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Pricing, Profit Maximisation and the Mythology of 3x - part 1 of 1 2

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By Rosalind Van Tuyl

Deciding what to charge for your art is one of the most basic questions in the business of photography. However, arriving at the right price is challenging and failing can leave you wondering at the end of the year why you worked so hard with so little to show for it.

Pricing for Total Profit Maximisation

You often hear about 'Pricing for Profit' - good advice if you were not aware that a for-profit business aims to make a profit. If you are currently pricing to lose money, then pricing for profit is certainly a worthy goal! That said, it is a catchy, simplistic and utterly incomplete directive, particularly when accompanied by an industry average as a target (eg 30% profit).

The question I would pose is: Why aim for just 30% profit margins? Why not aim higher? In fact, why not aim for the profit margin that will yield the highest total profit at whatever level of skills and resources you decide to commit to your business? In an industry where the value of the product is wildly subjective, using an industry average as a target is ill-advised, at best.

Ultimately, what really matters is pricing for total profit maximisation.

In pricing discussions, photographers talk about what is a 'fair' and 'reasonable' price. Framing the question this way is problematic because everyone has a different idea of what 'fair' is. Some prospective customers may think your idea of fair is unfair, while others think it is more than fair. So, it is critical to understand that, chances are, you are NOT your target market.

Since 'fair' is ultimately just a matter of opinion, your opinion on 'fair' is not a good guideline for creating pricing. And if you do use what you, personally, would pay for your services to set your prices, you'd better be sure you are targeting customers like you!

The Folly of Cost-based Pricing

The oft-cited industry profit margin of 30% has unfortunately been bastardised into a mythology that says you can estimate a good price by multiplying your costs by 3. This cost-based pricing approach (aka the 3x myth) is when you add up all of the costs associated with producing a given product (say, an album) and multiply that cost by 3 to get the price. For example, an album that costs $500 to produce would be priced at $1,500.

However, what if your clients would be willing to pay $2,000 for that album? Or $3,000? If you just charged 3 times your costs, you would be foregoing any additional money your clients might pay over 3 times your costs.

Think about that Coke you are drinking. It is marked up 400x and yet you willingly paid $2.00 for it. Even though the price is well over 3x their costs (about 2 cents), you are willing to pay more because that is how much value you get from that frosty beverage.

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last update 09/12/2022 14:58:13

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