The BUSINESS of Interior Design

Survey Results

2011-07-31T08:43:00.000-04:00

Thank you to the 50+ designers that took the time to answer my survey in the last blog post. The results are listed below and I will comment on them over the next week.

Q1: How do you charge clients for Design Concept Development (i.e. consult w/ client to determine design requirements; prepare initial design and color scheme; space plan; and possibly a preliminary budget)?

65% of you charge by the hour
19% charge a fee per space or a total fee for all spaces

Q2: How do you charge for the time you spend Designing / Sourcing / Shopping / Selecting items prior to actually purchasing items (i.e. taking the design concepts and sourcing out the individual items to present to the client for possible purchase)?

69% of you charge by the hour
26% of you don’t charge for these services – as you include the charges in either the Design Concept Development Fee, in your Purchase Mark Ups, Flat Fees or just don’t charge for it at all

Q3: How do you charge for Purchasing and Managing orders (i.e. the time after Proposals are approved; the time it takes to place orders and do all follow up work with your vendors, suppliers and workrooms through to completion and installation)?

58% of you charge a Mark-Up or Commission on top of the trade cost of the items or charge Retail Price and your fee is the difference between Trade and Retail Prices)
27% of you don’t charge a mark-up and only charge hourly for these services

Q4: How do you charge for work you do with the Project Architects and non-decorating contractors?

63% charge hourly
19% charge a fee equal to a percentage of the Architect’s or Contractor’s Fees

Flat Fees

One response that flowed through all four questions were the designers that charge a Flat Fee for the entire project. 8% of the designers responding to the survey said they charge this way.

How do you charge for your services?

2011-07-16T16:14:00.009-04:00

Clients hire designers for their artistic ability, design sense, skills and creative vision – and then the professional and experienced ability to actually deliver all of this in the form of a beautiful and cohesively designed home. Beyond what some people will try to tell you, the COST of a well designed and decorated home design is NOT the client’s primary consideration when interviewing designers. I’m not saying they don’t have budgets – it’s the great decorating results that they are after – within their budgets. Which do you think clients thinks about (or discuss at cocktail parties) after their home’s installation: how much money they saved by hiring a discount decorator – or how much they love their new surroundings that they will live with for the next decade or so?

I will be explaining with this blog over time how I feel Interior Designers and Decorators should be charging for their services and at what price points. But I would love to first get your feedback to 4 multiple choice questions about how (in general terms) you currently charge your clients for the following services so I know how to direct the content of these blog posts:

Please CLICK HERE to take the 4 question Survey. Thanks

Adding Expenses? What’s your SALES MULTIPLE?

2011-07-08T21:46:00.000-04:00

Knowing when your firm is able to add expenses is a tricky situation and clients ask me all the time – “Do you think I can afford to ………?” After reading this blog you should be able to answer (at least in ballpark terms) the question of how much additional revenue you need to generate to cover each dollar of new cost (i.e. adding an employee, renting new office space, etc.).

The next time you meet with your accountant or business manager take a look at your income statement and divide your Gross Sales (which includes item sales, time billings and Design Fees) by your Gross Profit (which equals Gross Sales less Cost of Sales) on goods and services. The resulting number tells you how many dollars in Gross Sales you need to cover one dollar of expense without increasing or decreasing your existing Net Profit.

Below is a simplified income statement:

Sales $ 675,000

Less: Cost of Sales $ 500,000

Equals: Gross Profit $ 175,000

Less: Operating Expenses $ 125,000

Equals: Net Profit $ 50,000

If we divide Gross Sales ($675,000) by the Gross Profit ($175,000) we end up with the number 3.86. This business will need to generate on average $3.86 in Sales for every $1.00 it wants to spend on new Operating Expenses, without increasing or decreasing its Net Profit of $50,000.

Let’s look at two examples of how this can be applied to real business settings.

