magazine | Mar 8, 2023 |
An industry survey spotlights what it takes to level up

A new industry survey charts how designers charge, how much they pay their teams and how they compete for talent in a challenging market. How does your firm stack up?

Transparency has always been a struggle for the design industry. From how to charge to what to pay their teams, designers have long found hard facts and figures challenging to come by. Without a point of reference, they are largely left to their own devices, figuring out what works through costly and time-consuming rounds of trial and error. Even if you ask around in your peer group, it can be hard to know how your company really stacks up in the wider market. But what if you could look into the books of 900 other firms, then synthesize that info into a play-book of best practices? A group of business consultants did just that.

Last year, Gail Doby and Erin Weir, co-founders of design-business coaching and consulting firm Pearl Collective, partnered with Ken Roberts of industry recruitment firm Interior Talent. Together they surveyed hundreds of interior design firm owners nationwide to compile the 2022 Interior Designers Survey on Fees, Salaries and Competing for Talent. The report’s results shed light on both where firms are succeeding and where there’s room for improvement and growth. For designers, the findings can also serve as a measuring stick—some very welcome real-time feedback on how their firm compares with those of their cohorts.

Beyond the oft-debated subject of fees, the survey also highlights how staff size, salaries, benefits and other employee retention efforts impact a business’s financial state. Its authors designed the study to help owners be vigilant about their firm’s health—to not only understand what it takes to operate and grow the business but to safeguard it against the unexpected. “You have to be paying attention to what makes your company work,” says Doby. “It’s not all about the numbers—it’s also about the people.” With that in mind, we gathered the survey’s top takeaways to answer designers’ pressing industry questions.

How many employees do I need to be profitable? 

Put simply, having employees tends to translate into more revenue. If the survey makes one thing clear, it’s that designers who reported operating as sole proprietors were far more likely to have hit a revenue ceiling—one that maxed out at about a quarter of a million dollars for 61 percent of one-person firms. Meanwhile, two-thirds of the survey respondents who employed one or two additional staff members were able to crack the $250,000 mark, and nearly all firms with four-plus employees exceeded that revenue milestone.

Hiring inherently comes with more costs—so what is it about staffing up that seems to translate to more revenue in such a statistically significant way? 
In a conversation with Doby about the survey’s findings, she points to the inherent downsides to working alone. Chief among them: If you’re doing everything, you’re definitely spending time on tasks you simply aren’t good at. Maybe that’s accounting, or CAD work, or tasks that spread you too thin, like sourcing or site visits. You’re also making yourself vulnerable to risks—if you get sick or go on vacation, who will check on your projects, keep things moving and continue to make the firm money?

How do I know when I’m ready to make a hire? 

For all the benefits of building a team, knowing when to hire (and if you can afford it) can be hard to determine. The survey identifies one major indicator that it’s time to start looking: when you or your employees are routinely logging 60 to 70 hours per week, plowing well past the 40-hour norm. Examining stress levels, burnout and workload can also show when it’s time to bring more team members on board. Beyond understanding the current workload and the toll it’s taking, look ahead at the firm’s project pipeline—even if it’s been a busy time at the company, will enough work keep coming to justify growing the team? “You have to be really careful about bringing on somebody just because you’re busy right now,” says Roberts, who works with firms looking to make a hire and helps place employees looking for their next move. “If you don’t have work in the future, [your ability to pay your team] is going to be short lived.”

A quick review of the firm’s financials are also in order: Do you have three months of reserves available to run your business and pay overhead expenses, including the additional costs of a new hire’s salary? The cadence of hiring is also important to keep in mind. While you might have several roles you want to fill, Doby says it’s wise to stick to one hire at a time—doing more will almost certainly lower profit margins in the short term as you invest in training that team member before they reach their full potential. And don’t forget to keep an eye on the numbers: For every employee you bring on who bills for time (as opposed to roles like accounting or marketing), you should see returns of at least an additional $250,000 in revenue; otherwise, Roberts says, they may not be worth the expense.

Can I tiptoe into hiring with a part-time team? 

You can start by outsourcing specific tasks or hiring part-time staffers, but if you want the firm to grow faster, Doby suggests hiring full-time workers, who are able to complete their assigned work more quickly and efficiently. Even better, hire staff members with billable hours first, because their efforts will naturally pay for themselves. Another surprising insight: For first hires, many designers go for the least expensive candidates, like design assistants, thinking they’re playing it safe. But that strategy often backfires, requiring the owner to take more time away from projects to train junior staffers. Though it might seem counterintuitive—and certainly contrary to the approach most designers follow—Doby counsels designers to hire experienced, high-level candidates first. A senior team member will hit the ground running, which takes pressure off the business owner and relieves them of some bigger-picture tasks.

