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Understanding Cost of Goods and Calculating your Overhead

Okay, so if you learned nothing else, nothing else from the business class, I hope you'll learn this, that if you know your cost of goods sold, if you are familiar with what everything is costing you, really, and that you can price for profit, you're probably going to be well ahead of the game. And I'm going to show you how to do that. We're going to talk about that. So what is COGS? If you're not familiar with business, never went to business school, or you weren't taught business, you may not even know, and that's totally fine. So cost of goods sold is literally what it costs to produce a product. This can be a print, something as simple as a four by six print. Well, what does it cost? Most of the time starting photographers say, well, I pay the lab four bucks for this print, so I'm going to charge eight bucks, and I'm making twice as much money. Woohoo! Yeah, kinda sorta not really, you know? And we'll talk about why that is a total fallacy. So cost of goods sold generally refers to...

the hard costs, but you're also going to consider labor to produce something, whether it's your own labor, your time and effort, the administration time to create the sale of this product, if you have to hire somebody else, send it to a lab, any kind of labor included in that is part of that cost of goods sold, as well. Packaging. You saw Unina's beautiful packaging that we kept yesterday. Well, all that has to be factored in to her cost of goods sold when she prices an eight by 10 print, because it's going to include a folder for the eight by 10 with a hot stamp on it, and a little ribbon, and some sprinkly glitter, and probably perfume, she buys expensive perfume and wipes it all over her stuff before she delivers it, and she does a little happy dance when she delivers the product, so she has to go to training for dancing, that's included in her cost of goods sold. So all of these things need to be factored in, and we don't think about them sometimes, oftentimes. So we're going to have a little spreadsheet that helps walk us through that. Cost of sales, which is similar, and a lot of people interchange the two terms, and it's not highly important that you get the technicalities right, but cost of sales generally refers to everything, including your COGS, but also other things to run your business. Advertising, indirect things, overhead, insurance, we talked about that yesterday. If there's any commissions that you pay a salesperson, all that's cost of sales, meaning that to be in business, to sell this product, in addition to the direct, hard cost of making that product, there are other things involved. Like you can't just sell that product and not have a studio space to sell it in, right? Or an office, or whatever you use. So all that creates your cost of sales as a percentage as well. All right. So let's take a look now at what things you would include when you're doing the math, and then we're going to pull up a little calculator to help you guys figure this out. So a very simple pricing formula would be including your cost of goods sold, those are pretty easy, because you just think about what am I putting into this product, packaging, printing, labor, etc. Cost of sales might include your education, if you spend time to go to workshops, or you buy workshops like this CreativeLive workshop, rents and overheads, marketing promotions, studio equipment, camera gear, that doesn't pay for itself. That has to get advertised somewhere. That's in your cost of sales. Your salary. Ideally, you have your business. If you're self-proprietor it's slightly different, but I really think most photographers, if they're planning to do it full time and they're planning to make this a career, think about doing an LLC at least, if not incorporating. An LLC, right? Protects your personal assets. An LLC's pretty simple to set up. It's no big deal, really. And then your business is boom, separate, and you, personally are separate, so your business writes you a paycheck. That's your salary, and that's part of your cost of sales as well, like how much are we writing to ourselves each much as a paycheck. Boom, right? Very simple. All right, so an example, target cost of goods sold would be about 30% of your sales price. 30%, okay? You don't just double it. That's not really enough to make you profitable in the long run. That might cover your expenses, it might cover your cost of sales, but it doesn't really give you enough to be profitable, and that's the point of a business. Okay, guys? The point of a business is not to survive, it's to be profitable and grow. If you want to be a non-profit, then you would just forget about the profit, and you'd still pay yourself a salary, but you're not putting back into the business, you're not really growing the business with any kind of profit. And that's fine if you want to do that, but I'm guessing most of us out here want to be profitable. We want to grow the business, want to put money into retirement, want to put money into savings, want to take trips, want to buy motorcycles and send them to me if you don't want to use them all the time, whatever. So you need extra money, you need this profit. All right, so let's take a look. I'm going to pull this up in a minute here on my computer and show you guys how to plug these in, but this is what a very simple pricing calculator would look like, and this is a bonus download, so there's a spreadsheet that includes three different spreadsheets covering the things that we talked about over the course. One was the backwards plan, to figure out what you need to make every month. Then we've got this one, then we've got a package calculator as well, which I'll show you later, okay? So look at this. Look at how it works out. First of all, admin time. This