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Excerpt from, Photography: Focus on Profit Paperback with PhotoByte® CD-ROM 416 pages, ISBN: 1-58115-059-8 by Tom Zimberoff |
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Note from the founder of Garage Glamour™ -- This is first of several excerpts of Tom Zimberoff's book, Photography: Focus on Profit. Recommended by top educators as part of their curricula --this is a must have if you plan on succeeding in the business of photography--Rolando.
Competitive Pricing--page two
© 2002 Tom Zimberoff
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Maximize Your Share of the Market
Market share is represented as a percentage of the total number of available assignments awarded to you instead of your competitors. It represents your share of the pie. This percentage fluctuates continually, and, therefore, is expressed as a snapshot in time; e.g., “a thirty-five percent market share for the first quarter of fiscal year 2001.”
Normally, this percentage of market share refers to what is called the served market or eligible market. The served market is focused exclusively on buyers who are predisposed to want what you have to offer. That puts the odds in your favor. In principle, if you are a landscape photographer, you will not compete for market share with those who specialize in shooting portraits.
Obviously, there are markets within markets. These are called specialties and subspecialties. The narrower the focus of your market, the fewer your competitors and the better your chances will be to maximize market share and increase your profitability. If there are lots of portrait photographers and fewer landscape photographers, you can charge more.
Be as focused as you can in defining what segment of the market you will try to conquer. Don't try to tackle portraiture, sports, underwater, and tabletop all at the same time; you'll have a harder time making yourself stand out in a crowd. That advice overlaps with marketing issues, of course. But, insofar as pricing is concerned, you'll want to stake your ground in territory that's not too crowded, because, by specializing in a subject matter and style for which there is little competition and great demand, you can name your own price. It is not impossible, however, to make a reputation as a “generalist.” (Refer to Part 4 for more information about specializing.)
As an alternative to the served market, you can look at what is called total market share. It's less interesting, though, because it doesn't help you to decide how to target your precious marketing dollars at a specific kind of clientele. Total market share doesn't point to buyers who are predisposed to want the kinds of pictures you most want to shoot. Instead of zeroing in on the fashion media, for instance, you would calculate a share based on the market for all kinds of pictures. That's not very realistic for a fashion photographer. There's too much competition.
It must be understood that any one of a number of specific markets might become saturated with pictures, when there are too many photographers shooting the same subject matter. This is especially true if you plan to maintain a stock photo archive. If there is a glut of pictures of the Golden Gate Bridge, to use perhaps too obvious an example, their value will decrease as market demand goes down. If the price that the market is willing to pay falls below a level that will sustain your profitability, your only choice is to exit the market for pictures of the Golden Gate Bridge and concentrate on shooting something else.
Maximize Your Volume of Business
If your price point is just low enough to attract new clients, you will increase bookings. But, if you lower it too much, you run the risk of critically lowering your revenue to a point where profitability is unsustainable. To get around that problem it is necessary to shoot more assignments. All things considered, the more you shoot the less you have to charge to make the same amount of money.
The more you shoot, the more costs there are to mark up and the more profit you can make. So, it follows that with increased bookings you can mark up billed expenses at a lower percentage rate and still make just as much-or even more-profit. That technique is called lowering your profit margin. For example, if you are billing 10 percent more jobs, your business can earn just as much profit by marking up costs, say, 30 percent instead of at a previous rate of 40 percent. That will lower your prices and increase your salary at the same time, because assignment fees (salaries) are unaffected by lowering margin; i.e., if you shoot 10% more assignments, you collect 10% more take-home pay. That's like giving yourself a raise. But with the lower margin, your prices remain at the same competitive level. You can't do that by simply cutting prices across the board. Incidentally, if you can shoot fewer jobs at a very high profit margin without worrying about encroachment by your competition, more power to you! There are always exceptions.
Maximize Your Profit
Even without increasing the volume of your business and cutting margin, there is another way to increase profit. You can cut your prices by cutting your direct overhead instead. Shooting assignments that cost less to produce allows you to increase profits without raising prices or lowering margin on an increased volume of work. In fact, your margin will go up. In other words, just because you've found a cheaper source for film and supplies, or you pay less for a new stylist or assistant, doesn't mean you have to charge less than before. You may continue to bill your expenses at the same rate you have all along. That will increase your gross profit. Enjoy the savings!
