Since I launched my business two decades ago, I’ve always used the same pricing model: cost-plus on all products that I purchased. I also charge a flat design fee that is paid up front in order for me to start the design process. But more and more, I find that my clients become increasingly resistant to my markup as we near the end of the project, having seemingly forgotten that they are getting the cost price. (Everything is very transparent on my proposals, so they see the cost of my markup, tax and shipping as separate line items.)
I’ve started to wonder if it would make more sense to flip the model around and instead tell my clients that I am charging retail prices with a very steep discount. Who doesn’t love a discount, right? I would actually be making more money, and I feel like at the end of the project, my clients would see how much they are saving rather than tallying up what in their mind is a series of additional costs. What do you think—is it time to make the change?
—Jennifer Mehditash, Mehditash Design
Value delivery matters. The real question is whether or not your client understands what they are paying for when they are paying for it. Your flat fee covers your design, and it’s clear from your note that your concern is not that fee. Your clients pay the design fee up front, and presumably feel like they’ve received enough value from the payment to give you permission to continue to produce your design. With that in mind, you can now assess why the perceived value of your work is valued less by your clients when it comes to paying you for production.
Transparency on your invoices is not your issue—and in fact, it’s the idea of being less transparent by charging a discounted retail price that does not do it for me. Here’s why: You are not in the “get it for less” business. Having your clients focus on the discount you are able to provide them because your market power (i.e., you buy 50 sofas a year versus their one or two) is entirely counter to why they hired you (and paid you a design fee) in the first place.
The fact that you are contemplating switching to retail pricing makes me question whether or not you have defined for your business what your markup actually represents. For a retailer, markup on product represents the return they need in order to pay for the shelf space (this is true of both brick-and-mortar and online businesses), staff, marketing and the risk that the item will not sell. Your markup on items you purchase for a client, on the other hand, represents none of that. Instead, it covers the management necessary to procure, in most cases store, and ultimately install the item to your specifications.
But when you tie your markup to the purchase of each item (which I am guessing is done through purchase order, client payment to you, and then payment to your production partner), you are telling the story of a retailer, not a manager. Clearly, this is confusing to your client and makes them question the additional cost—especially since they did, in fact, already pay you to find the item in the first place with your design fee.
Instead of touting the discount you can net for your clients, I suggest that you dramatically improve the story you tell them by changing both the timing of your production payments and what the money is actually going toward. The first step is to explain to your client what your markup actually represents. Even better, though, is changing when and how you collect your markup—why not get it all up front immediately following completion of your design? After all, this will make your purchasing and accounting infinitely easier.
If this is too much of a stretch for your clients, calculate what your entire markup would be, then divide that number by your expected production period to land on a monthly management fee. For example, if your markup is 30 percent, the production budget (before your markup) is $200,000, and your production period is five months, you can receive your $60,000 management fee via monthly $12,000 payments. Then keep sending your clients those detailed, itemized purchase orders—just without the markup.
Focusing on telling a better, more authentic story of the why and how you get paid what you do is vital. Today more than ever, designers have to be in the business of defining their value. What is happening to you is the very example of what happens when confusion gives clients permission to assess what they care about in your business—a no-fly zone if there ever was one.
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.