would be a typical eight by 10 print. Admin time, you figure out what's an hourly rate for admin time. This could be your time, or maybe you're paying a studio manager to do this. But if it's your time, you've still got to figure out what you're going to pay yourself as a studio manager, your own studio manager, which might be separate from your creative time. It's up to you. You might pay yourself the same all across the board. But let's say, for example, you or somebody else was getting paid 25 an hour, and you're going to probably spend at least 15 minutes in admin time. Why would that be? For an eight by 10 print? Does it produce itself? If a client says, "I want to buy an eight by 10," do you go, "Done?" No. You got to, "Oh, hi, how have you been, "How's little Billy, oh, the photo shoot, "yes, it was so fun. "Oh my God, you're the best client ever. "Yes, I love you guys. "I posted on Facebook how much "I loved you in our shoot. "Did you see it? "Yes, okay, good. "Oh, an eight by 10? "Yes, sure, let me get my computer here, okay." And then it's okay, boom, now I gotta go find it, find the image, pull it up, take it into Photoshop, then we have Photoshop time. You got to edit it, create it, tweak it, retouch it, even if it's a wallet print, I retouch everything as if it was a wall print. Whether it's a wallet or a wall print, it's the same amount of work. So why do we charge two bucks for a wallet and several hundred for a wall print? The difference in cost is there, but also your time is the same almost literally, right? So then you go, you work it, you work it, you retouch it, you fix their eyes, you do whatever you want, you put the little bunny ears on her, whee, this is fun, then you got to upload it, you got to log in to your lab, you got to upload it, you got to double check everything. Okay, it comes back. So now you're back in admin time again. You get the print back. You check the print. I'm always like spending time looking, it's perfect, it's good. Sometimes it has to go back to the lab and get reprinted. Do we charge for that time? Now you got to do it all over again. No, but you have to figure that into kind of a global padding into your expenses, right? Then I got to sign the print, then I have to either put it in a folder, or put it in the frame, wrap it, tie the ribbon, then we got to call her back. "Sally, your print's ready. "How's little Billy? "Oh my gosh, I just posted on Facebook about you again. "Check it out. "Can you refer me?" Remember that? Okay, good. This is admin time. Overhead. Do you think that will happen in 15 minutes total? Yes, I think it will. At least 15 minutes. All right, so you've got your Photoshop time. What do you pay yourself or your editor to enhance, retouch, prepare your images? Most editors, if you send it out, will charge at least 50 bucks an hour to do any kind of quality retouching. So why aren't you paying either yourself or somebody else to do that, right? I'm going to say conservatively .15, so five to ten minutes maybe per image. It shouldn't take more than that if you're efficient with your editing. Generally basic editing took two to three minutes. But we'll pad it a little bit. All right? Then we got our raw materials. We've got the eight by 10 print, which costs $3.50 from my lab. I always mount everything on a board, two millimeter styrene board, so that they have a nice presentation. I'm not sure if you guys ever try to do this, but the presenting of that print, a little floppy piece of paper feels like it came from Target, all right? You present it on a nice board, nice and sturdy, it feels like a little piece of art. So I always mount it to a board. That extra four bucks makes a big difference in the quality, the feel of that presentation. You can plug in other raw materials. I have down at the bottom here, packaging, presentation, so this would be the gift wrap, or the folders or sparkly glitter and all that, your dancing lessons, that all goes in there. Thank you card, which will go to everybody, figure that into there. So when you add that up, just to produce this without making any money, costs you about $22.95. And with a 30% cost of goods sold, you're looking at about retail, so this gets calculated for you, so it's suggested retail price of $76.50. All right? Then you plug in your actual sales price, so you can say, "Oh my God, I'm scared, "I can't charge $76.50. "I'm only going to charge 50 bucks." You plug that in, and this will calculate and tell you what the little, it will turn red if it's not ideal that you're actually at about a 45% or almost 50% cost of goods sold, which means you're covering your bases, but you're not really making profit. So if you were at 30% and charging $76.50, this would be a profitable sale. Does that make sense? Okay. So let's plug that in. I'm going to pull up that spreadsheet and show you guys. All right. So here's our spreadsheet on the computer, and when you guys download this, there'll be three components here. There's the product pricing, which we're looking at right now. There's a wedding package builder, which we'll play with later. And then your backward plan calculator that we used yesterday. So they're all three in one. All right? So let's plug in some other numbers here and figure this out. So let's say we're creating another item, maybe, what's a typical item that you guys sell? An eight by 10 is a very common one, 11 by 14 wall print. We'll just change a few things. Okay, so 11 by 14, I don't remember off the top of my head what 11 by 14, can anyone think what the price would be for that? Five bucks you think? Five bucks. Costco? You guys, that your lab? (students laughing) All right, so let's say eight bucks, we're going to use a good lab. And then a board for that's going to be a few more bucks, so let's say five, and I'm just pulling up numbers here. Okay, for a larger print, we may