business advice | Feb 8, 2022 |
My firm is busier than ever. Why am I not making more money?

Dear Sean,

Although my design business was slow for the first few months of the pandemic, I have been lucky and my firm has been beyond busy since the summer of 2020. Here is the thing though: Even though we are working so hard (I could not even dream of taking on a new project in the upcoming months), my bank account is not showing it. We charge hourly plus a 35 percent markup on purchases, and most of my projects are big! We purchase upwards of $2 million of product per year. Yes, I draw a nice salary—but for all of the work we are doing, I would think that there would be a lot of profit left over. But there’s not! What am I doing wrong?

Show Me the Money

Dear Show Me,

First, congratulations on being so busy. It’s always much better to be busy than the other way around. However, COVID exposed many of the design industry’s conventions and “best practices” as the dinosaur habits they have long been—and you, like many other designers, suffer the consequences. I am sorry for your pain, but please see this moment as a wake-up call to do better.

Before we get to the meat of pricing, a quick note to all the designers like you who have not changed their business model in response to COVID, and still charge the same fee or hourly rate plus markup: You are lying, and you have to stop. It’s a lie to yourself if you think the way you did things before still works, and to the client because it makes no sense to remain the same. Wages alone have gone up a ton in this country. How, then, can your rates be the same?

If you were making an appropriate amount of money pre-COVID, when delivery times were four to six months, how are you making an appropriate amount of money now that times are seven to 10 months? (And, no, the average cost of materials and labor has not risen by a third to compensate for the difference.) If anything, your budgets are likely static or slightly higher—after all, it’s not like we were in a recession pre-COVID—so you are making less money. And that’s OK? Or you were overcharging pre-COVID?

When risk explodes, as it has for designers, you have to address that risk or suffer the consequences. That 35 percent markup for six months of work is not the same as 35 percent for 10 months worth of work. Unless you are one of the fortunate few who can still control delivery times, you are challenged to change.

Now to the basics. Every designer actually operates three businesses with a possible fourth: design (creating a vision), production (organizing the vision from idea to manifestation), and installation (opening night, and that “ta-da” moment most designers live for). The fourth business is retail, where you actually sell items to your clients and bear the risk of delivery.

That “risk of delivery” is important. Ask yourself this: If the delivery truck crashes on the way to deliver your client’s sofa, who is responsible for replacing the sofa? Your answer will identify the party with risk of delivery, typically the manufacturer or retailer—not your design business, and definitely not your client.

Which leads to the most important thing about your “markup”: It is not a markup at all, and it never has been. A markup is for retailers, and is the difference between the price they bought the item for and the price when they sell it to you (or your client). Your markup is an agenting fee—a commission, if you will. It is what’s necessary for you to manifest the item and, in most cases, install it in a client’s home. As such, it is a back-of-the-envelope method for clients to understand what it takes for your firm to do the production work of making their design happen. In pre-COVID times, it worked because the window of delivery was known and narrow. That world is gone for today, and will likely stay gone deep into 2023.

Also out the window is using hourly billing as a crutch to cover for your percentage’s shortcomings, since paying the same hourly rate for checking on the sofa’s whereabouts is hard to swallow next to paying for design time. Hourly fatigue is real, and clients do not see it—after all, it is one thing to get a big bill for design but another entirely to get the same bill for dealing with shipping issues that still result in huge delays. My guess is that you are writing off your time more than you ever have.

What to do? Think again about what you are actually getting paid for, and act accordingly. I presume you are against a flat design fee, and I will not tackle that one here. However, if design is truly the most valuable part of your business (as it is with almost every design business), why are you not charging appropriately for it? Even if you think you cannot raise your rates (you can), you can buck convention and charge by the hour for your design time instead of 15-minute increments. Yes, spend 15 minutes and bill for an hour. Oh, you are offended? You made up 15 minutes to begin with! No designer I know bills to the second, so if we are going to adopt the legal convention, you can just as easily adopt another method that is more accurate to the work you undertake. Then, you can go back to those 15-minute increments when billing for production—though if you are charging hourly and a markup for production, what does that mean? It tells me that the markup is not enough. So why not just increase it and not charge hourly for that production time?

As for the “markup”, how about you do the math? Figure out what it takes for your firm to organize design given where we are today. Assume a fair gross margin, in the 35 to 40 percent range (so that if you spend $60 in staff time and overhead, you would charge $100), and divide by the time you believe it will take to design. You now have a fair monthly fee. If you charge $100, and it will take 10 months, your production price is $10 per month. If it comes in shorter, your client wins; if it takes longer, they share in the cost of delay. Fair is fair.

No matter what, kill the idea of transparency—and saving clients money, for that matter. You get paid what you need to spend their money better than they ever could. Effective spending is far more important than efficient. You are in the transformation business, which means you deserve what’s necessary to make that transformation happen—no more, no less. To get what you need, however, you do not need transparency. What you need is clarity in what you are paid for each of the efforts your firm undertakes (that’s the design, production and installation).

It is clear you have yet to do this work. The good news is there’s no better time than yesterday to start. The result will be not just the money you seek, but also the respect that comes with being the true professional in the room.

Homepage photo: ©Chinnarach/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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