how do I price myself? part 1: set a financial target

Pricing workshops cost hundreds of dollars.  They cost hundreds of dollars for a good reason: it is a complicated process.  It's not enough to just say, "I want to make $100,000 a year!" and then say you're going to do 100 sessions for $1000.  That's not quite how it works.

Since I often get vocal about how important it is to set your prices to reach your own very real and personal financial goals, I thought I'd take the opportunity to create some practical, self-guided instructions on how to come up with an an actual number so that you're not just plucking a random rate out of thin air (or off someone else's website) and thinking it has to work for you.  I'm warning you, though - this is a full day workshop packed into a single blog post, so brew up some coffee or tea and get yourself comfortable for the long haul. By the end of this post you will have been given tools and instructions to:

Calculate your pre-tax Target Income
Calculate your Cost of Doing Business
Factor in your estimated annual Income Tax
Know your actual Financial Goal

First, you need to know that there is no one single "right" answer for how much you need to charge, and as far as I can tell, the only "wrong" price is one that doesn't meet (or exceed) your financial goals.  If it is costing you money to do this, you're doing it wrong.  That being said, I am going to identify specific income goals, and you will need to put in the work to calculate the one that most accurately reflects your situation, including those looking to break even by making your hobby pay for itself.

For the purpose of this exercise, we are going to assume that you have already gone through the process of setting your company up and are just wanting to know how much you have to charge to meet your financial goals. (If not, here is an older post that covers the basic steps for getting yourself set up as a legal business.)

The first step is to determine your (actual) pre-tax TARGET INCOME, which won't just be a random round number (like $100,000) but will be a calculation of your cost of living, cost of doing business, and cost of goods sold. If you want to make a $100,000 profit, that number will be included over and above your target income. This number will be the same regardless of what kind of creative profession you are working in.

1a) IF PHOTOGRAPHY IS OR WILL BE YOUR SOLE SOURCE OF INCOME then you need to first figure out how much money you require to cover your bills, pay off your car loan, and sock something away for savings.  Completing this exercise will take you several hours (and perhaps days) to complete as it requires you gather up every bit of financial information you have from rent and utilities to consumer debts and retirement savings to childcare costs to your clothing and junk food budget.  The Government of Canada has created a useful tool that you can use to figure out your budget.  You can use the online version here or download the excel version of the calculator here. You will leave the field where you input your "income" blank until the end, at which time you will put in the net (after tax) amount you need to make to ensure that you are flush and that will be your pre-tax target income.

NOTE: If you and your partner currently share expenses in a way other than 50%-50%, you will need to complete a separate calculation for each of you that reflects this.  For example, you may split the expenses 35%-65% or your partner may cover the rent and utilities while you take care of groceries and car payments.  To ensure accuracy, this is a necessary step even though doing it may be more work.  (I did warn you it might take hours, perhaps days, to complete this portion...)

1b) IF PHOTOGRAPHY IS A SOURCE OF SUPPLEMENTARY INCOME because you already have another source of income, then you need to identify the amount of shortfall your income from photography is intended to cover.  To figure this amount out, complete the budget worksheet as in Step 1, but put your current income into the calculator.  The deficit showing will be your pre-tax target income.

2) IF PHOTOGRAPHY INCOME IS STRICTLY TO MAKE FUN MONEY because you already have you financial obligations covered, then you need to identify that number.  Perhaps your photography income is intended specifically to pay for your kids' extra extracurricular activities, to offset (or augment) the cost of your family vacations, or to top up your retirement savings.  You can set this number to whatever it happens to be and it will stand alone as a pre-tax target income.

NOTE: A number only gets entered in this category if it is 100% disposable.  If your child would be missing all extracurricular activity as opposed to not getting to take 5 classes instead of 3 because this income was eliminated, then it is not strictly "fun money" and you need to complete 1a) or 1b) above.