There is yet another strategy that may work to your advantage. If you can trim your overhead, you can pass the savings on to your clients. That will lower your prices without decreasing either your profit margin or your creative fees. The difference might be just enough to stimulate new business. Put another way, if two shooters bid for the same job, there's no reason why their fees can't be close together, if not the same. But the one who has lower costs, the one who can shoot the job for less money, can also bill less and will probably be awarded the assignment on the basis of a lower-priced estimate. The best news is that, in spite of under-cutting his colleague, best practices will not have been compromised because he'll still be earning a legitimate profit. That's the smart way to compete.
One final alternative, or one to use in combination with lowering your profit margin, is to lower your assignment fee. If you're shooting more assignments, it won't reduce your overall take-home pay. But, if it turns out that the volume of your work has not increased, make sure your personal overhead requirements can sustain the reduction (i.e., do you need to drive a Porsche, or will a Chevy suffice; and will your vacation be limited to two weeks this year instead of a month?, etc.).
Cutting Non-essential Services
The previous examples apply to cutting costs on services and supplies that you cannot do without. But you can minimize your costs and lower your prices by eliminating non-essential overhead entirely, especially if both your market research and your gut instincts tell you to target only budget-conscious buyers; i.e., small-town ad agencies and regional magazines instead of the big Madison Avenue media moguls. If you lease a studio but find that most of your assignments are on location, get rid of the studio. If you don't require a full-time assistant, use freelancers. There's no sense in paying for mega-watt seconds of strobe lights, grip equipment, and sheet-film cameras if you only shoot news stories. Why have a darkroom if you seldom use it? Tailor the services you provide specifically to the clientele you serve.
A Balancing Act
Making sure the price is right requires continual tinkering and experimentation. As you gain experience, you'll become adept at fine-tuning a bottom line that looks like a bargain to the buyer but is no less profitable for you. You must also search for equilibrium between price and the quality of your services. For instance, if you increase volume too much by shooting too many assignments, the quality of your work may suffer. So learn to recognize your own capacity to perform well. If you spread yourself too thin, no one will hire you at any price.
Don't base your pricing policy on any one factor. Always consider the five competitive factors as a whole. It will be easier to hold your ground against fierce pressure from other photographers and the leverage of a buyers' market. And, finally, it cannot be overemphasized that keeping your prices as low as possible does not mean lowering your salary.
The Relationship of Trade Practices to Maximizing Prices
Publishers and buyers do not conspire to impose practices such as demanding receipts for film and setting arbitrary day-rates; photographers keep punching holes in the bottoms of their own boats by either tacitly accepting them or simply by persevering in the false belief that they can survive without understanding the principles of profitability. The publishing industry cannot impose guidelines for photographers unless you acquiesce. On the other hand photographers can impose guidelines on the publishing industry if enough of you simply use them. Your clients play by the rules of capitalism. Will you?
Net Profit
At this point it is appropriate to include a more academic definition of profit.
Profit is a percentage of gross revenues. Gross revenues are revenues from all of your sales, including all the money your business collects from assignments, stock photo licensing, royalties from publishers and agencies; even simply renting your studio to another photographer or selling a used camera. So the highest level formula looks like this:
Of course, the Direct Costs in that formula should not include your assignment fees, your salary. The next step in the calculation is to subtract Indirect Costs , or overhead. Now the formula looks like this:
Finally, you must subtract the taxes and interest you have to pay:
Net Profit (also called net earnings, or net income, or bottom line) is the figure you are truly looking for. And there it is, also called the Holy Grail.
A Balancing Act
By maximizing competitiveness you are acutely involved in aforementioned balancing act between quality and price. If quality suffers too much, no one will hire you at any price. So balance is achieved by keeping quality high, while keeping your prices as low as possible. Keeping your prices low makes you more competitive, more attractive to buyers. But lowering prices does not necessarily mean lowering profitability-if you are careful.
Profitability must be maintained! To maximize competitiveness you must reexamine and fine tune your pricing practices on a continual basis, considering not just any one factor, but all five of them together: Competitive Advantage, Market Penetration, Market Share, Volume of Business, and Profitability . Maximizing them, strengthening them, will make it easier to hold your ground against price pressure.
*Examples of indirect costs include: rent, electric, office supplies, telephone, salaries and benefits, interest, travel, entertainment, advertising, legal and accounting, licenses and permits, dues and subscriptions, maintenance and repairs, postage, insurance and credit card services, etc.
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