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Smart Studio Pricing
CHARGE OR RETREAT
As the old saying goes: If you don't bet, you can't win. But to bet, you've got to have the bucks (or the credit line) to take the risk. To have that luxury, you have to be profitable. To be profitable, you have to charge what the market will bear. Otherwise you have to retreat from opportunities, accept the fact that you are an “also ran,” and settle in with the average people who just want to keep their head above water and stay alive. No growth, no leadership in your market niche, no nothing. What a drag!
BASIC PRICING POLICY
To remain profitable, you must know for certain what maximum amount may be charged for any given service that you or your facility performs in your recognized geographical business niche. By maximum, I mean the amount that won't cause your major clients to pursue the same services with another facility. You should also determine how low a price you must charge to be certain you get the particular business contract you are pursuing and still make a profit. Pricing under your direct-plus-fixed overhead costs is certain suicide.
This price range for each of your facility's services should be researched at least every 6 months in order to stay current. How to do it? Start with collecting all of your competitors’ price lists. You may be surprised at the difference between their rates and yours. Talk to your major clients and their accounts payable personnel. They are the best source for information about what your competitors are really charging for like services, as opposed to what their rate sheet says. All it takes is for you to become a little aggressive and ask the question: “How much does competitor X charge for such and such a service?”
Take the client or accounts payable personnel out for a meal. They'll be pleased with the attention they don't normally get from other vendors. They should give you information freely because it is not really confidential and is readily available from numerous street sources. The key point is to identify any sources of information that can help you make better decisions for your company. You can then afford to take some chances, look into new markets, cultivate new customers, and install the newest equipment that your clients demand. Grow with the industry.
PRICE ELASTICITY OF DEMAND
Today, in most global locations, the major facilities are very busy. In order to maximize profit, the basic business concept of “price elasticity of demand” comes into play. Simply put, it is the price that the market will bear. In our case, it is: “How much can we charge and still keep the important clients?” That is, if you ever have more clients wanting to use your facility than you can properly accommodate, the most profitable answer for you may be not to expand, but to raise your prices. It will drive the low-end clients to the discount facilities, but your best clients will stay because they know you are still competitive (and besides, they love the great way you treat them—they are comfortable and don't want to move). As long as your pricing is not a significant amount more than the available competition, they know they will not get any flack from their bean counters about paying a little bit more to stay where they are.
Remember, the best of anything is expected to cost more. In fact, in certain situations, if the charge for a particular service is less than expected, the immediate reaction, many times, is that there must be something wrong (or inferior) about the service, or the price would not be that low! Think about it.
INNOVATIVE PRICING
They say “pioneers get the arrows,” but someone has to lead the charge. We call these industry leaders the “Influentials.” They are the facility owners who will gamble on the newest innovations in industry hardware or software. If they guess right and their purchase attracts clients, they get the benefit of “innovative pricing” and significant profits. If they guess wrong, they have previously determined, hopefully, that they can “take the hit,” survive, and move on to fight another day.
A good example of innovative pricing is the Sony 3324 digital multitrack tape recorder. When it was introduced in 1982, it cost around $135,000. This was almost twice the price of a top-of-the-line Studer analog 24-track recorder, and almost as much as the 3M 32-track digital tape recorder that had been previously released. A big gamble at best. With a small down payment of 10–15 percent you were able to lease the machine for around $4,500 per month on a 3-year closed-end equipment lease (see 25).
The 3324 immediately became popular but, for the aforementioned reasons, most facilities were unwilling to spend that much for a tape recorder that might just sit in the corner and not cover its cost in additional revenue. As a result, the 3324 became a very successful rental item at $1,000 per day. As an incentive for it to be used on projects, clients were charged a 4-day week (3 days free, which reduced the price on a 7-day basis to under $575 per day) and/or a 3-week month (which reduced the cost to under $400 per day in most months).
From a fiscal point of view, the owner of the machine was into profit on the fifth day of rental each month. At Record Plant, even with several machines in inventory, we averaged 12 rental days per month per machine. This revenue yielded a profit almost double the size of our “at risk” monthly lease payment of $4,500. In addition, at the completion of the 3-year closed-end equipment lease, we were able to purchase the machine from the leasing company for a final balloon payment of around $13,000. We would then sell the machine on the open market for $60,000–$70,000, depending on its condition (much like a used car) for an additional profit of over $50,000. Now, that is audio recording for profit!
VARIABLE PROJECT PRICING
Early in your career as an innovative recording industry entrepreneur, you will discover the art of variable project pricing. What we mean by this is an hourly or daily rate that is reduced in proportion to the amount of time firmly booked by your client. For example, if your price list offers “Studio A” for $100 per hour, you will probably be able to give a client a “lock-out” rate (no other client will be booked in that studio at any time during the lock-out time period) of $1,000 (normally the cost for 10 hours). As an additional incentive, the client will not have to pay overtime labor charges until he or she has worked a minimum of 12–14 hours. From the client's point of view, if you give a “14-hour lock-out,” the hourly rate is now $71.43 per hour. Everybody wins. You are assured of $5,000 in revenue for that room that week, and your client receives a significantly lower hourly rate charge.
The “project” part of the equation is using the same strategy, but negotiating a longer time period at an even lower rate (we used to offer the incentive of “work six consecutive days, get the seventh one free” for a minimum lock-out booking of one month). If you can be assured of, for example, 4 weeks of solid lock-out booking in Studio A, you should sleep a lot better at night. Your client is happy because he or she has 4 weeks to complete the work at a fixed time cost for all services. Again, everybody wins.
RE-RENTAL PRICING
The audio equipment rental business is very profitable. In the major markets, pricing is always much the same among the top companies. The only differences are equipment condition/reliability, on-time delivery, and sufficient availability to satisfy the market's needs. If you are not in the rental business, but have extra desirable equipment that “sits on the shelf” some of the time, you might want to consider a strategic alliance with one or more of the major rental companies in your market at minimum risk to yourself.
The re-rental business means advising these companies of the availability of desired equipment. If they need it for one of their clients, they will pick it up and redeliver it to you at the end of the gig, insure the equipment for the time it is off your premises, and bill and collect from their client. You bill them for 50 percent of what they charge their client for the use of your gear. When their client pays them, they pay you. You may even be able to increase the percentage you receive from them if you take payment as a credit against future rentals for your facility instead of cash. The rental company may also give you an extra discount for rentals you need from them for your business as an additional incentive to have this arrangement with them. When you consider the various combinations, you can quickly see all the possibilities for receiving additional revenue (which is virtually all profit, since you already have the equipment in your inventory) at no additional cost to you. Again, everybody wins.
Spoil your clientele and they will spend more for the same service. Look to the hotel industry or the airlines as an example. If the client's budget can afford a suite or business class, why should he or she stay in a low-cost hotel or fly a discount airline? The increased price for a higher quality of service attaches to their status. It is what they consider “normal.” But, you must deliver by providing them the unique quality of services, working environment, and equipment that they have come to expect as part of their professional success. It is called apparent value—what they believe it is worth and what they are willing to pay for it.