choose to do a little frame or something like that, so let's do a little simple frame, and that frame might be a pretty basic one, so we'll say maybe it's 25 dollars, putting in numbers, so all the yellow areas here are numbers that you can play with, you can change, put in whatever you want, and the rest of those are calculated for you. So once I put that in there, it recalculates the total cost of goods sold here is now $53.50, and with a 30% COGS, my suggested resale should be about $178. Lot of photographers I know have a lower cost of goods sold because they want to be more profitable, and feel like they're worth more money. That's great. I know a lot of people who sell an 11 by 14 framed for way more than $178, and that's cool. So put in here what you feel comfortable with, but I suggest not going higher than 30%. So if I put in 20%, which is a better profit for me then my suggested becomes $267. So I'm going to say my actual sale price, so I'm going to be a smart business person, and I'm going to charge what I should be charging, and I'm actually going to step it up a little, since $267 sounds kind of weird, so I'm going to go to $270. Now my actual is down to 19%, which is great, that's good, and this is my retail price. Pop that right into my price list. I don't think about, does this make sense, can my client afford this. Oh my gosh, they just had to pay for a new Mercedes, they probably have no money left today. (students laughing) I'm going to give them a break. I'm going to lower the price down. No. You're a business. Your customers don't go into Target and go, you know, I'm having a hard week, I can't pay this much for the diapers, could you bring the price down just a little bit? Can you give me a deal? And Target's like, "Yeah, you know, I feel for you. "I'll give you a discount." No. You go, you pay, because there are kind of numbers that you need to make to stay in business. And we're the same, just like everybody else. All right. So does all that kind of make sense to you guys? In the, well I'll show you a little demo later, where's my thingamajig? Okay, I'm going to switch back to our keynote. Does that sound foreign to you guys? Because that's not hard for you guys to think, I'm actually going to charge what I'm worth. Is it? Yeah. Quick question. How do you charge for services if you hire somebody to do hair and makeup, for instance? Do you mark that up, are you supposed to? Yes. You're supposed to. That's up to you. For example, hair and makeup, example for me, I do a 50% markup when I subcontract. So if I pay my assistant a hundred bucks for whatever it is, then I charge the client 200 bucks. If it's hair and makeup, sometimes that you just pass it straight onto the client, let them pay that directly. It's totally up to you. But for commercial work, I always mark up. Portrait work, like hair and makeup, I usually just pass the price right onto the client. You let the client pay for... I let the client pay them for the hair and makeup. Now you can, if you came up with a deal with the makeup artist, where she was working with you pretty exclusively and almost like you guys had an arrangement, then you could maybe mark up whatever she sells up 10% and then include that in your price as part of your package, so that they pay you one time and then you reimburse her on a regular basis, and you would make a little bit for the overhead of managing that, and also for referring her on a constant basis. But if it's just someone who every once in a while you bring in, and you want them to have their own business and you don't want to deal with that extra income flow, and then having to repay it out, then just let them pay her directly, him or her directly. Thank you. I've done it both ways. With portrait sessions and weddings, I just refer, say hey, here's the makeup artist, you pay them directly. That's your option. But when I did commercial work, and a makeup artist was something I had to have, then I would book them, I would manage them, I would spend time dealing with them and paying them and final check and all that, so I would have to mark that up. Good question. Anybody else? Yeah, Pete. I have a question. This spreadsheet was based on prints on final product? Do you use the same spreadsheet for the actual shooting time that you're doing? Yeah. I'm going to show you when we build a package just a little bit later today how I separate out the shooting time, the creative time, from the hard goods, and so I'll add the markup to the hard goods differently from the shooting time. So if you were doing say a fashion shoot or something where you had time and some materials, you'd basically use the package builder and decide, my time, I'm going to get paid this much, I don't need to mark up what I've already charged you for my time, unless it's an assistant, which if you're a commercial fashion shoot, it's pretty common that you would mark up your assistant's fee, and pass it on to the client. But you'll see that in the package builder later on, we'll cover that. Yes. When you do weddings and you post the wedding online and guests and family can go on there and they go in to order, are you using the same formula for that? Or are you using something less than the 30%? No, it's the same. It is the same. Yeah. My 11 by 14's are this price. I don't care if grandma buys it or Gandhi buys it. But he's not around anymore. Well, Grandma, or, you know, everybody gets the same price. I do have separate pricing for non-profit work and charity events that I shoot, and that's basically almost my cost that I pass on, and that's just the way I work for those. And I use SmugMug, if you guys use SmugMug. It's a great little system for online sales. And you can set different price lists for every event, so I can say, here's my charity price list, here's my wedding price list, here's my commercial price list, whatever.