Tuesday, July 29, 2014

Pricing for Profit!

Last week I saw a beautiful Christening cake which was being proudly shown off by the lady who had ordered it for her Granddaughters Christening that weekend. Standing next to the cake was the very talented young lady who made it. I asked her if cake making was her profession as she was obviously very talented, she replied, "no, I only do this as a hobby as I don't think anyone will pay what the cakes are really worth, I only just cover my costs, but I really love making cakes so I don't mind".

I wonder how many people working in our industry feel the same, that they cannot charge the true value for their work?

When I started my home based business over 20 years ago I had no idea how to cost my work, like the lovely cake maker, I loved what I did! I enjoyed the challenge of learning new skills and being able to put them into practise, every penny that I charged was used to buy my next batch of balloons, helium and accessories, there was never any left over for me!

My turning point was when I joined the Qualatex Balloon Network and worked through the business section of the course... it really did teach me how to cost my work!

I wrote a blog almost a year ago called: 'How Much Should I Charge For That', so I don't want to repeat everything that I wrote then, however, after doing some research recently I found a great online workshop that for me was pretty inspirational!
The 'How Much Should I Charge for That', blog shows you how to use the Job Cost form in detail, if you have not read that blog you might find it worth reading after you have read through this one!

The workshop is featured on Etsy and is called Etsy Success: The Art of Pricing for Profit, hosted by Megan Auman and Tara Gentile.





For those of you not familiar with EtsyEtsy is an e-commerce website focused on handmade or vintage items and supplies, as well as unique factory-manufactured items. If you take a look, you will see that balloons are also sold through the Etsy website. 


The main focus of this workshop is to learn how to price for profit and to understand the power of perceived value! 

I strongly recommend that you watch the workshop, even though it is not directly related to the balloon industry it certainly relates to small creative businesses which in the main we are.


So having watched Megan & Tara's presentation, I decided that it was time to re-visit pricing and maybe look at it in a slightly different way!


Let's start with Percieved Value.

Perceived value can be defined as a customer's opinion of a product's value to him or her. It may have little to do with the product's market price, and depends on the products ability to satisfy his or her needs or requirements.

So when we buy something we are looking for that item to fulfil a need whether a mobile phone or a cup of coffee! Apple and Starbucks spend $$$$$ each year telling us that their products are the best, the coolest, an 'affordable luxury'... and we believe them! I cannot imagine not having my iPhone even though I probably only use a fraction of the facilities available on it and a simple mobile phone would probably suffice and would be a great deal cheaper!

So that is what we need to do in our own business's, learn the art of turning a need (I need a mobile phone) into a want (I want an iPhone), the price of an item at this point is not the primary concern.


Establishing a customers needs and turning those into a want is the key to selling success!


Needs V's Wants

I need to buy something for a friends birthday. 
V's 
I want to make my friend feel very special on her birthday!




I need to buy my boyfriend something for Valentines Day.
V's
I want my boyfriend to know that I love him!




I need decorations at my wedding
V's
I want my wedding to look beautiful and memorable!





We all look for our needs to be satisfied when we buy something even if we are not aware of it!

So how do we work out the perceived value of something that we make?


Some of the things that we sell have a pre-determined price, usually something that is easily available through different outlets, an item that does not involve much in the way of creativity - a helium filled balloon on a weight for example, the price difference can vary but not by a huge amount... a little bit like a carton or litre of milk, same product just different packaging, the price varies according to which shop we buy it from.


This is more about the creative 'stuff' that we make! I think that many of us can look at our designs and have a good idea how much we can sell that item for, however using perceived value alone will not ensure that you are charging the correct price or that you are achieving the profit margin that you really should be getting. - we will revisit this later in the blog.

You need to remember that you are not your customer! I know what I like, what my favourite colour's are, the type of work that I like to do and what hobbies I like to pursue, so why would your customers love what you love? Customers have their own personal preferences. The same applies for the price of an item, even if you think that an item is  expensive that does not mean that your customers would think the same way, if the item that they are looking at fulfil's their needs then price is rarely an issue.

One of the points that Megan Auman makes during the Etsy workshop is how she reviewed her pricing strategy using perceived value rather than her usual pricing formula and was astonished at how much more she could sell her jewellery for! She felt that she had moved her business into the artist, craftsperson, professional category from the hobbyist category and as a result was able to command a higher selling price for her work, but equally she had worked out a minimum selling price to ensure that she was achieving a pricing level or more in her case that covered her materials and labour, covered her overheads and gave her a profit margin that allowed her to grow and prosper!

So let's look at pricing for profit! 

We are going to do this together and lets see how the pricing  works out?

Below is a little character that I made called 'Movember Guy'. He stands approx. 24" or 60cm's tall.

