Business for Artists: Cost, Price and Value
and how to make more money when you understand them.
Making a living with art means doing business, so we’re going to look at some business fundamentals. We’re going to break down and introduce concepts gradually and clearly so if you’re usually overwhelmed or intimidated by this stuff, you’re in good hands.
Most of this information is repackaged from this great video from Chris Do @TheFutur, recontextualised for an artist audience and with my own twist. Give the source a watch if you have an hour though. We’re going to go over:
- The difference between Price and Cost
- Where Profit comes from
- How this all relates to Value
- Using this information to better your financial situation.
If that sounds good to you, strap in and we’ll get started.
Cost vs Price
They are often used interchangeably, but mean quite different things. Cost is what a product or service takes to produce. This is split into Time (=labour) and Materials. Anything you need to produce art — pens and paper, paints and canvas, your computer and tablet, a studio space / rent if you work from home, an internet connection, software subscriptions — are costs of doing business, as is your labour.
When people ask “What does this cost” they actually mean “what is this going to cost me to buy” rather than “what did this cost you to produce”. As we’ll see now, those are very different, and for good reason.
Price is set by the seller (you). You need this to be higher than your Costs or else you’ll be losing money conducting normal business. If you sell prints for $30 but they cost $40 to make (maybe you do something labour- and material-intensive, like add little gold foil flourishes by hand to each one) you’re losing $10 every time you make a sale. So you want to take in at least that much right? You take all your costs into account and you work out you can sell the prints for $40 sustainably while compensating yourself adequately for labour.
However that doesn’t account for abnormal business, and that’s where Profit comes in. Don’t let that word scare you, even if it might have a bunch of negative connotations (greed, exploitation etc.). If you don’t charge anything over what it Costs you to produce, if anything abnormal happens — your computer breaks, a client can’t or won’t pay you, delays in a project, you get sick or injured — you won’t be able to afford to keep producing, or in the worst case, even day-to-day living. You’ll have no safety net.
This is mainly where Profit comes from: your need to absorb Risk. The rest come from the Value you can provide the customer, but we’ll get into that later.
For example, a company will charge a client many times what an employee get paid in salary for their labour. They may charge the client $120/hr while paying their employee $40. This is because 1) a company has way more costs than an employee (office space, insurance, equipment upkeep etc.) but 2) they are assuming all the risk. The employee gets paid the same amount no matter what the company is going through, while the company has to charge enough to build up a buffer and not have to let people go during a slow season. They charge more in the up-times to better weather the downs and smooth out the bumps so their employees get a constant income. There is a lot more to it than that, but it is a big reason.
You could also take the example of investment. If you put your money in the bank on term deposit, your return on investment is going to be about 1–2.5% of what you put in depending on factors like your country and how long you lock it in for. The return is low because the risk is low — the possibility of losing money is almost zero.
On the other side of the spectrum is Venture Capitalism — investing in starter companies with the hopes of them being the next Twitter or Amazon and getting a windfall of 10,000+ *times* what you put in. This almost never happens — the risk of failure, and losing all your investment, is very high. But because the potential reward is millions of dollars, they still participate. One win can exceed a hundred losses. High profit from high risk.
So to summarise, Price should cover Costs, plus Profit to account for Risk and estimated added Value.
While the seller sets the Price, the buyer determines the Value to them. If I try and sell my hat for $30, for one person that might be way overpriced because they can buy a new hat with the same function for $10, and my one is used. To another, perhaps my hat is exactly what they need to complete their Billabong Fall/Winter 2013 hat collection and they’d be willing to pay $50 for it, so in their eyes it’s a bargain. They value the same item very differently and judge the cost based on that value to them.
In either case, I can’t force a person to buy my hat, I can only set the price and let them determine for themselves whether it is fair. The seller determines the price, the buyer determines the value.
The important thing to note is the difference between these cases. In the first case, the buyer will definitely not make a transaction because they deem my hat to be way overpriced. In the second, the buyer is eager to buy my hat, because it represents much more value to them than the price I set.
When Value exceeds Price, people give you money.
There are many more variables but this is the first hurdle to get over, and no transaction will happen if it isn’t fulfilled.
Where Value Comes From
So where does this internal value come from? What can you do to affect people’s perceptions of your product, and value it more highly?
Let’s look at a tale of 2 white T-shirts. If you go down to Target, you can buy a Hanes 3 pack for US$9.99, basically $3 per shirt. James Perse is a luxury brand, and they sell a white t-shirt for US$165. These are, functionally, the same item. They look very similar and are probably about as warm. Why would anyone buy the second one?
