magazine | Aug 11, 2021 |
Are markups disappearing?

An investigation into the design industry’s tortured relationship with product markups and whether they can withstand the age of the internet.

There’s this thing—call it a theory, a rumor, an urban legend—that everyone in the interior design world is familiar with. It goes something like this: “As the industry gets more and more transparent, clients won’t tolerate product markups anymore, and future generations of designers will charge only for their time.” Cue heated debate.

I’ve been hearing some version of this for more than a decade. I’ve heard it from designers who were terrified it was going to happen soon, and from those who wished it would come quickly. I’ve heard it as idle chatter from experts on panels, as quiet speculation from CEOs in off-the-record conversations, and as a confident prediction from entrepreneurs and would-be disruptors. Is it true?

Markups on product are as old as the design profession itself. So are clients complaining about them. Elsie de Wolfe, arguably the first modern interior designer, suffered from the scrutiny of her most famous client, Henry Clay Frick, who once wrote her a stern note warning her against double-dipping: “You undertake not to accept directly or indirectly … remuneration of any kind, other than your fee from me, and will use all your knowledge and means to purchase to my advantage, both artistically and financially, any and all purchases to have my approval in writing.” Friendly stuff!

Frick’s tone is old-fashioned, but the sentiment will be familiar to today’s designers. Markups have always been a sensitive spot in the design world. Even the most confident of designers—titans of the industry—will hesitate ever so slightly when explaining exactly how much they add on to the price of a pillow before handing the invoice to the client.

To be crystal clear, there’s absolutely nothing wrong with markups. Vast swaths of the global economy run on markups, and we take most of them for granted. No one walks into a grocery store and indignantly asks the manager what the wholesale price for a gallon of milk is. In fact, some version of that analogy is often used by designers to shut down clients who poke and prod at the idea of markups.

But just because markups are fair doesn’t mean that clients don’t question them. In some respects, their wariness can be forgiven. After all, if I go into a grocery store and see that a gallon of milk costs $20, I can easily walk to the next store and compare prices. The same can’t really be said for high-end furnishings, where pricing is opaque, complex and contingent on who’s doing the buying. When clients can’t compare apples to apples, they get suspicious about the price of apples.  

The other big factor that complicates markups is more emotional than economic. It may seem unfair that retailers can double wholesale prices unchallenged while a designer has to justify every single dollar of their markup, but the truth is that designers and their clients don’t have a retail relationship—residential projects are built on an intimacy and trust that goes much, much deeper. No one is angry when their grocery store puts the expensive milk out front. But what if your psychiatrist earned a commission on the medication they prescribed?

That paradox (“You have to trust me! Also, I make more when you spend more”) is a perennial powder keg of the industry. A designer who asked me not to use her name told me a story about a client who went from smitten to furious when she suspected foul play on a markup. “One minute she was texting me on New Year’s Eve, saying, ‘Happy New Year! I’m so grateful to work with you.’ Three days later, she’s in Mitchell Gold + Bob Williams. I had specified a chair from them, but we had customized the fabric. She saw a sample for sale on the floor and was like, ‘This chair is $800, but here it is on your invoice for $1,600!’ I explained to her, ‘We did a custom fabric!’ But she fired me on the spot.” A client who thinks they’ve been cheated (however wrong they are) isn’t an upset customer—they’re a friend betrayed.  

The challenges of the model have always existed. But let’s not kid ourselves: Markups work. The model has stood the test of time, undergoing very little change over the past 50 years of the design industry. The vast majority of designers have relied on some kind of markup to keep the lights on. While the amount of that markup might have changed a bit, the basic idea hasn’t shifted.

“In 1977, I took a class at Parsons with a professor who was an expert in the business side of the industry, and the contract he had is the model I’ve worked on forever,” says New York–based designer Jamie Drake, echoing a sentiment I heard from many veterans of the profession. “We’ve expanded it and filled in a lot of the details over the years, but the concepts are the same.”

For all its potential pitfalls, no cultural change has unseated the markup as a crucial revenue generator for the vast majority of design firms. But what about the internet?

Over the past few years, designers across the country have begun to notice something: Their clients have gotten really good at shopping online. As more commerce becomes e-commerce, a trend rapidly accelerated by the pandemic, there’s simply so much stuff available online, and so many tools to find the lowest possible price among hundreds. In the past, if a client wanted to “shop” their designer, they’d have to visit outlet malls, sneak into a design center, or at least make some phone calls. Now it’s often as simple as a reverse Google image search. That reality has only been compounded by the fact that many once trade-only brands are now available online in some form for consumers to browse. The result is a constant second-guessing on the price of, well, everything.