So the first thing I would like you to do is think about how much you could sell something like this for to your customers? Write down your "perceived value' guess and we can come back to this later! (I have mine of a piece of paper).



Movember Guy by Sue Bowler CBA


So, we now need to work out what our minimum selling price would be for this designs.


Materials list:



5" Plain x 10

5" Printed x 1
350Q x 1
260Q x 4
160Q x 3


Plus an additional  2  x 5" for a weight. (I always double stuff my weights)



So my total material costs = £1.15 - your material costs will vary depending on where you buy your balloons, please calculate your own costs to make sure that your final figure is correct!


Labour:

We all have to charge for our time, so what is your time worth? Talking about money takes many people out of their comfort zone, especially when we are talking to customers, but remember we all have to make a living to survive and is charging the minimum hourly rate realistic when many of us have invested in our art?

So take a deep breath and decide what are you worth per hour... this rate will grow as you and your business grows, a great quote that I read is that "small businesses are like little acorns that grow into big oak trees".

Once you decide what your hourly rate is going to be you can use this to calculate your labour cost to make your design.

So I know that for me to recreate 'Movember Guy' would take me about 10mins, a nice quick design.

So, using my hourly rate my labour charge for this design would be £3.33.


Material + Labour = Total Direct Cost

1.15 + 3.33 = 4.48

So now we need to consider how much it costs us to run our business? What are our daily, weekly, monthly overheads?

Overheads are calculated as a percentage of our annual takings.

So lets say your business has a total annual income of £50,000, that's all the money that you have been paid for work that you have done. 

Now we have to add up all the bills we have paid throughout the year that are not directly related to the materials (so not including the cost of our balloons, accessories or helium- this gets added into your material costs), but this would include our rents and rates if we run a store, heating, lighting, electricity, computers, stationery, internet, mobile phone rentals... and the list goes on!

So lets say these bills add up to £15,000 for the same period that we took the £50,000, that would mean that our Overhead percentage for that year was 30%.

15,000 divided by 50,000 = 0.3 = 30%

And finally we need to look at profit, profit is something that we all need to achieve to grow and prosper, a business that it not profitable will not survive any significant length of time unless it's a hobby and even then how long can someone survive investing in their craft without earning any profit? You will find that in craft related industries, that businesses come and they go, usually because they are not making enough money to survive.

So what percentage should be be looking to achieve? I have done some research and it suggests that the absolute minimum would be between 15%-20% but in reality it should be nearer 40%! 

So lets start with a modest profit % of 25%, you do not need to use the same profit margin every time, there will be times when you will be able to charge more!

So we now have all the information that we need to calculate a minimum selling price!


Overhead % + Profit % = 
30% + 25% = 55%


What this means is that 55% of everything that we sell is allocated to our overheads and our personal profit, which means that the remaining 45% is allocated to the direct costs (materials + labour).




So if we know that our direct costs are £4.48 we can work out our selling price.


4.48 divided by .45 = £9.95


If you are unsure where .45 came from, it's the percentage value (45%) that it represents to make up the sale, I have just changed a percentage into a decimal to make the calculation.

(if your percentages are different from mine that absolutely fine, just use your percentage value to find your selling price).

So here's the question? How did your perceived value equate to your calculated minimum selling price?

My perceived value for Movember Guy was actually £10, so I was very close to my estimation, I was tempted to give him a higher price but in reality I think to achieve a greater selling price I would need to 'add value' by adding a helium filled message balloon or even a bouquet of balloons!

Movember Guy with Birthday Colourful Shooting Stars #41662
Design created by Sue Bowler CBA






So how much is he worth now... suddenly the perceived value has increased even more and not just by the amount of a helium filled 18" message balloon! What we have to remember is that you cannot buy this type of gift just anywhere, it's not available in supermarkets or at most places where they sell balloons! This is a balloon gift that is very special, hand-made and can be adapted to suit any occasion... our creativity is worth being sold at a profitable price!

























We are a creative industry, that is our passion, being a sales person is a whole different skill. Selling requires confidence, but remember that our designs are unique and different, they are not readily available everywhere. It requires skills and knowledge to be a balloon artist.... we are entitled to make a profit, so lets get selling!


Etsy has some great online labs, I recommend that you check them out https://www.etsy.com/uk/community/online-labs


I hope that you find this blog helpful, thinking about perceived value before you work out your minimum selling price is a great way to grow your confidence as a seller as well as a creator.

Happy Ballooning!
Sue
www.suebowler.com




























3 comments:

Decoraciones David said...

Sue thanks for this article it is very useful.

David Portilla QBN

Betsy D said...

Hello Sue,
I was so wrong about pricing. Thanks for such valuable information.

Jayne Regan said...
This comment has been removed by the author.