APPENDIX F
Pricing Your Services
THE PURPOSE OF THIS APPENDIX is to help improve the way you establish the fees you charge for your services. It’s geared toward freelancers and small business owners who often have great production skills but lack experience with the business end of the industry. Often in our industry, new companies assume that the quality of their work is enough to be successful. Although great work tends to sell itself, great work alone does not usually suffice for a 3D visualization company.
We decided to include a short discussion on pricing in this book only because this information is requested so often from our students as well as those who participate in the many 3D forums. It is not our intention to dictate how you conduct your business, and more specifically, how you price your services. This document serves only to offer a few suggestions to new business owners who could benefit from some of the hard lessons learned by many of those who contributed to this book. It is quite simple and very general in nature, yet offers some sound advice we see too often overlooked.
To establish a fee for your services, be it an animation, a still image, or modifications to work done in the past, we suggest using the following very simple formula, to which all other discussion will refer back.
daily rate x project days = project fee
Often in our industry, business owners establish their pricing for a project based on a set daily rate, without first putting reasonable thought into how to establish an appropriate daily rate. Until you create a comprehensive budget that factors in all overheads and a realistic number of production days you have in a year, using the above type of formula is a risky strategy.
Although it probably goes without saying, the daily rate listed in the previous formula actually represents the required daily revenue your business must generate on a daily average, plus the profit that you decide to build into your operation. It’s important to make this simple distinction because your required daily revenue is what you must generate to stay afloat, while the daily rate you ultimately charge factors in profit that most businesses never even see in the first few years of operation. With this in mind, we can write our daily rate in the following way:
daily rate = required daily revenue + profit
We will discuss profit momentarily, but right now, let’s focus on calculating the revenue you have to generate to stay afloat. To do this, we will show one final formula:
required daily revenue = overhead costs / production days
The first step in calculating your required daily revenue is to calculate overhead costs. Once overhead costs are established, we can determine the total number of days in a year that we have to work on projects and add to that a profit margin. With a required daily revenue established, we can determine how much profit we would like to earn, if any, and this becomes our daily rate. We can multiply our daily rate by the number of days needed to complete a project, and this becomes our project fee. Pricing projects in this fashion may seem to be too simple to be applicable to your business, but we would argue that it’s one of the most beneficial business strategies you can employ.
Calculating your overhead costs
Overhead costs are all the expenses that are necessary for the continued long-term operation of a business. These should be calculated on a yearly basis and should include everything from office rent to the software you use. It’s also important to factor in things like the per year cost of equipment that will need to be replaced at some point in the future, such as computers. If you are a freelancer working out of your home and want to calculate your pricing based on conducting business from an office outside your home, remember to include the future expense of a lease or rent. Some examples of yearly overhead costs that might need to be factored in to create a legitimate daily rate include the following:
• office lease and utilities
• insurance
• travel
• employee education (including your own)
• software and hardware
• marketing
• sub-consultant fees
• salaries (including your own)
The last item on the list is particularly important because freelancers and small business owners often exclude their own salary from their list of overhead expenses, and instead consider it an item that can be sacrificed for the sake of building a profitable business. This way of thinking is usually not sustainable and is one of the reasons some businesses fail before their third year in operation.
Two important questions arise at this point. One is, ‘How profitable does the business need to be?’ This will be addressed in a moment. But first, another question that should be asked is, ‘How many production days will I have in a year?’
Calculating production days
Once you calculate your overhead costs, the next step is to determine how many days in a year you can reasonably expect to work on your projects. It’s absolutely critical that you be true to yourself in this area and you accurately determine what time you are willing and able to put into your business. Remember that larger companies have separate departments for marketing and accounting, but as a freelancer or small business owner much of your time will have to be set aside for these and other areas. Give yourself reasonable time to focus on these areas of your business and be sure to allow for some time off during the year for holidays, illnesses, and family matters.
