Author Topic: PRO102: Discounts, Taxes, and Financial Payment Plans  (Read 2992 times)

Mother Roshiya

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PRO102: Discounts, Taxes, and Financial Payment Plans
« on: August 23, 2017, 08:05:25 PM »
Congratulations! You have a willing-to-pay customer who wants a quote for your artistic services! You have your Base Rate Table already figured out, and it's so simple to calculate that number now! But... She's your BFF of forever and that number just seems so high, you're not sure if you have to add tax, and you KNOW she's broke. What do you do??

Welcome to the world of Discounts, Taxes, and Financial Payment Plans!


Okay, first and foremost, I'm going to say this: Don't EVER let anyone pressure you into giving them a discount. If they're not willing to pay full price, and they raise a stink about having to do so, they are NOT worth your time. Don't settle for that sort of disrespect from ANYONE, family and friends included. However, if they are willing to pay full price and YOU want to cut them some slack, go right ahead and do so!

You can offer discounts in a variety of ways, both as currency amounts and percentages. They fall generally into these categories:
Item Discounts are discounts that apply to the cost of a single item
Purchase Discounts are discounts that apply to the total purchase line
Bulk Discounts are discounts that are offered only if you buy a set amount of products
Membership Discounts are discounts offered only to people who sign up for your membership program
Group Discounts are discounts offered to a certain group of people, such as "Friends and Family", "Close Friends and Family", "Military/Veterans", "Seniors", etc.
Royalty Discounts are discounts offered on the upfront cost of your work for someone who intends to sell multiple commercial prints/copies at a profit when they sign a contract promising to pay you royalties (a percentage of the profit they earn)

You can offer as steep or as little of a discount as you want, or you could choose to do "buy one get one free" or other such promotions. Regardless of the discount strategy you choose, I suggest double checking a couple things first, BEFORE you implement them:

First, be aware of how your various discounts and promotions can stack on top of each other. Clients WILL try to game the system to get as close to paying zero/free as possible, and if they can legally get YOU to pay THEM to make art for them, they will do it. So if you're offering 15% Friends and Family, 10% Membership, 10% Military, 20% bulk, 30% item and you match for a 50% royalty discount, and they all are capable of being applied to the same thing, don't just add them together for a fat and scary 135% off! That means YOU would have to pay THEM 35% of the price of the item that they are purchasing! Instead, have a stacking tier for how they'll be applied. For example, add the Friends and Family, Membership and Military together for 35% and take it off (100%-35%=65%). Then take 30% off of the 65% (65*.30=19.5, 65-19.5=45.5%). Then apply the 20% bulk discount (45.5*.20=9.1, 45.5-9.1=36.4%). Then take off the royalty discount (36.4/2=18.2%). Or, alternatively, you can tier it for item(-30%=70%), bulk(-20%=56%), group(-35%=36.4%), royalty(/2=18.2%). Or royalty(50%), group(32.5%), bulk(26%), item(18.2%). Order doesn't particularly matter; they're still going to be getting a STEEP discount of 81.8%, but at least THEY'LL be paying YOU.

Second, make sure you are comfortable with the final price after the discount has been applied. The supply and overhead costs don't have the luxury of scaling down with the discounted price, so the end price has to cover those full costs. The rest of the funds will become your adjusted hourly rate. And if you're trying to make this into a living, an adjusted hourly rate of $2.15/hr~or worse, only making 20ยข off of a $10,000 project that'll take a year to complete~probably isn't going to be worth it.

Third, Royalty Discounts are a type of risk. You are saying "I'm giving you a discount now to a rate I wouldn't consider doing outright without the royalty promise, because the royalties over time could more than make up for it". There is NO guarantee that you will make that money back on your investment. True, if your project gets noticed and does well, you COULD make bank. However, if it doesn't, or the client gets greedy, you could be out the amount of money that you discounted, plus more if you need to get the lawyers involved. This sort of agreement should ALWAYS be backed up with a contract promising you the royalties before you begin the project. Measure the risk and whether or not you're comfortable taking it. I personally only feel comfortable offering this on projects I feel extremely passionate about where just getting it out there is reward enough. This way the royalties that come in are a bonus, not a necessity to pay my bills. Never budget a lifestyle on projected future royalties that may or may not come true!

Fourth, decide if you want to announce the exact percentage that you've taken off, or mask it by making adjusted base rate tables to show them. This is a psychology thing; studies suggest that seeing the "percentage off" sign on an item lessens the perceived value of the item, and addictively trains our brains to only buy when a discount is available, while seeing a fully written price, even if we can see that it is less than the full value, is somehow not subtractive to the value we perceive it to contain. Also, creating value packages where you add more value at a discounted price without using discount percentages, like "one free print with purchase" when you usually only offer a digital file, supposedly heightens the perceived value of the piece. However, showing the percentage on a group discount can make a person happy that you value them so much that you're willing to give them that amount off of the full price, adding value to being in that exclusive group while allowing them to accurately quote what the full price would have been to prospective clients when they make their referrals. The choice is yours.


Whether or not you need to add sales tax, or include income tax in your item's price, or pay income taxes preemptively four times a year on what you expect to make, changes town to town, state to state, country to country, with what type of business entity you're using to sell your products through (Sole Proprietor, LLC, Corporation, etc.), and sometimes by the category of business you're classified as (entertainment, service, graphic design, etc.). Sitting down with an Accountant or Business Adviser is honestly the best way to figure this out. If you don't have the funds for it, look up the entity responsible for the taxes in your area on the web, such as the IRS website, or the Small Business Association website, and see if you can work it out from the pile of paperwork for yourself.

