5 Aug 2010
ROI – Do We Think Like Business People?
I had a bit of an online heated discussion with a fellow artist friend recently. It was via emails, so we all know how things can be misunderstood with a chain of emails and we are both Israelis, so it is in our blood to say what we think first, then try to win our case or meet somewhere in the middle. I want to share with you some of my thoughts about ROI and where do we, as artists, fit in. Part of me has some notion about what I think is correct and what is not, but in most parts…I need your advice! So here we go!
ROI, or Return On Investment, should be the ABC of every business plan. The math should be very easy – how much you spend on any given project should always be lower than how much you make from that project. Therefore you earn money. Isn’t that what the bottom line of business is?
So, if we take an example in our world, let’s say our next project is to sell in an outdoor art show (did I say I will not speak about this again?) . We have many expenses, including show registration fees, setup costs, vendor fees, the cost of the art we make especially for the show, framing, and other materials like packaging, marketing materials, transportation to and from, accommodations, food, etc. The total of all these expenses is our cost. Now we want to make some money, right? So if we sell enough art to break even, we don’t lose any money. But if we sell even more art, we covered our costs and make some earnings. Quite simple.
Now, there is the future earnings potential – clients following up on commissions or to buy some art at a later date, gallery owners find you and want to represent you at their venue, your resumé with that show on it gives you future entrance to other shows and galleries, and more. It is really hard to measure these against the specific investment we put in the initial project, the art show. So, we could say that some portion of our spending in the show goes directly to “General Marketing” of our art business, rather than directly to our show.
The percentage of this portion depends on how new you are to the business of selling art. Usually in the beginning, you have to spend more than later on when established. But the marketing budget is directly calculated from your net sales revenue, usually starting with 10%, then going down as you are more established. To me this is still tricky, mainly because in the beginning you have to sense your market…how marketable your art is. And with art I find it quite hard to know.
Anyway, assuming some portion of your project’s cost is dubbed “marketing expenses” for your business (not specifically for the project in hand), then we take that number off the project’s expenses to get to our project’s ROI. So far so good.
Here comes my point of argument with my friend. Since I don’t know if I will sell enough art to make money or even break even, at least I want to have the potential to do it! And not only from an art show, but from any opportunity. So if I submit a painting to a juried art show – if accepted I have to pay participation fees (on top of the jury fee) and the show will also take their commission if my piece is sold. I want to make sure that at least I have the potential to make some money from that specific opportunity. If my art is sold for $250 and participating in the show costs $20 to be juried, another $150 to be part of the show and it will cost me another $30 to ship the art to the show or to schlep it myself over there (cost of transportation/gas) – then the gallery will take 40% commission when selling the piece — I basically lost $50 (not even taking into account the cost of making the art and framing it, assuming I had the piece from previous projects).
True, it will be great to have on my resume. And true, this will go into my future marketing.
But still, don’t I have to think about ROI for every project I am getting into? I thought I should. My friend thought I shouldn’t.
I think most of us don’t think in these terms. We just do it. We are artists, thinking with the right side of our brains. Creativity is all that we care for. But at the bottom line, we have to think business to make it a real success.
That’s what I think. What do you think?
Note: The investment world has some complicated scientific formulas for calculating ROI and comparing different investments to each other using these calculations. I have tried to simplify things here for the sake of discussion. By all means, I am not a financial adviser or accountant who can help you make these numbers work. I need one myself…
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