The Business of Being Creative

"Package" Does Not Equal Custom

I Twittered a few days ago that I am on a mission to wipe the word "Package" from the vocabulary of every creative business.  Add to that list "Inventory", "Offerings" or any other descriptor that denotes a standard grouping or bundle of services.

I understand the impulse and desire to create an easily identifiable structure for clients.  I am sure your thinking goes that if they know what you offer, then the better chance you will land the right client.  Couldn't be further from the truth.

At Engage '09, Carly Roney, Editor-in-Chief of The Knot, Inc., discussed The Knot's study on wedding industry trends during the economic downturn and which vendor group was hardest hit as wedding budgets shrank.  Wedding planners were far and away the worst off category.  Carley did not go into detail as to why, but did say that brides felt the planner was most dispensible (as opposed to photographers who they felt were not).  In seeing so many planners sites with similarly bundled services (i.e., day-of, middle-tier and full-service), I understood what the statistics bore out -- the sea of sameness reduced THE most subjective, high touch creative business out there to a function of price.  All else being equal, who the client goes with is who will give them the best deal.

Just so sad to me.  In America, we do not have royalty and, therefore, no ultimate standard to which we can aspire.  Major life events, weddings in particular, are meant to set our own standard for our lives.  Essentially, those in the wedding business are tasked with making that vision a reality, hopefully BEYOND the couple's own vision for themselves.  When you talk about what you do in terms of "Packages", "Services", etc., you debase the connection you as an artist need to establish with your client and make it all about your ability to accomplish tasks.

Will it take more work to explain all that you do to every potential client?  Yes.  But the point is to communicate directly with them and establish a connection.  Will you waste a lot of breath on the wrong clients?  That is up to you.  If you don't define who you are and what your art is truly about, then yes.  Go all the way there, without apology or concern for your competition, then no.  Be an Eventiste.

Industry standard offerings belong where the underlying product and/or service is the same: your cable TV provider, utility or cell phone service. They have no place in creative businesses.

Case Studies: "The Flip" and Palm

Today, Pure Digital Technologies, the maker of the "Flip" video camera announced that it was being sold to Cisco Systems for $590 million.  Since its introduction in 2007, Pure Digital has sold over two million Flips for between $150 and $230.  Also today, Palm, the maker of the Palm Pilot and other similar devices, announced that it lost $95 million for the quarter, its seventh consecutive quarterly loss.  Sales at Palm for the quarter ending February 28th were $90.6 million vs. $312 million for the same period in 2008.

Oh the lessons to be learned.  When it was introduced a decade ago, the Palm Pilot was revolutionary.  Having so much information at your fingertips was unheard of.  Palm dominated the market for a long time.  Then Blackberry and Apple built a better mousetrap by making the focus connectivity.  Palm didn't get it and became the dinosaur it is today.  The internet made information a commodity that supports connectivity, not the other way around. 

Then look at the Flip.  Nothing new about it.  How many camcorders and even cellphones do what it does better?  And the software -- there are a host of other video editing applications on the market.  Yet in 2 years, Pure Digital was able to sell over $300 million worth of the little guys.  Why? Because Pure Digital realized that most of us don't want to be Steven Spielberg, we just want to make sure we get quick video of the family that we can send along to the rest of the family right away.  Flip customers get only what they want for a reasonable price.  Sold.

What Flip understands and Palm missed is that it's all about what the customer really values and providing it to them.  Palm teaches us that there is no such thing a perpetually successful business model.  Certainly, the Flip will (and already does) have competition.  How they will be able to innovate and expand with Cisco's help will determine its ultimate success in the marketplace.

Just don't make the mistake of thinking you have to find out what your clients want.  They don't know.  What you have to do is figure out is what they value.  Once you know what your clients value, you can build your business around providing that value.  Blue Ocean Strategy for sure.

The beauty of creative business is its intimacy with the customer.  For the most part, no one needs your services, you get hired just to make someone's life richer, even if only for a day.  And it's all subjective, what lifts one client may do nothing to another.  But most of you are so close to your customer that you know what makes most of them happy just by their expression.  That is your value proposition.  Strip the rest of your business away from your value proposition.  You can still do it all if you want to, but only if the value proposition is front and center.  For the most part, clients will pay for what they value, enough for you to earn a proper return.

Just don't forget about Palm -- what is valued today may not be tomorrow.  If you put your ego aside, you will be able to adapt and shape your business accordingly for a very long time.

Effects of Pricing Pressure

I have talked about what portion of your business faces the most pressure in this economy in my first post on pricing.  However, this brings up another point -- what is the effect of all of the new competitors entering the market?

The answer is not good for those of you in the service side of creative business.  Service side would include event planners, photographers, videographers and designers (interior, event and graphic) to name a few.  Those of you that rely heavily on providing products which require a significant capital investment to get started are a little safer (but not much).  For purposes of this post though, I am going to focus on service providers.  

For service providers, there are practically no barriers to entry to your field.  All you really need to get going is a phone, a computer, a little bit of know-how and a lot of moxie.  For people recently unemployed, your businesses offer an attractive opportunity at being an entrepreneur.  Arguments can be made about the value of experience and reputation, etc.  However, the truth is that it is (and will continue to be) very hard for potential clients to tell the difference between providers, especially in the middle tier (i.e., not the absolute highest or lowest end).