If a high-level employee feels out of the question, Doby suggests that firm owners examine their daily activities and take stock of what tasks are lacking at their firms—an outsourced or contract-based employee might be better suited to the job if it’s accounting, sourcing and CAD drawing work. Plus, many companies exist for outsourcing specialized tasks like renderings, bookkeeping and even procurement, which streamlines and simplifies the hiring and onboarding process. According to the survey, the most frequently outsourced roles are financial assistants—including bookkeepers, accountants or finance managers—as well as photographers, visualization specialists (for CAD, Revit, 3D renderings, or augmented or virtual reality) and attorneys. Other outsourceable areas include social media, public relations, marketing and graphic design.

Doby does, however, caution against treating a 1099 contractor as a part-time employee, which can get business owners into trouble with the IRS. Among the guidelines to keep in mind: A contractor must be paid as a company or corporation, rather than an individual, and must work for multiple companies. If neither are true for your situation, she finds that it’s often simpler to set up the candidate as a part-time employee and pay them hourly.

How do I afford all of this? 

Properly pricing was a major sticking point for designers surveyed—one-fourth indicated that setting fees and generating more revenue from projects was their primary business challenge. According to Doby, many designers launch their firms by adopting the charging approach that they learned from design school or industry mentors, and then have trouble breaking that pattern. “It tends to be an emotional decision rather than a logical one,” she says.

Doby also finds that many firms are willing to adjust how, what and when they charge based on a client’s feedback or negotiation—changes driven by client appeasement rather than the firm’s operational and financial needs. But by following that path, designers may end up slashing prices or hours to make up for the corners they’ve cut in a misguided, reactive decision.

Hiring should facilitate revenue growth—but it only works that way if the firm has the right balance of billable and nonbillable employees. “Each billable person should create profit for the company at the rate of three to four times their burdened salary,” explains Doby. “The company requires a profit on [their] time because that covers salaries, growth and profit.” For smaller firms in particular, undervaluing services (and then underbilling for them) may deprive the firm of the funds it needs to reach the next stage of growth. “It’s that vicious cycle: If you don’t charge the right fees, you can’t afford salaries, you can’t offer benefits and then you can’t take on more work,” adds Roberts. “Depending on your pipeline of business, having additional billable talent would allow you to take on additional projects, [thus] adding additional revenue.”

How (and how much) should I charge? 

Those looking for a definitive answer in the data will be disappointed—the results indicate a healthy mix of successful charging methodologies across the industry. Hourly plus markup garnered the largest response, with 36 percent of survey takers, followed by fixed fee (25 percent) and hourly only (13 percent). The remaining quarter of firms bill in ways that vary from project to project. Of those charging an hourly fee, most charge less than $200 per hour.

In Doby’s experience, companies in their earlier years, or smaller companies making less than $250,000 in revenue, typically veer toward charging hourly plus markup—and often price their services on the lower end, lacking the confidence or experience to bump up their rates. The survey’s results reflected that insight, finding that firms less than five years old are likelier to charge $150 per hour or less, while firms that have been in business for 10-plus years tend to charge $250 or more per hour. Larger firms also tend to bill a higher hourly rate.

The survey also spotlights the lack of industry standardization—and wide disparities from firm to firm—on what percentage markup to charge. The majority of firms (two-thirds) charge 35 percent or less, with around a quarter of respondents charging less than 20 percent, and another quarter charging between 25 to 30 percent. On the high end of the spectrum, 23 percent of firms charge 35 to 50 percent.

» Related reading: How to get growth right

Still not sure which charging methodology is right for you? Selecting a cost structure is important, but landing on the number that will keep your firm’s lights on is another essential step to nailing your charging process. Considering factors like scope of work, productivity rate and billable time is a great place to start, says Doby. The labor that goes into each project is often more than expected, and Doby has found that designers with a fixed-fee structure often come to the shocking realization that their firm is billing about 50 percent below what their team’s efforts are worth when they calculate how much time goes into the project. That doesn’t necessarily mean it’s time to pivot to hourly billing, but it may be time to raise your fees to capture the true workload.

Big picture, it’s clear that most design firms are leaving money on the table somewhere. Survey data shows that the average net profit for designers was under 8 percent last year, which Doby calls very low. If your business falls into that camp, you’re not alone—but there’s room for improvement with a few simple shifts. How low is too low? Take a look at your net profit—that’s your actual profit after you’ve subtracted what you spent from what you brought in. If it’s below 10 percent, says Doby, you’re not pricing correctly. Another benchmark is to examine your firm’s payroll costs compared with your billing and fees. If the latter is less than the former, the writing is on the wall: It’s time to raise your rates.

