This blog is a summary of an article that was in the Professional Photographer magazine, November 2020 edition and was written by Jeff Kent. The article outlined a business strategy, originally developed by Mike Michalowicz, that prioritized profit no matter the state of the economy. It also represents the business model I will be switching over too and will be the business model of my photography business for the foreseeable future. My goal in writing this was not just to help my own business grow but to help other photographers with how they run their own businesses so they can be profitable too.
So without any further delay, let’s jump into this system and how it works to ensure profitability.
First, this system was develop based on the envelop system. That is where you take all your revenue and dived it up amongst envelopes. These envelops represent all your expenses. However, with it being the digital age, this would be a digital envelop system. I say that because you would set it up and maintain your records in a spreadsheet based software system, like Excel.
Second, the dollar amounts that go into each envelop is based off a predetermined percentage and is deposited at regular intervals. The underlying idea is to run your business off what you can afford, not on what you think you need. Percentages are key, they are based off your total gross revenue. Just remember, It is also essential to maintain the same percentages for each category or this system will not work as intended.
In order to get started, you will need one central account, call it revenue, deposit the money from that account into the four others every two weeks based off the predetermined percentages. The other accounts are called; Owner pay and retirement (50%), Taxes (15%), Profit (5%), and Business Expenses (30%). Those accounts will be used to pay the expenses that they were set aside to cover.
I know…It is a simple but revolutionary concept, set aside profit, save for income tax, and pay yourself. However, this concept is also heavily dependent on math so if that is something you have issues with, then maybe this is not for you but I always encourage people to try.
So let’s start by going back to the business expenses percentage, 30%, and let’s get more specific with business expenses by breaking that down further. Now we have cost of goods and general expenses (operating expenses). Cost of goods includes all costs it takes to create and deliver a product to the customer, such as lab fees, packaging, and shipping costs. General expenses include everything else, which includes studio rent, utilities, employee salary, and marketing.
Now to set your prices for profit. Consider how much you allocate of the overall 30% to cost of goods and general expenses. However, the key percentage you need to focus on to be profitable is cost of goods. I say that because this is how much it directly costs you to produce a product or service.
Also, here is simple equation from that article which is powerful. Divide 100% by the percentage you put aside for Cost of Goods. Such as 100%/20% = 5, 5 will be the minimum profitability multiplier for this example. The minimum profitability multiplier is the minimum factor you should be marking up a product or service by to maintain profitability. So if your cost of goods for a service is $10, then you should be charging $50 dollars for that service.
Oh don’t forget, you will also need to watch your spending. You need to do this to keep your cost of doing business as low as possible. This will allow you to stay profitable in the worst of times. To ensure that this happens, you will need to sit down and look really hard at how you want to run your business. Once you have that idea, you can then figure out what you need to ensure you are running your business based off of actually what you need and that is it. The idea is to keep all business expenses as low as possible…just remember never discount your product or service because you are worth it and there are clients out there that will pay for your work.
Now go forth and run a profitable photography business.