Understanding the Economics of Your Photography Business
November 11th, 2009 | Published in Featured, Photo Day
It takes a lot of effort to book photography events. It takes a fair amount of effort to schedule, photograph, set-up an event in software, upload images, create email campaigns and make sure everything is working properly.
All of these steps require about the same amount of effort, whether you gross $200 from an event or $2000. However, the bottom line profit result is quite different. In the case of a $200 photo event, you have probably lost money or made a very small amount. In the case of the $2000 photo event you have made a profit of 50% or better.
There is also another component that discriminates against a photo event that grosses only $200. That is the “opportunity lost.” “Opportunity lost” is the time and resources expended on a low selling event that could have been better utilized on a high selling event.
This “business case” begins with the decision of what to book. You should not make this decision lightly, as once the decision is made, the “dye is cast.” Only a decision maker who understands your photography business thoroughly should be entrusted with making this decision. The decision to turn down an event that is a “loser” can be just as important as recognizing an event which can be a big “winner.”
The first step in making a rational decision about what event to book is to calculate your “breakeven point.” “Breakeven point” is that dollar volume necessary to cover all expenses for an event. It is calculated by first figuring out your fixed costs per event photographed. This includes your office staff cost, your office, utilities, etc. A crude calculation can be made by adding up your fixed costs for one month and dividing by your average sales per month. For example, let’s say overhead is $5000 per month and your photo business’ sales are an average of $15,000 per month. Your fixed cost as a percentage of sales would be $5000 divided by $15,000 or 33% of monthly retail sales for your photo business.
The second step is figuring out your variable costs. The two biggest variable costs are photographer cost and lab/ production cost. Photographer cost should be kept to 10-12% of sales. Lab cost consists of print cost, e-commerce cost, credit card processing cost and shipping cost. This can be expressed as a percentage of retail sales. If prints are being sold at retail for $2.50 for a 4×6 and the cost is $.49, then lab cost is 19.6% of retail. E-commerce fees for an event, where the average image size is below 700K, is 5% of retail (in the case of our lab). Credit card processing fees are 3% of retail. Shipping cost is usually neutral, at worst, in this calculation because you would normally set shipping charges higher than the out-of-pocket cost. Therefore, your total variable costs are about 40% of retail sales.
12%(photographer cost max) +19.6% lab cost +5% e-commerce fee +3% credit card cost= 40% total variable costs.
Fixed costs should be added to variable costs for the average number of photo events in a month.
The Variable Cost is calculated by the formula Fixed Cost=R(Revenue)-.4R
Revenue Reducing: Variable Cost Revenue=Fixed Cost/.6 In our example: Fixed Cost=$5,000
So: Variable Cost -$5000/.6=$3,333
Break Even=Fixed Cost+Variable Cost. So, $5000+$3,333=$8,333
This tells us we would need to take in $8,333 to cover all expenses and not make any profit.
In our earlier example, our total costs as a percentage of sales on a volume of $15,000 per month would be 40% variable and 33% fixed for a total of 73%. This would leave 27% profit or $4050.
Since volume varies from month to month, you must do this analysis individually for each month because you will need to set your fixed costs low enough that you will break even or lose very little during slow months. Likewise, you will need to set your fixed costs at a higher enough level to be able to effectively handle the higher volume of business in busy months.
If you calculated the variable costs accurately, then they should take care of themselves because they go up and down with volume.
Most businesses hire extra people for busy seasons and then retain the extra people too long, thinking that they are necessary, even though the busy season is past. Employees are skilled at looking busy and elongating tasks to fill the time available. So, lack of productivity is not always readily apparent. It is imperative to cut back fixed costs, i.e. office overhead, at the earliest possible moment. In fact, this should be planned before the new seasonal employees are hired and they should be informed that the job is temporary.
Knowing your breakeven point and how much you are spending per month on payroll is key to operating a profitable business. Although there is a little work involved in doing the calculations, the time is well spent as you will insure the economic health of your enterprise.
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