business advice | May 3, 2022 |
How transparent do I really need to be on my invoices?

Dear Sean,

I’m uneasy about the growing trend toward price transparency on product. I see so many of my designer peers opening up their books to clients—not necessarily getting rid of their markup, but disclosing both the designer price and the client’s price in the invoicing process. It’s not that I’m trying to be secretive, I just feel that my relationship with clients is personal enough that they should trust me to ensure that they’re getting a fair deal while also securing profit for my firm.

Is this shift something you’re seeing, too, and how do you encourage designers to think about it?

Closed Books

Dear Closed,

I want to start by making an important distinction: Design firms get paid to create, produce and install their designs. Retailers get paid to sell product. The risk a design firm takes is whether or not a client is going to approve the design, then pay for the design firm to supervise its production and installation. The risk a retailer takes is one of holding inventory and making deliveries. (Even if all of its pieces are made to order, the retailer must have enough raw materials on hand to satisfy an order—and if the truck rolls over during the delivery process, they have to pay to replace it.) These are two separate businesses with two different metrics for success.

Why does that matter here? Because what I completely agree with you about is that there is no such thing as being half-pregnant. I believe that if you are using a “markup” to justify your production expense, you are playing a very dangerous game.

As I wrote in my last column, COVID-19 made clients much smarter. They know how much it takes for you to produce their design and what that effort looks like. For instance, if your firm seeks to make $1.2 million in revenue per year and production takes 20 percent of your firm’s time for six months, then the expense for your business is $20,000 per month for six months, or $120,000. Now, if you charge 30 percent on purchases and the spend is $400,000, then you happen to be in great shape. But remember: A broken clock is right twice a day. If you come out with surplus profit, then you are getting too much for production, and clients will know it and feel cheated. If your math is off in the other direction, you literally do not make enough money.

Revealing your pricing to justify your “markup,” as your question suggests your peers are doing, doesn’t solve that puzzle. Who cares how much you may or may not be making as a commission on the purchase of product? The real question is whether you are making the right number to justify the client’s expense of production: what it takes to get the design from your head to their house.

To be crystal clear, this should have nothing to do with a designer retailing product. Designers are in the value-maximization business, not the value-engineering business. If a designer says that the room will cost, say, $100,000 to produce, not only does it not matter what the cost of the sofa is, it certainly does not matter who provided the sofa. The name of the game is wholehearted approval of the overall $100,000 expenditure.

Retailers, on the other hand, get paid to sell product, not create it. The path to creation is the stuff of design and must have its own value. If you are using retail product sales to get paid for design—along with all of the risks of inventory and delivery that it entails—well, good luck with that. The market will speak, and you will find yourself competing with retailers who do not need to be paid for design and will therefore be focused only on risk of delivery and inventory. It’s likely that you will not be able to sell the product at a price to fit the design production target ($100,000 in my example).

Worst of all, though, are those who use retail sales to find profit in design while throwing all true retailers under the bus. If a retailer needs to make a 40 to 50 percent margin to be in business, then selling the same item at 30 percent markup on top of a designer’s discount is not only a bad retail sale—it also literally ignores the value of production for the design firm, since there is no cost of production paid by the client.

My challenge to you is this: Do your work with integrity, and get paid fairly for design and production. If you happen to sell product as part of that production budget, so much the better—just be as fair as any retailer would, then go from there. There are no shortcuts to integrity, and the slippery slope of dealmaking comes at the price of distrust. That’s never a place you want to be.

Homepage image: ©Nuthawut/Adobe Stock

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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.

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