An example of how many available production days you might have is as follows:
365 days a year, less 104 (weekends), less 20 days (holidays), less 5 days (sickness), less 24 days (2 days/month marketing and accounting) = 212 days a year for production.
Once you arrive at a reasonable number of production days available, you will be one step closer to calculating your required daily revenue.
Calculating your profit
The final step in calculating your daily rate is to establish a profit margin. Once you accurately establish your yearly overhead costs and divide this amount by your total production days available, simply add the amount you want to earn as a profit, and you will reach your daily rate.
If you are content with barely making ends meet long enough to become established and reputable, which is the goal of many new business owners, then your business’s profit is something that can be legitimately sacrificed. If you consider the fact that many businesses fail before their third year, and those that eventually do succeed fail to be profitable for many more years, then building a business that fails to make a profit in the short-term is not out of the question. However, if you decide to do without profit, your project fees should be unwavering because they become based solely on your overhead costs. It is extremely important, however, to remember to distinguish the difference between doing without your own salary and your business doing without profit. Those who fail to separate the two have little chance for success.
If you decide to sacrifice your business’s profit, it’s still important to calculate what your daily revenue would be based on the profit of typical businesses that generate a successful profit margin. Many businesses use a long-established rule of thumb for determining what to pay their employees. As a general rule, employers often pay their employees 1/3 of the revenue their employees generate. This leaves 2/3 for the business. Half of this is often allocated for overhead costs, such as those listed earlier, and the other half is set aside for profit. For example, if you are a 3D specialist earning $20/hour, then your employer is probably billing your time out at about $60/hour. With this rule, 1/3 goes to the employee, 1/3 goes to overhead costs, and 1/3 goes toward profit and absorbing unexpected dry spells where production slows or projects fail to materialize.
If you follow this rule as a guide you can assume that at some point in the future, when your business has become truly established, your salary as a sole proprietor should roughly approximate your overhead costs, which in turn should also approximate your business’s profit. Likewise, the combined salaries of all employees should roughly approximate all overhead costs and all profits. This is a good rule to plan with because even when profits are crippled by dry spells and unexpected financial burdens, your business can still be successful.
Summary
For some 3D artists, pricing is the most challenging aspect of running a successful visualization business. Clients often understand very little about how your work is produced and a great deal about pricing and negotiating. That by itself can put you at a significant disadvantage when you bid on a project, and the bigger a project is, the more likely it is that your potential client will be a skillful negotiator. Combined with some of the other documents in the appendices of this book that deal with things such as marketing, business plans, and pricing presentations, you can prepare yourself for successful price negotiations.
Additional Information
If you would like some additional information on pricing your services, be sure to check out a fantastic article from Blue Flavor (www.blueflavor.com), web and mobile design, development and consulting company. The following is an example excerpt from an article written by Brian Fling and found at:
www.blueflavor.com/blog/2006/apr/25/pricing-project
Pricing Poker: Bluffing, Budgets and Trust
One of the great mysteries of pricing a project is budgets… vendors always want them, clients never want to reveal them. We ask every client if they have a budget that they need us to work within, every agency I’ve ever worked on the other side of the fence with has asked the same. Very, very few clients ever reveal this crucial detail.
Having been the client on many occasions, I usually have a price in mind. The problem is if I say I’m willing to pay $15,000 for something, proposals magically come back with proposals priced at about $14,999. On the other side of that coin, every book on consulting says never ballpark a project, even though the client always asks for it.
I find it funny… in a sad sort of way, that we often start out our partnership with bluffing, no one saying what they are really thinking… how much they are willing to pay and how much it should cost (again using scraps of paper in the car dealership).
The budget reveals a lot about the client and the project. We use it as a barometer of how serious the client is, if they have given their project serious consideration, how much they understand about the project, to evaluate possible return on investment scenarios, to help define scope, whether it is cost-efficient for us to pursue, and to see if we can even do the project within their budget.