Monday, April 8, 2013

Pie, Profit, and Pricing

by  Kris A. Kramer
[Editor's note: You may notice some words in bold type throughout this post.  See this earlier post by Kris to understand the method to her madness.}

Since tax season is upon us, it would be a good time to write a little about pricing. If you are selling your PMC creations, you have priced them. If you received money for your work, then you have income to report on your tax return. If you are reporting income on your tax return, then you are likely accumulating legitimate business expenses (deductions) associated with this income.  

I’ve noticed that there is a natural evolution for artists, PMC artists included. When one first begins to sell one’s wares, he or she tends to undervalue time and creations. I appreciate this period in an artisan’s career no matter what the medium, as it often marks the most creative, authentic, primal, and truly artistic phase of one’s life. Perhaps basic needs and the practicality of life kick in, as most of us become savvy on how to make a living or gain some sort of monetary rewards from our art.

Articles written on pricing abound. A Google search “How to price art” yields about 1,790,000,000 results in 0.12 seconds.  How could I offer a bit of new information on this subject?  I’ll put a picture in your head.  Think of your favorite kind of pie, then cut it into three pieces.

  • Piece #1 is Overhead dollars. Overhead includes things like mortgage or rent on studio space, electricity, insurance, network or Internet expense, phone expense, and more. These are fixed costs and costs that do not change if you make one PMC creation or hundreds.   
  • Piece #2 is Production dollars. Production costs vary (variable costs) with each metal clay piece and the number of pieces you make. In this category I put Cost of Goods Sold (metal clay, cabochons, etc.) and Production Labor.  I pay myself $15 per hour, the standard rate in my part of the world (the state of Montana where people sacrifice rate of pay for lifestyle.) Here is where you get to use your PMC Time Log information.
Any other not-so-clear costs you might incur need to go into Piece #1 or #2. Which piece of the pie, #1 or #2, you put them in matters less than the consistency with which you place them. (See below for where I put these.)  Examples of these costs include donations (you can deduct materials only), education, small tools, bank or credit card fees, online-store fees, hang-tags, marketing costs, cost of shows and displays. Note that pieces #1 and #2 may not be equal in size; in fact, let's hope they are not.
  • Piece #3 is Profit dollars. Piece #3 dollars equals Piece #1 plus #2 divided by two. Yes, you get to make a profit.  This is the portion on which you pay taxes.  If you need to adjust your prices for what the market will bear, up or down, this is the piece of pie you adjust.
Piece #1 dollars plus Piece #2 dollars plus Piece #3 dollars equals the wholesale price for your item. Two times wholesale equals the piece's suggested retail price. These should be consistent wherever your pieces are marketed and sold.

The variety of inventory systems for businesses puzzles me. If I ever need to develop a complex record-keeping system, I will learn about them out of need. I’m swift to complain about complicated tax returns. I wish the IRS could make one easy form for every small business, which it has, IRS Form 1125-A Cost of Goods Sold. While this form continues to baffle me, I learn a lot from it. I learn a lot each year from my tax return and my accountant, too. If you want to study up, learn about legitimate business expenses, and/or do your own tax returns, then here is a link to IRS Publication 334 (2012), Tax Guide for Small Business.
What can I give you that lets you know I’m trying to keep this simple? That I’m really trying to help? Here is how I connect the dots between my prices with my taxes. Basically, from the income I make on sales, I have two kinds of deductions— pie Piece #1 Overhead a/k/a all other Business Expenses and pie Piece #2 Production a/k/a Cost of Goods (materials and labor). This is roughly how my deductions are grouped on the pages of my tax return. This is how I have my budget categories set up in my bookkeeping system. At year’s end, I print a report and transfer figures to the return.

There is one more consideration in pricing, which is in itself a way to determine your price. Look around at comparable PMC artwork and note the selling prices. Align your prices with others. My wish here is that everyone realizes the market value for all of us is brought down by PMC artisans who are casual about pricing or who still undervalue their time and materials. My desire is that we continuously survey what is out there in the market. My dream is that we assist each other in the valuation of our medium and our work so that PMC becomes even more appreciated and valued for its unique design capabilities and as the commodity that each precious metal truly is.

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