Cost of Doing Business / by Mark Van Noy

I know this is a controversial topic that no one is supposed to talk about: pricing.  That is silly.  Not talking about pricing just opens the door to misunderstandings.  No one wants to feel taken advantage of on either end of a financial transaction so we absolutely should talk about things like pricing and costs.


Most independent service industries are essentially in the same boat.  People who work in these industries have unique challenges because they are not paid a fixed salary.  They are also often independent contractors meaning that they are either self-employed or are effectively self-employed.  Some of the challenges of being a service based independent contractor are:


  1. Paid hourly
  2. Limited services qualify as billable hours
  3. Work must be done that takes considerable time that is not billable
  4. No benefits such as health insurance or employer matched retirement
  5. Equipment required to provide service is paid for by the individual providing that service


I am certain that I am missing some challenges.  This list just provides a broad outline of the considerations that go into determine a price to charge for services.  I would like to start with an example of a dance teacher before tying this discussion into how photographer’s need to set their prices.  


Our imaginary dance teacher makes $30 an hour.  That sounds pretty good. $30 an hour times 40 hours in a week, times 52 weeks in a year, works out to an annual salary of $62,400.  That sounds pretty good; certainly above the poverty line.  The first hitch, however, is that it is near impossible for a dance teacher to work 40 hours in a week.  People work and go to school during the day.  If we decide to be quite optimistic and assume that this imaginary teacher can teach classes five days a week consistently from 4:00 PM to 9:00PM then their 40 billable hours a week drops down to 25 hours a week which is quite a pay cut right off the top.  Also, no dance program can actually run all 52 weeks in any given year.  Customers expect that dance schools follow the vacation schedules of public schools so there will need to be breaks for fall, winter, spring, and summer vacations as people do not want to pay for classes they already know they will not be around to take.  To account for vacation schedules we will subtract four weeks out of the year which drops out 52 weeks down to 48.  This already moves the base calculation down to $30 an hour times 25 hours in a week, times 48 weeks in a year, for a total annual pay of $36,000 or an immediate pay cut of $26,400 or about 42%.


Okay, so our imaginary dance teacher is making a whole lot less money than $30 an hour sounds.  That should be fine because they only actually work 25 hours a week, right?  No; they work a lot harder than that.  We can safely assume that this imaginary dance teacher is working at least another ten hours every week meeting with students before and after class, answer current student questions over e-mail or phone, taking phone calls or e-mail from prospective students, scheduling class times, working on student choreography, managing billing as well as tracking down late payments, possibly managing the student space, and a whole range of other things I either cannot think of or do not actually know about.  All of this time outside of teaching has an additional cost in that it prevents our imaginary dance teacher from being able to work another job to bring in any additional income.


There is also the problem of additional expenses.  If we pretend that a person can get health insurance for $300 that has to come off the top.  There is no employer matched retirement, but our dance teacher needs to factor in retirement some day so we will give them an 8% of gross income to a tax deferred IRA which keeps them well below the 15% they could get in a more conventional salaried job; or at least could have gotten at one time.  The dance teacher also needs to provide music, some sort of device to play that music on, appropriate dance shoes and clothing, and so forth.  So with all of our assumptions, which are admittedly very optimistic and unrealistic, our imaginary dance teacher brings in a gross income of $29,520 before taxes for an expected 35 hours of work a week which is probably closer to 45 or 50 hours of work a week.  This would currently be a bit less than three times the federal definition of poverty, but this teacher could probably do considerably better for themselves financially doing something else.


Which brings us back to photography.  Much like teaching dance, photographers have a lot of time outside of billable hours that goes into running the business.  To start, pressing the shutter button is the least time consuming thing we do.  We still have to sort through all the photos taken and select out the best ones which can take several times longer than it took to take the pictures, then we need to edit the photos that were sorted, and the final edited photos need to be distributed to our customers.  There are also the standard business activities such as marketing, collecting payment, writing blogs, working on new lighting or other concepts, communicating with customers, and so on.  There are also equipment expenses such as the camera, lenses, lights, light stands, backdrops, light modifiers, batteries, extension cords, gaffer’s tape, containers to hold all this stuff, and on and on.  Equipment wears out an must be replaced as well.  There is also either setup time that is unpaid if shooting on location or the cost of maintaining a studio.


I am not going through these examples to complain about how little money people make in the hourly service industry.  The knee jerk reaction when seeing these kinds of examples is to state, “That is just the cost of doing business.”  Absolutely.  No question about it, these are examples of the cost of doing business.  In order to stay in business, in order to be able to provide the services people want, those costs must, without exception, be built into the price of the service.  Back in the early 2000's I tried leaving corporate IT and running my own service to small business and residential customers.  While I loved the work, roughly a third of my customers openly complained that charging $70 an hour was way too expensive.  They were seeing me as someone who was making $145,600 a year and taking advantage of them.  The reality was that I was making around $9,000 a year.  I failed to appropriately build in all of my costs to my pricing and was charging too little.  Admittedly, I also really failed very badly at marketing and clearly did not understand my market either.  However, when cutting health insurance still did not keep me from imminently failing to pay the rent on my apartment I knew it was time to close shop and go back to corporate.  And so, it is my sincere hope that by openly talking about the cost of doing business everyone on both sides of a transaction can fully appreciate that they are getting an equitable deal.