Dear Sean,

I am an avid listener of BOH’s The Thursday Show and a regular reader of your column. I know you (and podcast hosts Dennis Scully and Fred Nicolaus) all think that the design industry is in a state of flux considering the rapid advancements in technology and the general state of the world. I was wondering if you could break down the business practices that you see as a necessity for designers going forward. What structural ideas do you think every design business needs to have today to be successful?

Future Forward

Dear Future Forward,

To manifest the level of professionalism required of designers today, I believe three principle tenets have to underlie every design business: Always be ahead of the cash; fully separate your design fees from your production fees; and be completely agnostic to the cost of production.

Be Ahead of the Cash
I gave an example of what it means to be ahead of the cash in my last column. Fundamentally, it means that you are paid first, and you work second. It does not mean that you are wholly paid first and then do the work—that is too risky for everyone involved. It means that, at any stage of a project, you will not be faced with the horrible choice between compromising your design or losing the money your business needs to keep going. Specifically, this system means that you will always have enough money so that if, heaven forbid, the project disappeared, you would have the financial wherewithal to replace it.

You might protest that your hourly will do that for you, except it cannot. Most designers I know who bill hourly charge between $200 and $350 an hour. There are 166 work hours in a month. In other words, around $33,000 to $58,000 per month is the maximum that you can provide your firm. And since you would never work full-time on any one project, there is no way you would be ahead of the cash if you were terminated early in the design process. Hello, engagement fees! They change that entire dynamic so that you can provide uncompromising design.

Separate Design Fees From Production Fees
I hinted at this concept in my last column. Let’s flesh it out a little more here. If a client does not know what they are paying for, when and why, then they will tell you what they are valuing, and will act accordingly (that is, in their interest, not yours). If the real value of design is $40,000 and is an amount that your competitors are charging and receiving, then when you can only bill, say, $30,000 in hours, there is a mismatch; as in the $10,000 has to be earned somewhere to justify your work. The question is: Where? In your continuing hours for production? Your product markup? And since you are not telling your clients where they are paying for the extra $10,000, they will have to guess and tell you. That’s a recipe for distrust if there ever was one.

The primacy of value delivered for value earned is everything. Yet most designers simply cannot embody that principle because design is not properly charged for, let alone paid. Remember, design is an irrational endeavor, meaning you need what you need to create as you would create. The aim is to manifest an environment that is transformative and measured as such, at least in residential work (and I would argue more and more for commercial work too). What design is not measured is in the financial realm. No one buying a $20,000 sofa is hoping to sell it next year for $30,000.

Production, on the other hand, is a rational endeavor—it takes what it takes to procure, store and ultimately install the elements of your design. Clients understand the cost of production far more than they do the value of design. So when you put them together, the value of design gets vastly diminished, if not eliminated. A great way to keep the value of design artificially low is to have the vast majority of it be earned during production. Yeah, how about we not do that?

Be Agnostic to the Cost of Production
When your fees are inextricably linked to the cost of production, there is an inherent distrust baked in. You can tell me all day long that your clients do not question your markup and I will never, ever believe you. If the more you spend means the more you make, and nobody needs what you do, then the entire dynamic is a fiction of value. If a client spends $100, you are worth the $35 in markup. What if a client spends $110—are you worth the extra $3.50? Yet what are you doing for $110 that you would not be doing for $100? What justifies that extra $3.50? No one can answer that one with a straight face.

There are other dysfunctions baked into the markup model—take line-item pricing. If you are getting paid on the cost of the sofa, telling a client you will not share the price of the sofa makes no sense. It also means you are asking for an irrational decision (Do you like the sofa and how well it tells its part of your design story?) to be made rationally (Do you like the sofa for $20,000?). And worse, now you have to justify making a 35 percent commission across the board, whether you’re ordering a $10,000 coffee table from your favorite retailer in an email or managing complex construction of a $10,000 custom banquette. Make that contradiction work.

Instead, I invite you to look at it this way. You need what you need (money, space, time or other resources) to produce the project as you need to produce it. You know what ingredients have to go in your soup and how to cook them to achieve your specific design recipe. Let that be enough.

If you are paid what you need to earn without regard to project spend, then all of these inconsistencies disappear, because you are paid to spend clients’ money well, no matter the furnishings budget—instead of being paid based on how much you can convince them to spend. This creates a completely different, and far more professional, client energy and dynamic than one where transactions are derivative of product costs. This permits you to eliminate line-item pricing, receive all of your production money in advance, and stress that the production money is strictly their money even though it is in your bank account for you to spend on their behalf. Then you can treat it far more like a lawyer treats an escrow account rather than as the driver of your firm’s revenue.

Yes, I appreciate that the three tenets might feel scary and even off-putting. Then again, change is always hard and painful. The only thing harder and more painful? Trying to avoid change that is inevitable, costing you time, opportunities, and a whole lot of fun along the way. (Ask former Blockbuster executives who turned down the chance to buy Netflix, not once, not twice, but three times.)

Working for nothing, chasing money and seeking commissions had its place in a world long since gone, just like videotapes. The future is here. Your path is your choice, and I hope you let the three tenets drive you forward.

____________

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.