Overheads and pricing

If you want to make money (or at least not lose it!) selling your work then you are running a business. In the past we’ve talked about how to make money and looked at two approaches to pricing your items, but there is one factor that can be more complicated than people are often prepared for: Overheads. It certainly caught me off guard!

Overheads are costs that you need to pay in order to run your business, but aren’t necessarily tied directly to making a specific product or service. These might typically include things like:

  • Rent for a space you use
  • Power
  • Internet
  • Phone
  • Tools and equipment
  • Ongoing subscriptions or regular services
  • Accounting or legal costs
  • Marketing

Each of these things can, in a lot of cases, count as an expense for your business – even if you’re not GST registered or set up as a sole trader or an actual company. That means that the GST you pay on these items (15%) can offset the tax that you have to pay on any income. This is worth doing!

Side note: The easiest way to keep track of all of this is to run all of your creative ‘stuff’ through a dedicated bank account (probably with its own debit card). I managed to talk my bank into putting a business spending account on the ‘CHQ’ account of a debit card, and my personal spending account on the ‘SAV’ account of the same card. This way I can set up online or regular payments for business on that card, and also still use it for business or personal items at shops day to day.

Understanding your overheads is really important when in comes to pricing your work also, as this is where the money is coming from to cover these (very real) costs.

Here is a simple way that you can figure out (and cover) your overheads:

  1. Decide the ‘ideal amount of work’ you can reasonably expect to do in a year, or a month. You might count this by: the number of items you can make and (hopefully) sell; or the number of hours or days you will spend working on the business. For me making music, I think about it in terms of how many gigs I can safely assume I’ll be playing (1-2 per month = an average of 18 per year). Put a number on it relative to a month or year (15 items/month; 1 every two weeks; whatever).
  2. Write down all of the actual costs that you have to pay across a year (or month) that aren’t directly tied into the cost of making your work. Add them all up to calculate your Total Annual Overheads. This is worth thinking about more broadly, and getting the views of a small business accountant (or a friend who is an accountant) if you’re unsure what you can include. (This post on ‘what can be a business expense’ is also very helpful). For my ‘musician business’ here are some of my overheads:
Overheads Paid monthly Paid annually Annual cost  Notes
Phone  $39.00  $468.00 <- = $39 x 12 months
Music room rent  $200.00  $2,400.00 <- = $200 x 12 months
Gear repairs  $300.00  $300.00 Rough estimate 
Printing costs  $200.00  $200.00 Just in case
Streaming service  $14.99  $179.88 <- = $14.99 x 12 months
Website costs  $145.00  $145.00
Gear hire  $130.00  $1,560.00 <- = $130 x 12 months
Contents Insurance  $130.00  $130.00
Total annual overheads:   $5,382.88

You’ll see that I pay for some things once a year – like insurance – as it works out to be cheaper in the long run than paying monthly. I do this whenever possible for things that I know I’ll want for a full year. What I haven’t included in here are big ticket items that I’ve bought in the past, but this is where you could include things like Lay-buy or Hire-purchase costs, or even a set savings target for a new piece of equipment or your own work that you want to make.

3. Divide your total annual overheads by the ideal amount of work you want to do to. In my case, this is: $5,382.88 per year divided by 18 gigs per year = $299.05 per gig. Now, when it comes to my pricing for a gig, I include this amount as a fixed cost that I factor into my pricing. I actually take it one step further because not all gigs are the same. I assume a ‘typical’ gig is 3 hours, so I factor in $100 per hour of performance as a fixed cost to cover my overheads before even thinking about time spent on the gig and all the other ‘obvious’ costs I need to cover for a gig.

When I first did this overheads exercise I found out that I was actually often losing money on gigs! I had been pricing them by simply adding up the variable costs involved in a gig (time, travel, accommodation) and calling it a day. Breaking it down into a fixed cost that is covered in your pricing can be done it lots of different ways, as long as it based on what is likely to happen in the real word. In reality I perform more than 18 gigs some years and less other years, but because I track all of my numbers it all works out in the long run. For you it might look like adding a few dollars onto your ‘hourly wage’ rate that you pay yourself; or a fee for each item or batch of items you make. You might have to start by looking back at your sales track record, or starting to keep records so that you can figure out these numbers for yourself. It’s never too late to start making money.

When I upped my fees to cover my $100/hour overheads I lost some customers, which was terrifying (to be clear, I literally just added an extra $100 to the ‘hourly rate’ in my invoices and didn’t mention overheads anywhere). But I fairly quickly gained some new customers, and they were happy to pay a higher rate for a more premium experience – which in turn were more fun gigs for me! Learning what made the new customers book me gave me the confidence to jump to a value-based approach to pricing rather than cost-based (which we recommend you should also do). After doing all of this, I started to actually survive off my music income. Happy days!

Calculating your overheads doesn’t haven’t to be a big job nor do you need an exact figure – close enough can be good enough. It can take as little as 20 minutes to do – especially if you can look back through your bank statements to get some rough real-world numbers.  It’s totally worth it.

And you can do it right now on the back of some scrap paper. You might be surprised what you learn…

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