Why You Need To Raise Your Prices
This article is my response to a number of long-running threads in the Video University wedding forum, as well as other videography forums. The question of “how much to charge” is constantly raised, and endlessly debated…usually by people who don’t understand how to calculate this sort of thing.
If you try to figure out your pricing in your head, or on the back of an envelope, you’re likely to commit some serious errors in setting up the problem. The most common include:
- Confusing owner/operator salary with profit
- Confusing hourly pay with billing rates
- Failing to allow for depreciation, maintenance, and equipment replacement
- Omission of essential benefits (e.g., medical insurance)
- Omission of essential protections (e.g., business insurance)
- Failing to correctly consider all items of overhead in general.
Part-time videographers (myself included) are particularly prone to these errors. If we make enough money to pay for our latest piece of video gear, we’re happy. But this is a serious mistake. For one thing, unless you run your part time business as a business, the IRS is likely to consider your income to be “hobby income”. In this case, you can’t offset your gross income with any of the usual business expenses. It’s simply taxed as straight income added to the pay from your “day job”. Ouch, big tax bite!Secondly, you should expect to get a fair return on all the time you invest in your part-time endeavor. After all, you could be spending those hours in a “real” second job – so your video business should pay you at least as well as that second job would.
Let’s consider a hypothetical wedding business, “ABC Videography”, owned by Ms. Vicky Video. Vicky’s been in business for three years, and knows how to shoot and edit a quality wedding video. She works at the business full-time, averages bookings of 45 weddings per year, and shoots most of them as a one-person operation. She uses an unmanned second camera at the ceremony.
Vicky has been charging about $1,500 per wedding. She’s begun to wonder if she’s charging enough to eventually buy new HDV gear for the business. So she sat down and put together some spreadsheets. See the spreadsheet (note: requires Excel)
First, she listed all her equipment. For the items needing regular maintenance, she figured how much she averages per year. She also listed the service life (how long she expects to use each item), and what she thinks she can sell the item for at the end of its life.
(At this point, I hear someone saying, “I already had a computer and a desk and chair and so on when I started my business. Do I have to list them?” Yes, you do. Notice that Vicky brought a third camera, a one-year old 1CCD model, into the business, valued at what it’s worth as a used item. Even if you already own something, when you bring it into the business and put it into service, it’s a part of the business’s capital. Eventually, it’ll wear out and have to be replaced, and the business has to be able to make enough money to replace it.)
A note to accountant types. I’ve figured service lives here based on actual experience, not necessarily what the IRS allows. This is a “real world” depreciation calculation, not quite the same numbers as you’d put on your tax return.
Vicky’s included her car as part of the business equipment. You can do so if you like, or you can keep it as a personal vehicle.
Vicky doesn’t have any fancy steadicam equipment or lighting kits, and she doesn’t do events that would generate orders for large numbers of tapes and DVDs, so she doesn’t have duplication equipment. Vicky concentrates on doing weddings. She has a total of about $25,000 invested, an estimated annual equipment depreciation cost of about $4,000, and annual maintenance of $1,400.
Next, Vicky added up all her non-billable expenses. These are the expenses that you have to pay regardless of the amount of work you book, and generally they can’t be allocated to any specific project. The accounting term for these expenses is “overhead”. Vicky brought the maintenance and depreciation estimates from her equipment sheet to this tally, as well as her marketing expenses, office expenses, and various types of insurance. It took her a couple of days to really sit down and make sure she’d included everything that needed to be in this list…she kept thinking of new things to add in. She may still not have thought of everything – for instance, she has no disability insurance.
“On to the billable expenses,” thought Vicky. “The stuff that’s specific to each wedding.” She made a separate sheet for that, and came up with a cost of about $104. She also added items for her own labor in shooting and editing, but left them blank until she could figure out what she should be charging per hour.
Since Vicky had previously been a schoolteacher, she knew that on average, teachers make about $46,000 per year. After taxes and other deductions, her take-home pay as a teacher was about $29,900. She figured that, since she’d already accounted for those taxes and benefits as business-related expenses, that it would be fair if she paid herself a salary from ABC Video that was equivalent to her old take-home pay.
