business advice | Sep 29, 2020 |
Should I open my books for a distrustful client?

Dear Sean,

I run my firm with closed books—a fact that is clearly outlined in my contract. But one of my clients is insistently, obsessively demanding to see invoices and receipts. The project is going well (or, at least, I thought it was!), and the client has been thrilled with my designs and my firm’s service every step of the way. We’ve also stayed very firmly within the budget outlined in our initial meetings.

In terms of billing, we charge for our time and then use a markup on products. It isn’t a fixed percentage—though sometimes I feel like that might be easier. Instead, we adjust the rate but guarantee our clients that they’ll never pay more than retail. That means we make more on some goods, but little to nothing on others. I feel confident about billing this way, but I don’t think I should have to open my books for a client—especially not after they agreed to my billing methodology at the outset. But I’m also worried that this will be a sticking point and prevent us from moving forward.

What should I do?

Dealing With Distrust

Dear Dealing With Distrust,

Imagine you are a private chef who also happens to own a farm where you grow your own produce and raise your own livestock. A family hires you to make a delicious soup for dinner, and they give you $100 for the effort. You show up at their house with the pot of soup for them to enjoy. It is the best soup they ever had, and they talk to you about it for days—a win for everyone.

Now for the left turn: For a socially distanced excursion, the family decides to come to your farm. While there, they surmise that it costs you about a dollar to grow the carrots you used in their soup, and they see your farm stand where you sell the carrots for $3. “Wow, that is a hefty markup,” they say. They turn to you and say that even though they loved the soup, it should have only cost $99—you made too much money on the carrots. Now they do not love the soup anymore because they feel like you ripped them off. You owe them a dollar, they say, and then they will love the soup again like they first did.

You are very clear: Your design and production time is paid hourly. You also retail product at the same price as any other retailer of comparable products (i.e., item, size and quality). My advice is that you have to do a better job of delineating when you are acting as a designer and producer (i.e., charging hourly) and when you are acting as a retailer (i.e., charging markup). Each business should be separate, and should have its own profit goals that are unrelated to the other. The only way the retail business should be related to your design business is that you are its biggest (and perhaps only) client. As such, you get discounts—treatment similar to any other large and important client—and that is it.

I’m going to say that again to make sure it sinks in: Each business is separate and has its own profit goals.

What I suspect is that your client does not believe that your hourly billing is enough to support your design business. That is easy enough to prove. If, say, you are a firm of three and bill at an average of $150 an hour for 40 hours a week, 50 weeks a year, then the most you could possibly make as a firm is $900,000. If the project is supposed to represent, say, one-quarter of your billings, you would need to bill out $225,000 for the project. Your client probably assumes you are running your business well and if they are billed properly, the money you would make on hourly billing would be enough to support your design business. So when you bill only $150,000, you think you are doing great and doing your client a favor for the discounts you provided to them.

They do not.

They know you need the $75,000 to make enough money, and it has to come from somewhere, so the only place it can come from is retail. Shocker of shockers: They think you are making too much money on the items you are selling to them to make up for your losses on the design side. Oh, and they might not be wrong. Perhaps you charged them $4 for carrots when $3 is the going rate, or your cost was 50 cents, not a dollar. Yes, they are questioning your integrity, and it most certainly does not feel good.

The answer, then, is to go back to the soup. Your client paid $100 for great soup. Part of that money went toward your imagining the soup in the first place, then procuring the ingredients and actually making the soup (your hourly billing); the other part is acquiring the ingredients from your other business (your retail markup). Again, they are two separate businesses, each responsible for its own value proposition and profit. If you cannot clearly explain how each runs, your client will do it for you, no matter what your contract says. Value delivered for value paid matters. What that value is, when it is delivered, and what it takes for you to deliver is and always will be your responsibility.

What is not your responsibility is to engineer your determined value once you have provided clarity. Your client can love the soup for $100 or not.

You live to the bar that you and you alone set. Your client is calling you to task to define value. See it as an opportunity for clarity despite their misgivings, and your answer will be far better than, “No, my contract says we do not have to.”

____________

Should I open my books for a distrustful client?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.

Homepage photo: Shutterstock

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