Despite that grim news, there are some pointers that I can give:
Generally aim to put aside 25-30% of your income into an account for your income taxes. That means on a yearly salary of $50,000 you should be putting aside $12,500-15,000. If you want to be left with $50,000 after taxes have been taken out, you need to figure out how much you need to raise your yearly income by in order to do that. The math is easy to figure out using the following formula: 100%-[Income Tax Percentage]=[Paycheck Percentage], [Paycheck Percentage]/[Income Tax Percentage]=[Income Tax Cut Number], [Desired Salary]/[Income Tax Cut Number]=[Income Tax Cut Amount], [Desired Salary]+[Income Tax Cut Amount]=[Adjusted Yearly Salary]. If you've talked with an Accountant or Business Adviser and they give you a different percentage, use that percentage instead. You can double check that the number is correct by taking the Adjusted Yearly Salary and multiplying it by the Paycheck Percentage.
     i.e. 100%-25%=75%, 75%/25%=3, $50,000/3=$16,666.67, $50,000+$16,666.67=$66,666.67. $66,666.67*.75=$50,000.0025
          100%-30%=70%, 70%/30%=2.33333, $50,000/2.33333=$21,428.60, $50,000+$21,428.60=$71,428.60. $71,428.60*.70=$50,000.02

Know your target country/demographic's expectations. In the United States, income tax would be included in the price of the item, while sales tax would be its own line with the percentage clearly marked. In the United Kingdom, all taxes are included in the price. If you have to include these numbers, adjust your base rate table accordingly; I suggest doing this by adding three columns labeled "Income Tax", "Sales Tax", and "Total Price". Under the Income Tax column use the equation "[Price per Inch Number]/[Income Tax Cut Number]" using 3 for 25%, 2.33333 for 30%, or your own number for the percentage you need to put aside. Under Sales Tax use the equation "([Price per Inch Number]+[Income Tax Number])*[Sales Tax Percentage]", and under Total Price add together your Price Per Inch and Tax columns.
     i.e. Painted w/ Lineart (Simple BG, 300 ppi): [ 1.08 ] [ 0.432 ] [ $5.18 ]  [ (5.18/3=)$1.73 ] [ ((5.18+1.73=6.91)*.084=)$0.58 ] [ (5.18+1.73+.058=)$7.49 ]

Financial Payment Plans

Finally, once you have your total quote price, adjusted for discounts that you're comfortable with and the tax you need to include, you can think about offering Financial Payment Plans.

Financial Payment Plans are promises to pay the total amount by a set time, and usually consist of two payment types: the Down Payment and a series of Installment Payments.
A Down Payment is an agreed upon amount that has to be paid up front for the Financial Payment Plan to be enacted. This can be a set currency amount, or a percentage amount. It is usually a hefty chunk~or at the very least, it is usually higher than the installment payment amount~as a way of saying they'll be committed to paying you the full amount as stated in the agreement.
Installment Payments are one or more payments that make up the remainder of the quoted price when added together, made over time in weekly/bi-weekly/monthly/etc. amounts.

As an example, a client of mine had an order for $66.55. Knowing their financial situation, I offered a payment plan to them that ended up being a down payment of $21.55 and three installment payments of $15 bi-weekly on Friday when they got paid.

You can choose to organize your payment plan however you like, and you're even allowed to add a Financial Payment Plan Fee to make it worth your while, but no matter what you decide write it down and have it legally obvious that both of you are agreeing to this plan! You can have spaces for both of you to sign and date the agreement, you can state that by paying the down payment that the client is accepting the agreement, you can have both in there and also require their fingerprint. But whatever method you choose, make sure it is obvious that the client is agreeing to the payment plan so that there is less legal wiggle room for clients to try and get out of paying you.

Other things that have to be noted in your payment plan to protect yourself and your client:
After what payment or currency amount reached will you start their project?
After what payment or currency amount reached will you hand them the finished project?
If applicable, after what payment or currency amount will you draft a copyright transfer form transferring the copyright of your image to your client for their unlimited use?
What are the possible consequences of the client not paying an installment on time/at all?

My personal preference is to start the project after the down payment has been received and show them low resolution screenshots of the work to reassure the client that I've started as agreed upon or when I need their input on the design. From there, I'll hand them the finished project only once the cost of the project has been covered, and the copyright transfer document to sign once all the copyright transfer fees have been paid (which I have payable only as the very last installments). I might start before any payment is received for people I know, but unless I know the person AND they're in my Close Friends and Family group, I'll only hand them very low resolution files and prints as previews of the finished project until I receive the last installment payment stated in our agreement.

As an example of the last part, the Terms and Conditions I gave to my client included under Financial Payment Plans the following: "The Commissioning Customer will be responsible for contacting the Artist if they are unable to make a payment and to make arrangements with the Artist accordingly. Failure to make a scheduled payment to the Artist without communication may result in the cancellation of the commission without refund, withdrawal of printing rights, withdrawal of the Financial Payment Plan arrangement with the remaining balance due immediately, and/or collection efforts at the Artist's discretion." They were late on only one installment, and it only took a simple reminder email that the balance was due for them to pay it.

And that's it! In the next tutorial we'll go over creating your Terms and Conditions: what they are, why you need them, and what to put into them.