business advice | Aug 4, 2020 |
Can I charge for procurement in addition to my markup?

Dear Sean,

I am in the process of reconsidering my billing strategy, and I’d love your thoughts. As a quick overview, I bill hourly or with a flat fee, with a staggered principal and assistant rate; I also charge a markup on trade procurement. I do not charge additional markup on items purchased retail, just design time to source them. My office manager does all the procurement, budgets, bookkeeping and invoicing. When is it acceptable to bill clients for items beyond the cost of procurement, which the markup covers?

Markup Misgivings

Dear Markup Misgivings,

A few realities: Clients want your business to make the money it needs in order for you to do your best work—no more, no less. Clients also want the clarity of knowing what they are paying for and why.

That said, transparency is not showing your underwear; rather, it is allowing for educated decisions within specified constraints. If you go to Whole Foods to buy an organic banana, for example, you do not ask the manager for the wholesale price of that piece of fruit and then decide on an appropriate margin the store is entitled to make. You either pay the 75 cents for the banana, or you do not. The educated decision is whether or not the cost of the banana is worth it to you. If it is, you will buy it. The same is true of your design business. If you charge hourly, what is this time and rate for? I have spoken before on the idea of different rates for different work; the same thoughts apply here.

If you bill hourly for your design time and your markup on product is for what you are effectively buying at wholesale, then what fee covers all of the back-end work, like procurement, budgets, bookkeeping, invoicing and trade management? You might say that your markup on your trade pricing covers it. Nope, nope and nope.

When you charge a markup on trade pricing, you are acting as a retailer (no matter how you choose to describe it): You buy at one price and sell at a higher price. That transaction is the same as any other retailer—buy it, take it from the store or have it delivered, done. It does not encompass what you would do beyond what a retailer would do (i.e., most of your back-end work). What you have done, then, is effectively robbed from one business to support the other. In that thievery, clients lose their minds because they do not know what they are paying for—is it the item itself or the back-end work you have to do for both retail and trade items? And if the latter, how much for each?

Here’s the thing: If you leave it to your clients to value each element of your business, they will absolutely get it wrong. Only you know what each element is worth, and only you can define it. When you do not, you literally have no foundation, since there is no agreement on what is being paid when. Clarity of purpose and intention manifests with price and payment.

Ultimately, this means you have to change your question. My philosophy is this: If you touch it, you have to get paid for it. For instance, if you source a sofa at Pucci and the client buys it, you are still responsible for coordinating delivery, ensuring quality, and ultimately installing it in a way that is in keeping with your design. Your current method does not honor that effort; instead, it demands that your markup on trade items cover you. It skews everything, in that you would rather buy nothing at retail, since you do not get paid for production, which means that when you tell your client the trade item is best, they do not believe you. And why should they? The rational choice is to go to where you make money and shop only with the trade. Except, you do not make enough there either, since you are only able to make what other retailers make, despite doing more work. Ugh. If it all sounds incredibly unfair—well, it is.

Instead, recognize you are running three businesses: design, production and retail. Each has its own value proposition and needs to be able to stand on its own, even if they are all dependent on each other. By your example, hourly charging is for design and production—hopefully at different rates—on all items that you source, whether from the trade, retail, or designing around existing items; markup is for wholesale items that you are able to effectively retail to your clients. Clarity.

An importing parting word: Your business is for you to define. Expedience and industry standards are extraneous to the conversation. There is no right way, only your way. Live there.

____________

Can I charge for procurement in addition to my markup?Sean Low is the the go-to business coach for interior designers. His clients have included Nate Berkus, Sawyer Berson, Vicente Wolf, Barry Dixon, Kevin Isbell and McGrath II. Low earned his law degree from the University of Pennsylvania, and as founder-president of The Business of Being Creative, he has long consulted for design businesses. In his Business Advice column for BOH, he answers designers’ most pressing questions. Have a dilemma? Send us an email—and don’t worry, we can keep your details anonymous.

Homepage photo: Shutterstock

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