We'll tackle our most popular question on this webinar: How should I price my products and services? We discuss how to determine your shelf pricing for items based on wholesale price and your area's demographics. To help you in this session, please have your monthly rent and your studio's square feet handy.
Bordeaux & Bordeaux CPAs is a Supplier Member of CCSA (Contemporary Ceramic Studios Association) which is a organization representing paint your own pottery studios (PYOP) and ceramic arts businesses. Donna Bordeaux, CPA provided the webinar to CCSA association members as a benefit of their membership in the organization. Their CPA firm specializes in growing PYOP studios with industry specific key performance indicators by helping them grow their studios and minimize the impact of taxes.
Episode Transcript:
Hello, thank you for joining me today. My name is Donna Bordeaux and I'm going to be walking you through some information about pricing for profit in your studio. First off, we're going to talk a little bit about my background, and then we'll dig in to the effects that rent has on your pricing, and how to price specifically for your demographics.Our team at Bordeaux and Bordeaux CPAs deals with accounting solutions for PYOP studios all across the country.
Our team includes myself, I'm Donna, I'm a CPA. My husband Chad is also a CPA.. Nancy happens to be my mom, she handles all of our administrative work here in our office and helps out with coding and accounting. In case you hear a bark in the background that might be Dixie, our security forces.
As I've mentioned, we work with studio owners all across the country. We are located in Charlotte, North Carolina, just over the border in South Carolina. I'm about a mile from Charlotte city limits. That allows us to work with studio owners everywhere across the country through applications like this where we deal with mobile situations, and you could be anywhere, anytime and still work with us.
Let's get down to some numbers for today's discussion. First, we'll talk about the cost of goods sold and what effect that has on your pricing, as well as the rent and some net profit targets for you. When we talk about cost of goods sold here we're talking specifically about the cost of the bisque that you sell, the clay, glass, canvass, whatever the base product is. We don't generally include the supplies like your paint, or glaze, or brushes or things like that in the number. We're talking about the bare essentials of the item. If you look in a catalog from one of the suppliers and you purchase an item, we would be talking about that price that you paid to them.
We should be trying to achieve a 15% ratio for cost of goods sold. That means that ... Your revenues are $100,000, your cost of goods sold should be $15,000. That translates to about a seven times multiplier, and that's where that magical number comes from if you've heard that throughout CCSA before in your discussions with other studio numbers. It is a very generalized rule of thumb. If you paid $2 for an item, you would mark it up about seven times, the selling price should be about $14.
If you have a studio that operates with a studio fee, you'll need to take one extra step there. You'll want to look at the average studio fee per item. You would take the total studio fees that you have collected for a range of a period of time, maybe a month or a year. Divide that by the number of items that you sold, because we know that some people could come in and paint more than one item at a time, so you don't want to just subtract the studio fee from this, otherwise you will come short. You would take the $2 cost, multiply it times to seven, and then subtract out your studio fee to get to the selling price. It would be somewhere less than $14 assuming that you have a studio fee involved.
Rent is another one of those magical numbers. It's a big variable out there. When we look at the rent numbers here we are assuming the base rent, but if you have a significant amount for common area maintenance CAM charges throughout the year, you probably want to add those into the mix when we look at the annual numbers. The CCSA survey that some of you may have participated in, averages about $19 per square foot for a studio. I strongly urge for you next time that survey comes around, please participate in that and use some accurate numbers there, that helps us to give you a better information as well.
Back to the rent factor, we want to look at rent being about 16% of your revenue. Again, in our basic example, if you have $100,000 in revenue in a year, your rent should be no more than $16,000 for the year in order to be in alignment so there's money left over for you at the bottom line.
In an example of how to calculate your per square foot number, take your monthly rent and convert it to annual. Again, if you want to add in your common area maintenance charges you can do that, or any other significant numbers that add to your rent. Divide that by the square feet in your studio, and you'll come to a dollar per square foot number. That is the key number that we're going to use when we look at our pricing to diagnose a little bit deeper where your multiplier needs to be to make sure that you have money left over at the bottom line.
