Wednesday, January 07, 2009
Adjusting pricing in a bad economy
The most frequent question I have been getting recently is in regard to making price adjustments to work in the current economy. This is a very difficult question to answer in a few sentences. With this in mind I am going to break down the fundamentals of pricing and try to address how they are made to work when the economy is slow.
As we begin remember perception is reality and if people perceive the economy is bad, it is bad. Even when people are not directly impacted by a slow economy they will change buying habits and look for a bargain. The strength or weakness of the economy relies on what people believe to be true. When all the economic indicators are pointing to a recession and every headline screams doom and gloom it is natural for people to panic.
Where your business is concerned my advice is DO NOT PANIC. When you are making decisions based on fear you are going to make bad decisions. Therefore we need to address pricing fundamentals. The first question you need to address is do you intend to make a profit from the work you do. If the answer is yes, you must price for profit. If the answer is no, read no further, you can simply give your work away.
Now for those of you who want to be profitable, we begin by looking at the costs of running your business (general expenses including paying yourself) and producing your product (cost of sales) and add a fair profit for your business (returned to the business to use for future growth). Once we understand these numbers we can begin setting pricing based on numbers.
Understand your have to meet the minimum requirements of profitability (general expenses, cost of sales and net profit) if you are going to have a viable business. Beyond this we look at market demographic, quality of work, placement in your market and other such factors to establish your product value and your selling price.
Because the economy is perceived to be bad does not necessarily mean you need to cut prices. Often it requires restructuring and a change in mindset in order to give your client value and keep your margins profitable. When people have a finite amount of money to spend on your services you want to make sure they are buying out of your most profitable products. Generally these are your prints. Be careful in offering specialty and digitally manipulated products which erode your profitability.
On the expense side you need to cut the fat. Do away with unneeded expenses, streamline workflow and delegate away those things which keep you as the business owner out of your revenue streams. Photoshop is fun but is it profitable. Equipment vendors hate me. Here is my advice on capital expenditures. If you can’t show me how the item you want to purchase (camera, software, background, etc) can make you more money then you cannot make the investment. From a business perspective it is crazy to spend money on something which will not make you more money.
If you are overshooting on sessions, you must learn to cut back. This is a time waster and a drain on your profits whether you realize it or not. This is an area where photographers are pathetic. Shooting several hundred images on a portrait session or several thousand on a wedding is actually negatively impacting your business. You are chewing up hours of time in dealing with image files. YES, YOU ARE! By showing the client so many images you are confusing buying decisions and ultimately when the client is confused they buy less. And you are not going to like this, but I think photographers are actually lazy when they overshoot. The thought process being, “I will take a bunch and then I will have a few really good ones".
Are you mad yet? I hope so. Now what are you going to do about it. Change is in the wind. It’s time you discover your photography is a business and you need to treat it as such. If you need more help, contact me and I will be glad to assist you.
Remember, DO NOT PANIC! Now create a plan for your business which includes a solid pricing plan based on the things we discussed earlier and trim the fat from your expenses. Put off capital investments which will not give you a return and work your plan. Best wishes for a successful future.