Example 1:

The firm wants to hire a new employee that would be paid $40,000 in Salary and maybe require them to pay an additional $5,000 in health insurance and $3,000 or so in Payroll Taxes per year totaling $48,000 in additional expenses per year. If we multiply this cost by the multiple of 3.86 we find that in order for the firm to afford this new employee, they will need to generate approximately $185,280 (3.86 x $48,000) more in gross sales! To make it scarier, this number will surely increase if they add in the costs of a new computer, software licenses, desk space, telephone, and anything else that must be purchased for this new employee. So the question is, will adding this employee allow them to generate $185,280 in additional revenues? If not – than they probably reconsider hiring this person.

Example 2:

The firm’s principal wants to move the office out of her home and finds a space to rent for $1,800 per month. With other expenses (utilities, insurance, internet connection, garbage, etc.) she expects total costs of the office to be around $2,500 per month. Using the multiple of 3.86 and multiplying it by $2,500 per month we see that her company needs to bring in approximately $9,650 more in Gross Sales per month (or $115,800 for the year) to pay for the new office space. Will the move to the new office bring her enough new business or allow her to work more efficiently that she will be able to earn another $115,800 in Gross Sales to afford it? If not, she needs to reconsider her reasons for wanting to move the office from her home.

After determining YOUR sales multiple - keep it in mind before making major expenditures or even everyday purchases that cannot be billed back to the clients. It’s better to only raise your overhead costs when you feel comfortable that your revenue stream will increase enough to cover these costs on a regular basis.

70% Revenue from 30% of the clients?

2011-07-03T09:46:00.001-04:00

How does time spent by you and your firm compare to the revenues each client generates?

Most designers are unable to tell me with any certainty the breakdown of how much time their firm actually spends working on each client’s projects. I understand that most designers (principals and staff) have very little patience for tracking time, especially if they aren’t billing their clients on an hourly basis. BUT – I always get a reaction when I do the following exercise with them.

When consulting I like to look at several years of a firm’s revenues and make a listing of each client’s NET Project Revenues (which is their total item sales plus time billing plus design fees minus the cost of items sold). This is the amount of money that each client has contributed to the firm’s revenues before overhead costs. Next, I take the net revenue for each client and divide it by the firm’s total net revenues, which gives each client’s contribution to the total net revenue as a percentage. Here’s an example of a typical company:

Client Name	Net Revenues	% of Total
Anderson	30,000	2.00%
Franklin	90,000	6.00%
Grant	210,000	14.00%
Harrison	75,000	5.00%
Ingle	60,000	4.00%
Jones	45,000	2.00%
Mason	90,000	6.00%
Lincoln	390,000	26.00%
Peters	60,000	4.00%
Stevens	450,000	30.00%
TOTALS	1,500,000	100.00%

The bulk of the revenues in interior design firms typically come from a small percentage of their clients. In the above example 70% of the revenues ($1,050,000) are coming from 30% of the clients (Grant, Lincoln, and Stevens).

When I review these charts with designers, I am told (usually with some fairly descriptive expletives) about HOW MUCH OF THE FIRM’S TIME the low revenue producing clients are taking up. [If your firm does keep track of time – compare the % of time spent to the revenue %].

It’s not to say you shouldn’t do the low revenue producing jobs – but you need to be smart about them. Every project requires personal attention from the firm’s principals and the staff. Contracts need to be written; design meetings need to take place; shopping will happen; the phone calls and questions the client has will need to be addressed; and of course all the orders will need to be placed and followed up on. You can’t ignore the client or be less professional in the way you treat them – just because they have a smaller budget or project scope. So what can you do?

You can try to schedule small budget projects at times between when other major projects are ending and beginning.
Make client meetings as time efficient as possible. Set firm meeting times (“I must be leaving at 2pm”) and show up with a specific agenda of what needs to be discussed and decided upon.
Be much more aware of how much time you spend on the smaller dollar value purchases. Don’t spend hours shopping on items with $50 profit margins.
Just keep in mind that the bigger budget clients are driving the revenue of the firm. Continue to focus business development efforts on projects like the ones that are most profitable.
AND It’s OK to turn down jobs every now and then!