Take a look at the last page of the spreadsheet. Notice something here: Vicky is working 1800 “billable” hours, or 40 hours per wedding, 45 weddings a year. That only leaves 200 hours out of a standard man-year to do all the rest of the things her business needs – marketing, bridal show attendance, continuing education, bookkeeping…where will it come from? Answer: Vicky is going to have to work a lot of overtime, just like most small business owners! There are between 1920 and 2000 hours in a standard man-year (40 hour work week), depending on how many Federal holidays you take off, and how much vacation time you allow for. I asked a couple of fellow videographers how much time they had to spend on their “business tasks”, stuff besides shooting and editing. The answers we got ranged from 500 to 1000 hours per year. So Vicky is going to have to put in somewhere between 300 and 800 hours of overtime. This is why many videographers recommend you charge high, and book fewer jobs.
Before figuring her pricing, Vicky needed to determine how profitable her business needed to be. There were several options. If she just figured a 10% annual return on her investment, she’d need to make a profit of about $2,600. But, if she wanted to be able to afford HDV cameras and editing equipment within three years, she figured she’d need to put away about $4,000 per year. If she wanted to do the HDV upgrade, plus add some additional gear, like lights and duplication equipment, she figured she’d need about $3,000 a year more. All told, that figure was less than 10% of her gross receipts; not an unreasonable profit expectation.
(A further note about “profit”. Notice that if ABC Video does not make a profit, then Vicky will have to dip into her salary to finance any improvements…since the business is just making enough to cover equipment replacement, with nothing left over for upgrades or expansion. Profit is what you use to grow your business, and needs to be accounted for apart from owner’s salary…or worse yet, gross receipts.)
Now Vicky knew her non-billable and billable expenses for the year, and how much profit she was aiming for. She also knew about how much time she spent shooting and editing each wedding. After putting some trial values for prices in her spreadsheet, Vicky figured that a price of about $1,716 would both give her a standard of living equivalent to teaching, and allow the business to grow as planned. To give herself a little margin for error, she decided to charge $1,750 for her services.
Vicky was a little surprised to see that her “billing rate” was $16.61 per hour. After all, she had only taken home about $14.95 per hour as a teacher. But then she realized that the hours she billed directly to a project didn’t add up to a full work year. She was “working” for 1800 hours to shoot and edit those 45 weddings…but she was busy the rest of the year, too…with marketing, continuing education, bookkeeping, and surfing the Video University forums. Her “working” hours had to pay for her “non-working” hours, so that her annual take-home pay would stay equivalent to her old job.
Now it’s time to try it yourself. By all means, modify Vicky’s spreadsheets to suit your own circumstances. In some cases, you may need to decide whether an item is a “business expense”, or something you should pay for out of your “salary”. See your accountant for best results.
These numbers are sensitive to things like how efficient you are in editing, and how many weddings you book per year. If you put a lot of “extras” into your weddings, like photo montages and Love Story interviews, your editing time will increase. Likewise if you spend time creating a lot of custom graphics and effects. Vicky does a pretty basic “package”, and is very efficient in her editing. If your editing time is more (and 60 to 80 hours is not unheard of), then you need to charge more. Try putting in some values that are more in line with your own business, and see what it does to the bottom line. Be careful to manually paste any changes in the non-billable expenses into the corresponding place in the “Income Vs. Expenses” sheet. (sheet 4, cell C6). These two locations are not linked by formula to avoid a circular reference. I’ve color-coded the sheet to make it clear where you can put in your numbers, and where the sheet wants to calculate a value for you.
One last comment. I’m a videographer and a rocket scientist. I do have an MBA, but it’s pretty rusty…and I never did understand “present value”. So before you put down actual money based on Vicky’s spreadsheets, be sure to sit down with your accountant. He or she will be able to go into a lot more detail, and provide better accuracy, than I can.
DOUG GRAHAM is an engineer, rocket scientist, writer, event videographer, and animator. He also sings, plays the guitar badly, and juggles.