One business model for your art business could be producing and selling a series of prints, photographs, sculptures or multiple copies of any artwork. The advantage of this model is that it allows you to leverage the work or designs you have created and achieve some level of efficiency and predictability in producing the copies. An edition can be either limited or unlimited in the number of pieces produced. Before you embark on producing and selling multiple copies or prints, it is a good idea to know what your costs will be and how you should price the works so that you will make a profit.
There are a couple of ways to determine your project profitability:
- You can go ahead and produce an art project and sell it, then add up all of your costs and subtract them from your project revenue and whatever is left over is your profit.
- You can take more of a planning/estimating approach by determining what your anticipated profit will be before you start the project. If you have already created your project and know your costs then your pricing becomes the most important thing in determining project profitability.
Identifying your costs
In order to properly plan the profitability of an edition you will have to keep good records and your accounting system should be set up so that you can easily identify your costs. If you need help ask your accountant or bookkeeper. If you are starting a new project take some time to identify your costs. Try not to leave out anything as this will be crucial in determining your pricing, breakeven, and project profitability. After a while you should get pretty good at identifying your costs, it just takes a little practice and attention to detail!
Some basic concepts about costs
The cost of producing art or any product or service for that matter consists of two basic types of costs. These costs are called fixed and variable.
Fixed costs don’t change whether you produce one piece of art or hundreds. They also can be categorized as overhead. It is important to note that all costs can vary even fixed costs if the time period is long enough. The normal time horizon that is used to identify fixed costs is a year. The amount of fixed costs you apply to your project is generally based on how long the project takes to complete. If the project takes a month to complete then you would apply 1/12 of your annual fixed costs. If the project takes 6 months to complete then you would apply ½ (6/12) of your annual fixed costs to the project and so on.
Some examples of fixed costs:
- Rent and equipment leases
- Loan payments
- Insurance, taxes and maintenance
- Your website and other online fees and expenses
- Utilities, phone, internet, etc.
- Cost of originals or masters
- General advertising or marketing
- Depreciation expenses on equipment
- Labor not associated with any particular product such as administrative salaries
These are costs which vary by the amount of art or products you make, they are also referred to as direct costs. If you don’t produce anything these costs will be zero unlike your fixed costs that don’t vary with the number of pieces produced. Typically these costs move in a constant way, if you produce two items then your cost will be twice that of producing one item and so on.
Here are some examples of variable costs:
- Direct labor – This is the cost of the labor that actually went into the making of the product
- You will also need to include any payroll taxes or employee benefits
- Materials and supplies
- Sales commissions and distribution costs
- Packaging, shipping charges and postage
- Advertising or marketing directly attributable to the product
- Other components to your projects such as frames, etc.
Putting it all together – Break-Even Analysis
Once you have gathered the necessary information on both your fixed and variable costs for an edition, you can employ a simple yet powerful business tool called a “Break-Even” analysis. The concept is fairly straight forward with the analysis as it tells you how many pieces in an edition you need to sell to cover all of your costs or “break-even”. Suppose you sell a piece for $10 and the costs you have into the piece (variable costs) are $3 then your profit per piece would be $7. But wait, the $7 profit per piece only considers the direct or variable costs. To determine the true profit of the piece we also need to consider our fixed costs or overhead. The $7 profit goes towards covering these fixed costs and is said to “contribute to fixed costs”. When all of these fixed costs are covered you reach a breakeven point after which the cumulative $7 profit on each piece sold becomes your true profit.
Of course you will probably want to do more than just break-even. The Break-even analysis can do much more than just determine your break-even point. Some of the things it can do are to help you test different scenarios or “what ifs” like:
- If I raise or lower my price, how will this affect my break-even point and the overall profitability of the edition?
- If it costs less or more to produce a piece, how will this affect my break-even point and the overall profitability of the edition?
- If my fixed costs or overhead increase or decrease, how will this affect my break-even point and the overall profitability of the edition?
A Break-even Analysis example
A break-even works like this: Take your variable costs associated with producing an edition and subtract them from the price at which you will sell the product or project. The amount left over is then applied to covering your fixed costs associated with the edition. The break-even will tell you how many pieces you need to sell in order to cover your fixed costs or break-even. Here is an example:
Selling Price for a Limited Print = $150
Variable Cost for a Limited Print = $10
Contribution to Fixed Costs (Selling Price – Variable Cost) = $140
Fixed Costs Associated With Producing Limited Prints = $2800
Number of Prints Needed to be sold to Break-even (Fixed costs divided by Contribution = $2800/140) = 20
The general formula is Total Fixed Costs per Unit / (Unit Sales Price – Total Variable Cost per Unit)
Experiment with changing your sales price and costs to see what effect they have on your breakeven point. Before too long you will get the hang of it and you will become better at planning your business and your profits! Use the worksheet to determine the breakeven points of your products and projects.
The bottom line(s)…
The Break-even Analysis can be a powerful tool to help you plan and price an edition and you should take advantage of it. One of the neat things about this analysis is that you can apply it to other projects or even calculate a break-even for your whole art business.
Here are some resources to help you learn more about break-even analysis:
Download the break-even Analysis Spreadsheet