Your service will become increasingly commodotized, meaning that, all other things being equal, potential clients will base their purchasing decisions mostly on price.  The more price sensitive a potential client, the harder it will be to create value for them in areas other than price.  This has the effect of resetting the market permanently lower, posing a large (and lasting) threat to those of you who have been in business for a while and do have overhead.  New entrants, who have little or no overhead and are getting business, are making money.  It is just that they are willing to make a lot less than many existing competitors.  Long term, some of the new entrants may go away, but a lot will stay.  More competition, based heavily on price, will reset the market for your services lower -- permanently.

So what to do?  Try to put a price on your experience.  If you have been in business for a while (i.e., 4+ years) with any sort of success, you have developed and nurtured professional relationships with vendors, associates and related businesses.  These relationships are what is most valuable today, if only because your new competitors don't have the history with these folks that you do.  Figuring out what you can provide to your industry relationships to help their businesses and ensure referrals is helpful, but will likely not abate the pricing pressure you face.  Instead, why not form partnerships with vendors, associates and related businesses to create new offers for both of your clients that highlight the value of the business experience each of you possess?  For instance, a graphic designer getting together with a planner to come up with a cost effective way to create a logo for clients.  If you can get potential clients to pay for this new service, you can not only get paid but may be successful in demonstrating the value of your experience vis a vis your newer competition.  And, if you are able to do that, you will likely be more effective in resisting pricing pressure from new competitors for the services you both offer.  In the end, differentiating your brand in a meaningful, tangible way (i.e., other than just by saying you are different or have more experience) will be the key to lasting relevance in today's marketplace. 

More on Pricing -- Nuts and Bolts

I often have to figure out what to charge for any particular good, service, license, sponsorship, etc.

My general approach to pricing is to start from the top down as opposed to cost plus markup.  This is really spelled out in Blue Ocean Strategy -- one of my absolute fave business books.  Basically, it is the difference between what do you want to make (top down) vs. what can you make (cost plus).  

Creative businesses either 1) provide goods (florists, stationers, lighting professionals, rental companies, bakers, etc.), 2) services (event planners, musicians, makeup artists, hairdressers, etc.) or 3) both (event designers, interior designers, graphic designers, photographers, etc.).  

Those that provide goods typically command the lion share of the budget for any particular project, BUT they also have the most risk associated with them (ask any florist whose flowers died the day before the event) and the highest fixed overhead (need a workspace, machines and staff).  Those that provide services don't usually have a lot of fixed overhead (most only need a phone and a computer), BUT have to manage their and their staff's time effectively to earn a proper return.

So my rule of thumb is that those providing goods need to have net margins of between 15% and 25% depending on the size of the business.  Those providing services between 45% and 65%.  If your business has been around a while and you are not achieving these numbers, time to take a look at your pricing.  Practically, if you are a florist and you are doing $500,000/yr. in business, you should be profiting at least $75,000 after all is said and done (including your salary).  An event planner doing $200,000/yr. should be making at least $90,000.  For those with goods and services, the rule is the same and the percentages should shift based on the composition of goods and services in your business (hopefully, you are working to make more of your business about services).

I love multiple revenue streams and vertical integration of a business (an event planner owning a rental business) and it should be the goal of every business, creative or not.  The more diverse your revenue streams the easier it is make it through the tough times we are in.  If you don't have multiple streams yet, no time like now.  However, I would only be looking to add a service business to any existing creative business.  The reason is simple -- if it works, it will be very helpful to your bottom line and, if not, it won't hurt the existing business that much.  I don't like adding a goods business unless it can IMMEDIATELY be profitable to you.  The drag on cash flow will often overwhelm your core business before it gets a chance to help your bottom line.

Lastly, in today's economy, the temptation to find volume through referral agreements, set rate contracts and the like is enormous.  Please resist.  You will only wind up adding to your fixed overhead and will probably not make any more money.  More important, these deals will also divert your focus from your core business (and brand) and the new (and far more profitable) opportunities that await you.  Start a new service instead.

Pricing

In today's economy, the temptation to reduce prices to keep your business going must be, to many of you, the bitter pill you think you have to swallow.  In some cases, you are right, but mostly you are not.

In every creative business, there is a commodity component and an artistic component to what is provided to a customer.  The problem is that many of you try to get paid for the artistic component through the price of your commodity.  Several quick examples, a florist doing a line item proposal for a wedding, a stationer charging a per piece fee, an interior designer charging a commission on items selected for a project.  To a point, the market will accept a difference in price of the commodity based on your reputation and perceived quality of your work.  However, only to a point -- would your clients pay $10,000 for an item your nearest competitor charges $3,000 for?  Probably not.  In the economy we are in, it is the commodity that will face the most price pressure and rightly so.

If you can (and you can), try to figure out how you can price the artistic component of what you do separately.  You will still have to price your commodity (i.e., your florals, stationary, etc.), but why not be transparent -- say materials and labor plus a reasonable markup.  And then focus your energy on earning a proper return for the true value of your business -- you and your art.  After all, this is what customers are really paying for and what is most subjective in the marketplace.