3) Regardless of your pretax target income, YOUR PHOTOGRAPHY INCOME ALWAYS HAS TO COVER THE COST OF DOING BUSINESS (CODB).  This applies to everyone, including HOBBY PHOTOGRAPHERS who, if they accept any amount of payment for their services, are required by law to have a business license and pay taxes.  There are several simple calculators available online including this one from the National Photographers' Association of Canada, but in order to get accurate numbers there is a lot more work involved. I know. ~heavy sigh~

There are several factors that you need to take into consideration when calculating the cost of doing business, the first one being OPERATING COSTS.  Your costs will be slightly different depending on your industry (knitting, sewing, pattern-making, etc.) and you need to adapt this list to reflect that.
Operating costs refer to expenses that you generally pay regardless of whether you had any clients or not.  Operating costs vary greatly from one company to the next based on a number of factors but we are going to specifically focus on whether you operate as an on-location home-based business (HBB) or out of a studio or office.  In both cases, the fixed operating expenses will be similar regardless of your corporate structure (sole proprietorship or incorporated entity), but it is imperative to exclude amounts for eligible use-of-home tax write-offs such as your cell phone and internet if those amounts were already included in your household budget in 1a, 1b, or 2.

Standard operating costs for both HBB and studio might include:
  • business licenses
  • liability, equipment and business insurance
  • memberships and dues
  • software subscriptions
  • office supplies (stationery, stamps, paper, toner, etc.)
  • accounting and legal fees
  • cell or land phone, internet, security system and monitoring ONLY if it is used exclusively for your business and you would disconnect it if you stopped working
  • web hosting/site maintenance
  • advertising
  • equipment maintenance and repair
  • attire/shoe allowance
  • consumables such as paper backdrops

If you operate from a space (studio or office) outside of your home your additional operating costs might include:
  • rent or mortgage on commercial space
  • building insurance
  • utilities
  • security system/monitoring
  • internet and additional phone
  • toilet paper and cleaning supplies

Next are your CAPITAL COSTS which are physical goods that you use to operate your business such as computer and photography equipment (here is where you include repayment of business loans or your leasing costs) and props, reusable backdrops, costumes, etc.  These are one-time expenses that you will depreciate or can re-sell.

If your company owns your vehicle and you use it exclusively for work, you can include your vehicle insurance, fuel, loan payment, and maintenance in your operating costs.  If you use your personal vehicle, you can include an estimated amount ($/km or fuel receipts plus a defensible % of vehicle expenses) here.

Other VARIABLE COSTS that you may want to budget for are things that you could reasonably eliminate yet remain fully operational.  Examples of this might be coffee, professional development, magazine subscriptions, and so forth. We will deal with the Cost of Goods Sold in a little bit...

Of course I am not going to leave you high and dry - here is a calculator you can use (just save a copy to your own Google Drive or message me via the contact form on this site and request an email copy!)

4) After putting in your OPERATING COSTS, enter the pre-tax target income you calculated in 1a, 1b, or 2 at the bottom of the calculator.   It will automatically add them together so you can add 25% - 35% for income taxes.  This.  THIS will be the actual "magic" number you seek, the true and very real amount you need to earn to reach your own personal, individual financial goals.

You are now ready to start looking at how to price your products and services!  

If you are only providing digital files, you can skip this part and join us later, but if you are selling or including products such as USBs, prints, and albums whether by in-person sales or a service such as SmugMug, in preparation for setting prices you need to factor in the COST OF GOODS SOLD (COGS) COGS are expenses that are directly related to product sales.  You can easily identify products and services that are related to the cost of goods sold by determining if you would not have to spend money on that product or service if you did not have a client needing it.  You will need to make two lists, one of expenses that you will be passing along directly to your client, and one of expenses that you will be calculating into your pricing.  Here's a starter list of common photography expenses under Cost of Goods Sold:

  • USB keys
  • prints, canvases, albums, etc.
  • specialty packaging
  • shipping and duty
  • short-term (daily or hourly) studio rental
  • food and refreshments (ie) champagne for engagement session or cake for cake smash, etc.)
  • hair and make-up artists
  • keepsake costumes or props
  • extraordinary travel expenses (destination weddings)

If you are a graphic designer or videographer, you will need to make this list reflect your specific expenses. Now. You've earned it, so go have a glass of wine or a pint while you mull this list over and start brainstorming to complete your own.

I'll see you in a few days for Part 2: setting prices, in which we will figure out how much you need to charge per session, how many hours of work you will likely be putting in each week, and what you should be charging for products (if you are carrying any.) We will also touch a bit on how the products and services you include form a part of your corporate identity or "brand" and how to build in a growth plan for your company!