business advice | Apr 19, 2022 |
Does my markup still make sense?

Dear Sean,

With all of the supply chain issues, and now inflation, many of my fellow designers say that they are abandoning the markup model in favor of either charging a flat fee or hourly billing for the production phase of the project. They are still charging their design fees—this is just a new way of covering all of the time that’s going into project management these days. I am terrified at that prospect, as my markup represents such a big portion of my income, and I wanted to get your opinion before I give up what has been so lucrative for me.

Holding on to My Markup

Dear Holding,

If you are one of the rare (and I mean really rare) designers who can control delivery times in today’s climate, then what worked for you pre-COVID-19 can still work now. You probably still have to work a little harder to produce your designs, so modest increases in net prices likely compensate you for the extra effort.

For all other designers out there who are mere mortals, COVID and our current economic environment is imploring you to do better. More than that, I firmly believe that there’s more at stake than just your firm’s finances: If you do not address the issue now, your credibility will be shot in the long run.

Let’s say your 35 percent markup earns you $120 (silly, I know, but bear with me), and pre-COVID, it would take you around six months to complete the production phase of a project. That means you’re earning $20 a month under normal circumstances. Now it’s taking 10 months, but you’re still only making $120—that’s $12 a month, which means your markup just gave you a pay cut. (Yes, prices have surely gone up, but they are not enough to make up the difference.)

If you're thinking that you can take on other work while you wait around for your client's furniture to arrive, let me point you to the story of the server farms. Back when cloud computing was dawning about a decade ago, the energy usage was overwhelming. As The New York Times reported in 2012, “the inefficient use of power is largely driven by a symbiotic relationship between users who demand an instantaneous response to the click of a mouse and companies that put their business at risk if they fail to meet that expectation.” It meant that servers had to be running at full capacity, even if nobody was accessing their data—any lag while the server “woke up” would be unacceptable to the user. This is your issue, too. You have to be ready the minute you are able to complete your design, which is why the client needs to keep paying to stay on your books, even if it feels like the project is on pause. If you are distracted with another project, good luck keeping either client happy.

The real question, then, is who has to pay for these delays. Hint: It’s not you. While you should make your best effort to properly estimate time of delivery, both you and your client need to share the risk if there is a delay or reap the benefits if you can complete the project sooner than expected. Going back to the example above: Imagine that instead of a 35 percent markup that netted you $120, you simply charged $20 per month with a minimum of six months and a targeted goal of eight months. In that scenario, any outcome would be fair for all involved. Finish in seven months and your client saves a month’s worth of fees; finish in nine months and they pay for an extra month of your attention.

The key here is fairness. Production requires an estimate of your firm’s time that needs to be dedicated to the project so the resources are available when needed—which is why billing hourly for this part of a project just will not work. It’s the same dilemma you run into on a server farm: Your client should be paying for you to be ready to do your best work. Period. The alternative is to jeopardize your entire business when it fails to meet your client’s expectations.

Last but not least, it’s time to retire the term “markup” unless you are a retailer (which you are not). It is a back-of-the-envelope way to calculate production that represents a commission or agent fee. What it can no longer be is leverage into earning more for your design work—a shortcut for those who were undercharging on their design fees and using a markup to make up the difference.

You have to get paid for design, then get paid for production. Design is irrational, meaning that its value is what the designer says it is. Production is rational, in that there is a defined market for it—and if you cannot define it, you will not be paid for it. Clarity matters here, and in today’s environment, you have to do much better than trying to guesstimate anything. Your responsibility is to define the effort you are making to take your designs from your head to their house so that you can measure success against it.

Remember, you deserve to be paid fairly for the effort it takes to produce your design in such a manner that you will stake your very reputation on it. No more, no less. But one thing is certain: Charging a random commission on product is no longer good enough.

Homepage photo: ©Memed Özaslan/Adobe Stock

____________

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.

Want to stay informed? Sign up for our newsletter, which recaps the week’s stories, and get in-depth industry news and analysis each quarter by subscribing to our print magazine. Join BOH Insider for discounts, workshops and access to special events such as the Future of Home conference.
Jobs
Jobs