How much should I pay myself? 

If the firm owner finds themselves earning less than their employees, something is clearly amiss with the business model. The survey found that the average design firm owner typically brings home 17 percent of total revenue. Within that, however, there’s variation, which can be traced back to each business’s tax filing status. If the firm is registered as an S Corporation, owners will pay themselves a salary, but their income is also the net profit of the business (meaning they’ll be taxed on both). If a business is registered as an LLC, however, owners can take money out of the business as they choose, and they’ll pay taxes only on the business’s net profit. What about the raw numbers? The survey found that more than a third of respondents pay themselves less than $100,000 annually, while slightly less than a third take home $100,000 to $200,000. 

How much should I pay my team? 

Designers who are currently hiring staff are encountering job seekers who demand increasingly high rates—especially when it comes to more experienced candidates like senior designers. And given the glut of work during the pandemic, firm owners are at the mercy of job hunters, who have plentiful hiring opportunities with substantial salaries. These days, it’s not uncommon to see employees jump from company to company in search of a salary bump—or to have other companies poach high-value employees, which may even prompt the original firm to counter with a better offer.

While the survey paints a broad picture for the going rate of staffers at various levels of experience, those numbers may vary from market to market. To ensure you’re paying employees competitively, Doby suggests researching local cost of living and digging into comparable salaries offered by neighboring companies. Information on sites like Glassdoor, where anonymous crowd-sourced salaries are displayed based on location and industry, can give you a ballpark estimate. For a closer look at standard rates, asking peers may be the most reliable data point.

No matter how you slice the numbers, a competitive salary is a key ingredient to landing great employees—and also keeping them. “If you’re paying employees less than the midpoint [of the going salary range] you’re putting yourself at risk of losing them,” says Doby, who suggests proactively offering raises (or bonuses, or both) to qualified staffers. Offering a robust benefits package can also be the difference between keeping your all-stars and starting over.

What benefits should I offer? 

The design industry’s hiring processes have undergone a major shift in recent years, as candidates gained enough leverage to ask for top benefits, or walk away if their needs aren’t being met. While firm owners used to be able to blame a lack of benefits on a firm’s tight budget, that reasoning no longer resonates in today’s labor market.

The best way to stay ahead of the curve is to keep what today’s candidates are seeking in mind. Roberts says the interview process shouldn’t simply be salary focused. Rather than upping costs as much as it takes to nab a plum employee, use interviews to determine which additional benefits a candidate values, and then use that knowledge to craft the firm’s final job offer. “You have to look at the total package,” says Roberts. “Salary is definitely one of the motivators, but the total package includes company culture, benefits, hybrid or remote work—all of those things have to be considered.”

The most important benefit employees are looking for today is healthcare, says Roberts—a finding backed up by the survey’s results, where more than one-quarter of all principals cited requests for full or partial health benefits paid for by the company as one of their team’s top priorities. (Other coveted perks include retirement planning and time off for winter holidays.) In the wake of the pandemic, candidates have realized that prioritizing health and well-being is no longer a compromise, and while it can be hard for a smaller company to afford a full suite of benefits like a larger company might, there are ways around that. For a business in its early years, owners can offer employees a health stipend—this is called an EBHRA, which stands for Excepted Benefit Health Reimbursement Arrangement—to give employees a monthly allocation to pay medical premiums and expenses. They can also opt into a PEO, or professional employer organization, which offers small businesses an array of HR resources that would be far more costly to purchase a la carte.

Benefits don’t have to be exclusively financial. According to the survey, flexibility is the second most important benefit employees are seeking, with more than half of respondents reporting that employees have asked for remote work, flex schedules or more comp time. And if a firm owner plans on onboarding remote employees, Roberts suggests providing relevant work equipment—a cell phone, laptop or design programs—or a technology allowance for that candidate to use their own devices. Many job seekers are also looking for a firm that is aligned with a greater purpose or mission, whether it’s giving back to the community or contributing to a more sustainable future. Even having systems in place to recognize employees for their achievements, or to help pave a path to career growth, can act as soft benefits to boost your firm’s retention rate. “The key here is to remember that your employees really are your internal clients,” says Doby. “They are so important to the success of your business, and if you treat them well, they’ll treat your clients well.” 

Download the complete 2022 Interior Designers Survey on Fees, Salaries and Competing for Talent here.

Illustration: Danlly Domingo

This article originally appeared in Winter 2023 issue of Business of Home. Subscribe or become a BOH Insider for more.

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