits.
The deadline for receipt of applications is Friday 25 June 2010.
How to successfully approach retailers and buyers
A post from our partner Cockpit Arts Making It blog:
The world of selling can be a daunting one, so we asked Southbank Centre Retail Team’s Adam Thow and Katherine Walsh’s and Cockpit Arts Open Studios Manager Catherine Zoll for their top tips to help you get through the door of major retailers.
1. Be professional
Buyers are approached every day and get numerous messages from people who don’t supply the right information. If your contacting a buyer make you include good quality images and a wholesale price list so you stand out from the crowd.2. Do your market research
It’s crucial that you do your homework in advance of making any approach to a retailer. Visit the shop in advance so that you get a greater understanding of the type of customer that they are targeting and the ‘story’ that the shop communicating – retailers are looking for products that sit well with the “personality of their shop”. This saves time and demonstrates your understanding of the retailer. Also look at the other type of work that they’re stocking in terms of pricepoint and be careful not to try to compete with work that they already have.Be careful and thoughtful about who you approach. Ask yourself is this really right for my image, the way I work and my products? Choose shops and spaces who are a good match and strengthen your brand or identity. A good way to work this out is to look at the type of customers they attract – are these the type of customers you want to attract?
3. Be enthusiastic
Don’t be afraid to be different and let your personality shine through!4. Be prepared
Be clear and confident in your presentation and approach. Make sure the retailer understands your lead and delivery times; provide them with information about how the work is made to strengthen the object’s inherent value. But don’t overload them – make sure information is relevant and useful!5. Images are key
Make sure images are the best you can afford. They should show your work clearly. Choose a selection of detail shots, pieces in situ and whole items so retailers can instantly see the quality and nature of what you produce.Coming up…we’ll be posting some top tips on how to develop a product specifically for retail so watch this space!
About the author
Adam Thow, Head of Retail & Buying at Southbank Centre
Adam has been Head of Retail & Buying at Southbank Centre since 2008, with responsibility for the overall performance and ranges in the site’s three shops and online. www.southbankcentre.co.ukKatherine Walsh, Buyer and Merchandise Manager at Southbank Centre
Katherine is the Buyer and Merchandise Manager at Southbank Centre since 2007. Katherine has a wide range of experience in the retail sector and since joining the Southbank Centre has developed strong ranges for major shows at the Hayward Gallery including Psycho Buildings and Andy Warhol. www.southbankcentre.co.uk
Catherine Zoll
Cockpit Arts Open Studios Manager, Catherine Zoll, has extensive experience of the retail sector for craft, having managed projects for museumaker, Crafts Council Shops, V&A and Dazzle.
Time management for creative people workshop
Mark McGuinnness is hosting his popular Time Management for Creative People workshop at Cockpit Arts Holborn on evening of 7th July 2010.
He will be giving advice to designer-makers and creatives on how to:
The numbers are limited to 25 places, so book early.
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As a taster to the workshop, you can read Mark’s top tips to stop email killing your creativity over at Cockpit Arts Making It blog.
Reality checks – setting sales targets and more …
Continuing the theme of sales, we welcome back Ellen O’Hara, Head of Business Development at Cockpit Arts for this post on setting targets. Look for a free worksheet to download towards the end of the post.
Some tips, tools and learning on calculating an annual sales target for those self-employed, product based businesses among you. These are drawn from a workshop series entitled ‘Creating An Outline Business Plan’, which I recently delivered at Cockpit Arts for an enthusiastic group of self–employed designer-makers.
The first workshop began with some exercises on defining success and articulating values. Each participant’s tasks was to clarify which rewards they were hoping to reap from their self employment.
It was pretty clear that most people had no problem describing what they wanted to gain in personal and creative terms. However, most of the group had trouble defining financial success and what money meant to them. I recommend working through these exercises as they can be quite illuminating – a worksheet can be found on our website here.
So, as we moved on to ‘goal setting’, we spent some time discussing ideal levels of drawings – i.e. the amount you take from the business for personal use when you are self employed. This figure ranged enormously from person to person, but overall, most makers were aiming to generate enough profit to enable them to pay themselves at least £30k pa in the medium-long term.
Using break-even analysis as the basis, the group then spent some time with their calculators working out what level of sales they would need, at current costs and prices, in order to achieve that level of target drawings and cover other costs To do this for your business, you will need:
- Total annual fixed costs: including studio and related costs, marketing and sales costs, administration, any permanent staff.
For example £10,000.
- An annual drawings target: i.e. the amount you would like to pay yourself from the business.
For example £25,000.
- Average selling price for one unit of your work: if you find this tricky, you could use the price of your best selling product, or a mid point between wholesale and retail prices.
For example £150.
- Average variable cost for one unit of your work: this would include materials, small replaceable tools, production outworkers, packaging if you always supply this with your work, research and development costs and other costs related to the production of your work. Again you may wish to use your best selling product as an example.
For example £40.
Step 1
Sum your total annual fixed costs and drawings target.
£10,000 + £25,000 = £35,000. We’ll refer to this as A.
Step 2
Subtract your average variable cost per unit from the average price per unit to work out the profit per unit.
£150 – £40 = £90. This will be B.
Step 3
Divide A by B to give you the volume of sales you would need to achieve in a year to cover your costs and acgieve your drawings target.
£35,000 / £90 = 389 units
Step 4
Finally, multiply this volume by the average selling price per unit to calculate your annual sales target.
389 units x £150 = £58,350
Bear in mind that this assumes fixed costs and prices, and doesn’t account for you putting cash away for next year’s tax bill or retaining profit to invest back into the business. It does, however, start give you a clearer, more realistic idea of type of business activity you need to engage in order to become sustainable.
The exercise raised some interesting issues among for the group. For some it illuminated the need to increase prices in order to improve unit margins, which in turn raised questions about repositioning and branding. For others it emphasised the importance of streamlining production in order to increase production capacity and productivity. For others it was all about controlling costs.
Recent research from Cockpit Arts shows well performing, sustainable designer-makers are generating sales in the region of £65-£70k. But this is with net margins of around 40%.
So what do your figures tell you?
For ease you might want to use this breakeven tool, which you can incorporate a retained profit target into. Download worksheet here.
Ellen O’Hara, Head of Business Development at Cockpit Arts.
A summary of out recent research report can be found on our website.
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