When we analyze rent I want to point out a few items of interest for you. First off, I do hear some people say, "You know, I can't get a seven times multiplier, I'm not in an area that I can do that." If you have lower than average rent, you may need to spend more money on advertising, you may have less traffic whether that be foot or vehicle, maybe you're tucked away around the corner. You also need less of a markup to be able to sustain a healthy profit.
Also, you may be in an area that has some lower household income, and you overall probably have less revenue than the average studio, but that doesn't mean you have to be less profitable. You just need to price properly to make sure that the profit is still there. If you have higher than usual rent, you may need lower advertising cost because you have more foot traffic or vehicle traffic. You're probably in a more displayed area that people know where you're at. You also have a higher markup needed to help cover that rent. You may be in an area that has a higher household income or higher demographics than usual, and you'll probably end up having higher revenues than the average studio.
Back to that multiplier number that you came up with. What you want to do is use this chart for the rent per square foot and determine where your rent lies. If you're above the $30 that's okay, I have studios above the $30 number and we can go higher with this and you would want to. Use this chart to determine where your multiplier lies and see how things are priced in your studio whether or not you're in alignment. Again, these are not hard and fast numbers, but they're targets for you and to give you some examples of where things should be to make sure that the bottom line falls into place.
If you have a $3 item and your rent is $10 per square foot, you would want to be looking at a target price of about $15. On the opposite end, if you're a $30 per square foot rent, you would need to sell that item for about $27 per square foot to make that bottom line still be there. As you can see, there's a pretty big difference between a studio here and a studio here in their pricing.
They're not to say that one is any better than the other, you just need to know your surroundings and your demographics to make sure that you price properly for your area. I do caution you, when I see a lot of conversation on the CCSA chat board about what an item sells for, how much someone else is selling something for. Be cautious, their rent numbers may be drastically different than yours, so take that into consideration in your discussions.
If your pricing is right, what will happen? That's going to be a big part, the biggest part of making sure that your profit comes down to the bottom line as well. In studios we are aiming for a 15% profit margin at the bottom line. If you are a sole proprietor or partnership, you would be looking at 15% all the way at the bottom as your net income.
Keep in mind, as your income goes higher it may be more beneficial for you to be taxed as an S corporation, but there are a lot of factors there depending on your situation in particular as well as the state you operate in. Still, with S corps we look for a 10% officer compensation plus a 5% net income, so still taking home about 15% net profit.
If your cost of goods sold numbers based on pricing, or your rent are too high for your revenues, the profit is where it will suffer, it will come out. If instead of 15% cost of goods sold yours is running at 20, guess what, the 15% would change to 10 and lower your profits. Pricing is crucial.
When we work with studio owners all throughout the year we help them with their accounting and bookkeeping systems as well as all of their compliance needs through tax preparation and payroll processing. That allows us to have solid insight to help them analyze these numbers and look at their pricing throughout the year, and make sure that everything is in alignment so that they can have 15% or higher profit to the bottom line. We can also help with studios that are brand new or opening, and if you're buying or selling a studio we can help with those tasks as well.
I love working with studios and we've done a lot of work to help grow our industry as well. If you pop out to our website at pyopaccounting.com, you'll see some great resources there that you're welcome to use whether you are a client or not. Our blog has several posts that may be of interest to you about things like payroll, loyalty programs, how to find good health, increasing your ticket average, and also again, about pricing your services.
We love the industry so much we even wrote a book about it, it's the 10 Most Expensive Tax Mistakes that Cost Studio Owners Thousands. For our CCSA members we'd be happy to get you a copy of that, you just sign up right on our website. I thank you for joining me today and hopefully you've got some good information on pricing from our session. If you have other questions or would like to talk about the possibilities of working together, I would love to speak with you. You're welcome to set up an appointment directly through our website. You'll see a pop up that will allow you to schedule an appointment right from there.
Again, I'm Donna Bordeaux. I hope you have a fantastic day. Thank you.