Well, it’s made of premium softer cotton from Japan, it’s from a trusted brand which implies higher quality control and better construction = lasting longer, and it might impress some people to know you are wearing a shirt from an expensive brand. You have good taste and appreciate fine things in life, and have the money to spend on them = social currency.
All that is to say, the t-shirt makes you feel good to wear it. Not just physically from the premium fabric (though that helps) but emotionally: empowered, valued, confident.
A 350ml (12oz) can of Coca-Cola is very differently priced depending where you but it from, but is still popular everywhere. If you buy it in bulk from a wholesaler, it can be as low as $0.29 a can. From a vending machine it’s $1.75, and at the cinema the same can is $4.50. What accounts for such different prices while they all seem fair and get purchased?
Each stage has different amounts of value added. A wholesaler is usually inconveniently located in an industrial area, the boxes are dusty and you have to buy a lot at once which is heavy, but at least it made its way out of the factory and is packaged into units. The vending machine’s can has been chilled and is conveniently available, you don’t have to perform any extra steps, you can slake your thirst right then and there.
At the movie theatre though, first they have a monopoly on drinks so if you want the experience of drinking coke in a theatre, you have to pay what they’ve set. Second, it’s a part of the ritual of going to the cinema for many people to buy a box of popcorn and a drink — the movie-going experience doesn’t feel right without it. That usually comes from early memories of the cinema where you’d be treated by whoever you’re going with. Your parents get you drinks and popcorn because they like to see you happy (or $4.50 is a fair price to get you to stop asking). You go with your first boyfriend and he treats you to not seem cheap and make you feel appreciated — and of course gets some for himself because otherwise it’s a bit weird. Maybe you share a popcorn.
At the theatre, people buy the $4.50 coke for the way it makes them feel — appreciated, successful, relieved, nostalgic, or just because they always have and it feels wrong to not.
There’s the secret of true value. The important part is how it makes you feel. This is the underlying reason why people buy nice clothes, or go out to fancy restaurants, go on holidays with their family, or even give money to charity.
It’s certainly the main reason people buy or commission art. The positive emotional reaction is the real value. This works at all levels too: An individual loves the piece they commissioned, an advertising campaign seeks to make the public feel positively about a brand, a multi-million dollar video game or blockbuster movie looks to entertain and engage.
Applying This to Your Work
The better your work makes someone feel, the more valuable it is to them, and the higher the price they think is fair.
This means more profit for you if costs are similar.
An important thing to note is these higher prices are not taking advantage or ripping off. If that value is truly given, that is equal exchange taking place, but with an intangible component you can’t list on a price sheet. It requires a bit of empathy on your part. You may not be the best judge of your art’s value as you’ve been close to it your whole life and are able to see all its flaws, but you’re selling to other people, not yourself. You need to see what value you are providing from their point of view. Again, you can’t force people to buy from you, only set the price, so if they buy at a high price that means they think it is fair, and who are you to question their tastes?
Good questions to ask about your art: Who is this for? Why do they want it — What problem does it solve or what value does it provide?
For example, maybe you specialise in portrait commissions of family members. This often solves the problem of what to buy someone for a birthday or Christmas, and provides the value of a strong emotional reward to both parties — for the recipient, seeing that someone thought their own likeness was so valuable to them they want to put it up on the wall, and for the buyer, seeing the recipient’s reaction to that message.
If you understand this you can focus on getting the likeness and capturing an emotion, since that’s what the clients value most. A fancy background or realistic rendering would make the painting better, but not in a way the client cares as much about. If you are concentrating on giving them more of what they do value, you can charge a fair amount more than someone who paints whatever for whoever and doesn’t understand those nuances.
This is why it’s so important to know your audience, and why trying to target everyone isn’t a good strategy. If you know who you’re providing to, you know what they value and can provide more value to them. Provide emotional experiences specifically catered to them, relieve pain they’re specifically going through. Give them what they need. How to do this specifically varies wildly depending what field you’re in, but understanding it is crucial to success.
Even if you’re only doing work that pleases yourself, being able to evaluate it from an outside perspective lets you know where you can share it, and who to share it with, to be most appreciated.
Hopefully I’ve provided value to you with this article! Now you can apply it to making more money with your art, getting yourself in a safe and happy position doing what you love, and making your chosen people happier with it too.