As an accountant you might expect me to say that YES, the numbers should drive the pricing question, but I think that for a small business operating in a competitive marketplace and a recession there is a more common sense approach to pricing that is a mixture of marketing and finance.
As you might expect most customers will decide whether to purchase based on whether they perceive they will receive value for money from a purchase. Therefore for products and services that are similar to other competitors there will be a market (or target) price that you might think you have to price your products at.
If this is the case then you have two answer two questions. (A) How do I ensure that I make money by selling at this price? and (B) How can I add extra value to my services or products that mean I can raise my prices?
To answer the first question you must be able to break down your product into individual costs incurred in delivering that product so that you can calculate your gross profit margin and compare it to other products.
For example if a wedding package is priced at £1,500 and the individual costs total £700 the gross profit it £800 and the margin 53% (£800/£1,500).
You might find that the margin does not match that of other products and you might want to look at the individual costs to identify any that could be cut or scaled down. This approach to pricing is known as value engineering and assumes that the price is fixed by the market.
You might decide to answer the second question after making sure that your product is profitable by answering the first. To start to understand value I talk to my clients about their competition and ask them to review ten of their competitors to understand what they are offering.
By identifying features of your competitors products on a "competitors features grid" (available to clients in the client area>templates section) you can then compare their similarly priced products to your own. This then allows you to add features to your own products that "add value" and consequently mean you can charge a premium for.
At the same time you should be considering your marketing so that you clearly identify these "value added" features in on your website, adverts and other promotional items to demonstrate the uniqueness of your product.
So to conclude the pricing question is both an art and a science. Get the science right and the art can be the cream on top!
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( 3.1 / 137 )My wife keeps telling me that photography is an expensive hobby . . . and with camera companies constantly improving their equipment and so many gadgets available I have to agree!
For the professional photographer though there are some good tax savings to be had from offsetting your equipment purchases against your taxable profits.
So that everybody is treated the same when it comes to offsetting capital items against profits our friends at HMRC developed a scheme called the capital allowance system that effectively standardised the allowances that can be claimed on an annual basis on the value of plant and equipment (not cars!) used within a business.
Last year this scheme was updated with the introduction of the Annual Investment Allowance. This allowance enables you to offset 100% of plant and equipment purchases in the year of purchase, up to a value of £50,000, against your profits.
So if you purchase the latest professional camera body and set of lenses for say £10,000 and you make profits of £40,000, for tax purposes profits are reduced to £30,000.
So if you are a basic rate tax payer you save income tax of £2,000 and as a higher rate tax payer, income tax of £4,000. So remember to carefully consider the tax allowances available when making those equipment purchases and have your defence ready when people ask you whether you need that new gadget!
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( 3 / 142 )Value Added Tax – registration , pricing and profits VAT can be one of the most confusing and complicated taxes and one that every professional photographer should be aware of. Assessing and understanding the impact of VAT registration is vital if a business is to adopt VAT registration successfully.
As a VAT registered business (a business with turnover of over £68,000 on a rolling 12 month basis) essentially you collect tax on behalf of the Treasury on the value you add to your products. So for example if you produce widgets and they cost you £100 plus VAT you fill them with gas at a cost of £30 plus VAT and then sell them for £200 plus VAT you will pay £10.50 of VAT to the Treasury, the £30 collected on the sale less the £19.50 paid on purchasing the widgets and the gas.
Registering for VAT does not cause businesses who sell to other VAT registered businesses too many issues other than the calculation of what VAT is payable. For photographers though who sell to consumers there is a pricing issue to consider.
When you register for VAT you have to apply the VAT rate, currently 15%, to the net price of your goods. So if a wedding package is priced at £2,000 VAT of £300 should be charged on top resulting in a final price to the consumer of £2,300. If this price takes you outside of the market price in your area you might have to suffer the VAT and hold your price at £2,000.
If this was the case then £2,000 would become the gross price and £1,739 the Net price. You would be able to reduce the Net price of your costs by reclaiming the VAT incurred on purchases, and so if the costs were £750 including VAT these costs would be reduced to £652.
So pre VAT registration the profit made on the sale would be £2,000 less costs of £750 a profit of £1,250. Post VAT registration the profit would be £1,086, £1,739 less costs of £652.
This reduction in profit over say 35 weddings could cut profits by £5,740 a fall in profits of 13.12%.
For any business approaching the VAT threshold planning for the impact of VAT registration is therefore vital and should form an important part of the their financial plan and strategy.
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( 3 / 145 )Last time we took a look at how to start to prepare a cash flow forecast by looking at expenses and cash out flows. The next stage is to add cash inflows and income to the forecast.
I always like to build sales forecasts from units upwards. First you should try to think, for each type of income you have, how many units you think you will sell over the next twelve months. There is always some element of guesswork here but you can use your previous experience as a guide.
The next stage is to look at your pricing structure and add an average price for each type of service. This will then provide you with your income forecast. If you take deposits you may need tweak the forecast to account for these.
The next stage is then to look at the how much it costs on average per unit of sale. To do this you should identify all of the direct costs that are incurred for a particular type of service.
You can then calculate your gross profit percentage for that type of sale.
For example if your average price for a wedding was £3,000 and all of the direct costs that are incurred total £1,275, the gross profit percentage (or margin) is calculated by subtracting the costs from the price. You arrive at a profit of £1,725 and, by dividing this by the price of £3,000, this would give a gross profit percentage of 57.5%.
Once you know this you can then apply it to your cash inflows to forecast, on average, your direct costs of sale.
By applying some formulas to the spreadsheet you should then be able to calculate your overall cash flows for the year by subtracting your personal cash requirements, and annual business costs, from income after payment of direct costs.
As you can see the second half of the forecasting process is a lot less objective in that it is largely based on an estimate of sales units. Of course, if you know your sales up front for the year, you can forecast these into your cash flow model.
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( 3.1 / 186 )With all of the doom and gloom that surrounds us at the moment it’s easy, as a business owner, to get stuck in a rut and worry about the future when you should be pro-actively planning.
As cash is a businesses most important asset it is vital to understand where the cash in, and out, flows will be. It is for this reason that one of the most important planning tools for any business owner is a cash flow forecast.
The process of putting a cash flow forecast together doesn’t have to be difficult or complicated as I recently demonstrated at the SWPP business school. Over the next two posts I aim to provide some practical advice as to how you can put together a forecast for your business.
You should start by looking at the personal expenditure you need to cover each month, and the extra cash that you personally want to draw from the business. At the end of the day you have chosen self employment as opposed to employment and you should be compensated for the time and effort you put into your business.
The next stage should be to look at the businesses costs. I like to start with a blank piece of paper and review the costs of the business from scratch. This is a good time to review whether a certain expense is necessary or not.
You should try to enter the costs in the month that they will be incurred.
Once annual costs have been forecast you should then turn your attention to your equipment. There is always another piece of kit from our favourite manufacturer to tempt us or an item in our camera bags that needs to be replaced.
You should identify at the start of the year the items that you need to replace and how much this will cost. You should then look to enter the costs into the correct month on your forecast,
Next time I will take a look at how you complete the forecast by adding cash inflows and income.
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