Excerpt from The Next Level- Flat fees and minimum expenditures– these are from two pages amongst 101 pages!
Profitability depends on your ability to deliver a product to the marketplace.
That others will buy for more than you spend to produce it. This is the essence of running a business.
Pricing a project should be about the finished product- what is this “product” worth on the open marketplace?
If I can do a kitchen design in 30 hours as an accomplished k and b designer is it worth less than if Susie Q takes 60 hours?Or does it matter what the finished product is WORTH to the client? How many of you truly focus on trying to figure out what is this project worth to this client? I am guessing not many-as not sure this is ever taught!
This is part of the problem and type of narcissism of charging hourly- someone is told to charge what they are worth but really it should be viewed as what the project results are WORTH to the client.
You need to determine not what you are worth but what your product is worth.
And forever more think this way.
Right? Mind shift. Think like a business person. Not a designer. When you are pricing your projects, you are NOT a designer you are the owner of a business.
This is the simple precept of a free market economy. Buy low sell high. But in our world of interior design, somehow the business end got lost along the way in many cases or in some- was hijacked by a few who did designers wrong with crazy thinking of splitting discounts and fancy word problems to calculate a simple price for a damn chair.
“I am here to tell you splitting discounts is bogus bad.”
If you do this now, stop. If you prefer this method, at least do a simpler discount off of retail- the “if the discount is xx but not over xyz then you get xyth but if it is less than xx you get xtzqwe- whatever! Kills me.
I do not have time for all the clients who would look at me like I had lost my mind. The price is the price. Make it a win win and no one is going to begrudge you profit. Set the stage properly for the epic journey and this is not an issue.
So to what to charge and how to charge- what is the product worth?
Who cares what an hourly or even flat fee is – what designers who want to run a business and not let a business run them- need to think about is what is the profit on this project? What is it worth to the client?
These are the only two metrics that really matter in the end- the rest are just methods to get to a result that often does not really have a single thing to do with the price of the “product”.
Analyze the work flow and assign a time cost to each aspect. More on this later. Working on some things to help with this.
Then look at all the elements of profit – your overall gross profit.
Product sales? Expenses? What can be cut? What can be added? New services?
Competitive analysis in similar designers of same skill level?
What is it that goes into your unique”cake” you are baking then offering for sale? Can you articulate this?
What are the elements of your “mix”? And how much do they cost you?
And what do you want to make on the “cake” at the end of the day?
Analyze your own business and decide what goes into your business THEN you can determine your own hourly charge–from your hourly needs based on expenses and profit you want to achieve you can back into a flat fee (this is more complicated than figuring your hourly rate.
Email me- (firstname.lastname@example.org) your monthly average expenses, your desired goal for personal income, and how many billable hours you want work each week and I can tell you what you need to charge. Bonus if you sell product but must be able to tell me how much you sell and what your gross profit margin is on it.
Profitability efficiency -Tracking Revenue by category is key
I advise keeping your sales revenue into groups in a high, medium and low profit category system so that you can better track your GPM in each category. It may vary in your bookkeeping system- but should be able to do it.
This is very dependent upon your own firm and what sort of accounts you have set up but unless you are buying all items for close to same margin, best to split them up. Makes much easier to read your P and L too if all sales are not grouped in one lump category.
Examples of profit categories you can adapt to your needs– this will depend on your business structure
High profit margin categories might be: 40% or more
- Design fees
- Furnishings with stocking dealer status
- Custom furniture you design
Medium profit margin categories might be: 25% to 40% margins
- Wall covering
- Cabinetry (if not a stocking dealer)
- Cabinet hardware
- Non stocking dealer furnishings you get from a trade source
- Plumbing fixtures
Low profit margin categories might be: 20% margins
- Retail sales where you get a small discount
- Storage and receiving if you mark it up a little
- Accessories you purchase retail and resell
Of course these numbers are suggestions and may be different for your firm. The idea though is to begin tracking it now- for growth later. If you are newer and have fewer product sales then perhaps a high and low might be enough.