Cost of Goods Sold for the Photographer.
Is your business profitable? Are you sure?
If you don't understand your Cost of Goods sold, you may not be as profitable as you think. If you set your prices without taking the full COGS into account, you could be losing hours, days, even weeks of your time! And you know what they say…time is money!
Understanding your costs can lead to better pricing, which tends to be a difficult area for a lot of photographers (and all types of small business owners). It can also help you see where your money and time are going to you can make better business decisions, such as if/what to outsource, where to cut back, and so on.
Technical mumbo-jumbo
Let’s get the boring stuff out of the way first. According to
Investopedia.com, cost of goods sold (aka cost of sales) is defined as,
“The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin.” Now, hopefully I didn’t lose all of you after all the accounting jargon. Stay with me, it will get better I promise.
Read that last line from above again: “COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin.”
What that boils down to is as a small business owner, you MUST have a good handle on your Cost of Goods Sold (COGS) to become and remain profitable. Without profit, you have a hobby. (Note: There is nothing wrong with having photography as a hobby, unless you are expecting it to be a business.)
How does this break down for a photography business?
Let's use an easy example: An ordinary print order.
The first part of the formula is pretty obvious: cost of the materials used in creating the good (the print). This would be the price that your lab charges you for that print. Also include any additional options such as luster coating, textures, mounting, etc.
Now, we aren’t quite finished with the cost of materials yet. Do you pay shipping to your lab? All the costs we incur as part of getting the print to us, like shipping fees, retouching fees, and rush charges, are also a part of cost of goods sold. Do your prints get packaged (either by you or your lab) before they are delivered to the client? Make sure to include the costs of those materials as well.
Okay all that sounds harder than it seems. Let’s put some numbers in an example. Let’s say you want to sell a 16x20 print to your client.
Print cost $18
Lab Retouching Fee $ 5
Luster Coating $ 2
Print Mounting $11
Packaging $ 7
Print Shipping $ 4
TOTAL $47
This example considers material, shipping, and packaging but what about your time? What if your client asks you to design her holiday cards? You need to determine how much your time is worth and set an hourly rate. Just to have a nice round number let’s use $100/hour for design/retouching/editing work. (Note: You will have to figure out what your time is worth to you, as there are many considerations, i.e. time away from your family, other business activities, etc.)
50 double-sided 5x5 flat cards $36
Design template $10
15 minute design time $25
Card shipping $ 4
Packaging $ 5
TOTAL $80
As you can see, design/retouching time can add a lot of cost to product. But like I said before, if you set your prices without taking the full COGS into account, you could be losing hours, days, even weeks of your time!
Keep in mind, that COGS will be different for every business. As a general rule, COGS should represent 33% (or less) of your price. The other 67% should be split between marketing/admin/other & profit. Again, this is just a general guideline and you should decide what makes sense for your business.
As you can see there's a lot to consider when determining your COGS. Every dollar you forget is a dollar you don't realize you’re spending. Understanding your costs allows you to know what you should be outsourcing, if your prices are appropriate, and ultimately if your business is sustainable.
Please note that while I have worked as a cost accountant (for manufacturing companies) for the last 8 years, I am not an attorney or CPA. For professional advice please consult a small business attorney or CPA.
Jessica graduated from SIUC in 2003 with a B.S. in Accounting and has been working as a full-time Cost Accountant ever since. She started Tails of Love Photography & Monarch Tree Photography last year to purse her passion. She lives in Chicago with her husband and pit bull, Maggie.