The disruptive power of the internet has chipped away at product markups in more subtle ways, as well. Before, clients came to the process with a vague sense of how the design world worked—a fact that often worked to designers’ advantage. Now, it only takes a quick Google to glean the mechanics of the industry. “There’s more exposure around design, and people know the ins and outs of it,” says Tacoma, Washington–based designer Heidi Caillier. “Some clients are savvy enough to ask questions, and there is this common mentality among them—usually they’re in their late 20s to mid-40s—that one of the benefits of working with a designer is access to our discount. I’ve had clients who won’t work with us because of our markup.”  

Given these fundamental shifts, you might think designers across the industry would be pivoting to a model less reliant on markups. I aimed to find out. It’s difficult to gather hard data on the residential design industry, so I tried the next best thing—I called a bunch of accountants and bookkeepers. Ultimately, I reached seven, whose combined clientele encompasses hundreds of designers spread out across the country, working at all levels of experience. I asked each one the same question: “Are your clients shifting away from product markups en masse?”

The collective answer, in a nutshell: No. Most told me that fewer than 5 percent of their designer clients had abandoned markups. Peter Lang, an East Greenwich, Rhode Island–based accountant who specializes in the design industry, said that a purely time-based model of charging is less common now than it was 10 years ago, and that, in fact, most of his clients are looking to raise their markups. Portland, Oregon–based bookkeeper and management consultant Justin Masonek said that across the scope of his career, he had only ever worked with one designer who passed along her trade discount and charged solely for her time. (Ironically, she was his most profitable client.) Even if they’ve adapted the model, his clients still charge some version of a markup: “One client charges a percentage of the overall project, not a markup by product,” he says as an example. “She refers to it as a ‘handling fee,’ and it works very well for her.”

That informal survey was backed up by my own hunt: In speaking with designers concerned about the disappearance of markups and the overall weakening of trade protection, I consistently heard references to unnamed swarms of designers who pass along their trade discount willy-nilly. As a result, I assumed it would be easy to stir a few up.  

Not so much. Some designers, under rare circumstances, say they will forgo a markup. But that’s not quite the same thing. Younger designers do often charge no markup or a lower markup, a fact that’s sometimes trotted out to prove that the next generation will be different—a misleading assumption, because many of these young designers are simply en route to charging a higher markup once they graduate to bigger projects.

A designer who never charges a markup is a rare breed. After an increasingly desperate search, I finally found one—Starrett Ringbom, founder of New York firm Starrett Hoyt. As it turns out, Ringbom isn’t reacting to market conditions or trying to stay ahead of Google-obsessed clients. She simply prefers to work this way. “I’m a creative person, and I don't want to spend half my time being an accountant,” she says. “It seemed like a pretty easy solution to say, ‘Here’s what I need it to cost—you’ll never get charged for anything else.’”

We find ourselves in a strange moment. Many of the macro trends in the world seem to be exerting pressure on the concept of markups as they have been traditionally understood in the design industry. At the same time, aside from a few anecdotal examples, there’s not a ton of evidence to suggest that these changes have had any real impact on the way most designers charge. Everything is changing, but nothing is changing.

One of the uglier sides to the debate is a byproduct of the siege mentality that many designers feel on the issue: an anger toward those who experiment with other pricing models. A couple of designers who pass along their discounted price to clients told me they’d prefer not to comment for this article because they were concerned about provoking the ire of the design community. One told me that another designer had said, to her face: “You’re ruining the industry.”

Surely, if markups are here to stay, it’s because they’re a good deal for clients and designers alike, not because anyone was bullied into a particular pricing model. If markups do go the way of the dodo, there’s a widespread assumption that it would be disastrous for the industry. It’s not hard to see why—for many designers, markups on product represent more than half of their income. However, some argue that, far from keeping the industry afloat, markups are stunting its growth. A more standardized, open pricing structure, they say, would invite in clients who historically have been turned off by the complexity of the industry’s current default pricing model.  

I don’t know who’s right, and I’m not confident we’ll ever find out. As part of my hunt for a designer who had relinquished markups, I was chatting with Hillary Ellner, a consultant who specializes in the residential and contract design industries. She had tracked someone down, but it was too late: “I found a designer who only charges for time and I was telling her, ‘You should talk to this guy at Business of Home!’ But she got back to me and said, ‘You know, I wish I could help, but I’ve switched back to markups.’”  

Homepage photo: A serene living room by Seattle designer Heidi Caillier | Haris Kenjar

This article originally appeared in Summer 2021 issue of Business of Home. Subscribe or become a BOH Insider for more.

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