Dear Sean,

I am all over the place when it comes to billing. Don’t get mad, but I charge hourly—and that’s it. I pass everything through to my clients, even if I custom-make pieces for them. That has worked just fine for a long time. But recently, when my clients have added up the cost of my hours versus how much they spent on their FF&E budget, they have freaked out. I feel like I am being incredibly fair, but I am having a hard time articulating why. Can you help?

Value Proposition

Dear Value,

If hourly billing works for you, then it works for you. Instead of breaking down why I typically advise against that approach, let’s focus on what your clients are comparing you to: designers who charge hourly or a flat fee for design work and a percentage of FF&E for production. So that we are comparing apples to apples, we will say that the flat fee for design equals hours you would spend on design, and put them aside—call it $100,000, for the purpose of this column. What we are talking about today is comparing your billing for production hours to a designer who charges a commission (a markup on product) to be compensated for their work related to production, and maybe also for installation. To zoom in further, we are saying that you and comparable designers do significant custom work, except they retail these items at a marked-up price and you do not.

Let’s compare how the two approaches unfold: Your team will spend a collective 1,750 hours on production, billed at a blended rate of $200 per hour (all pretty standard), and your client gets a bill for $350,000 in production hours alongside an invoice for $890,000 in product, all at designer-level pricing. All in, the client spends $1.24 million.

The designer we’re comparing you to, meanwhile, charges a commission rate of 35 percent on the cost of goods rather than billing for production hours. At the same time, my guess is your competitor has made or found custom items for $90,000 and is retailing them to their client for $200,000—that’s a $110,000 profit (which is fair, by the way). The rest—$800,000, if you’re purchasing identical goods—is coming from unrelated third-party vendors that are, ahem, setting a designer price. That means this designer’s client is paying $1 million for product, plus $350,000 in commission. That client pays $1.35 million when all is said and done.

Get this: While the cost of the items you and your competitor are delivering is vastly different, the value is identical.

Put another way, the value of the products in either scenario is $1 million. The amount of time and work necessary for the designer to produce the project is $350,000 whether it is calculated in hours or markup. It is just that the hourly designer has chosen to provide custom goods at cost(ish), or $90,000—literally handing the client $110,000 in value. The other designer keeps that money by retailing the product for $200,000 like any other vendor—and because the value of $1 million is also the spend, the client readily accepts the 35 percent markup and the designer gets $350,000 without pushback (and makes $110,000 more to boot).

Your client is the one who loses it because what they see is all those billable hours—even though they are spending far less on product than they would with another designer. That is the curse of transparency. You think you are being a wonderful steward of your client’s finances by showing them where their money is going, regardless of whether they understand what it all actually means. But because you did not go through the exercise of explaining the value of what was delivered, only the expense of what was delivered, there is simply no way for your client to grasp the difference.

Now, before you tell me how unethical, immoral or deceptive it is for your competitor to retail their custom pieces, ask yourself why. The value a client deserves is to pay what any other designer would pay. AI and your phone make it entirely possible to determine that value for just about any element, custom or not. Ironically, delivering singular pieces at cost is actually the move that’s immoral. In the above example, how fair is it for a client to compare a sofa you charged $2 for to other $2 sofas, when they should really be comparing them to $6 sofas? You literally hurt everyone: you, your client (with their misperception of value), $2 retailers, and worst of all, $6 retailers.

Here’s what you need to keep in mind: Value must always exceed cost, or we would not do what we do. That’s why an item manufactured for $1 will traditionally retail for $8. The manufacturer sells to the wholesaler for $2; the wholesaler to the retailer for $4; and the retailer to the consumer for $8. If the retailer could only sell its product for $1 or even $1.25, the whole exercise is likely just not worth it. There’s too much risk and not enough return.

The solution: Do the work. If you do not wish to retail custom items directly to your clients, at least have the decency (and competence) to share with them the true value of what is being delivered to them: $1 million worth of FF&E, not $890,000. You and any other designer in a similar position are going to face this issue over and over again—trust that it will only get worse from here. Value understood is value delivered. The responsibility is yours.

____________

Sean Low is 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.