An Edge Member’s Questions, Answered!

I love getting emails from Edge members and always try to answer them within 24-48 hours, depending on the degree of research and analysis I may have to do. I got one recently that had such detailed questions that I decided to share it with all members. Enjoy and be sure and leave comments below for areas where you might see things differently.

And please keep in mind that anytime I site “benchmarks” or “ranges,” these can vary radically. If you are far off, it could be bad…or it could be good! The key is to let these at least force you to ask, “Why?” My answers are in caps.

Q: What is the typical or standard pay structure that you have found with other designers that you mentor? Are they salary plus commission? Independent contractors or employees?I currently have 3 designers that are employees but are 100% commission. I am looking to change our compensation plan and am curious also what you have seen that is the best pay plan? 

A: SO WE’RE DISCUSSING FIXED V. VARIABLE COSTS HERE. VARIABLE (IE; COMMISSION) PROVIDES A GREAT DEAL OF FLEXIBILITY AND SAFETY IN THAT YOU ONLY PAY FOR WHAT THEY BILL. BUT IF YOU ARE OVER YOUR BREAKEVEN POINT, YOU’LL PERSONALLY EARN MORE IF THE COSTS ARE FIXED, OR IN THIS CASE, SALARIED. I HAVE ALWAYS ADVOCATED FOR A BASE PAY + COMMISSION APPROACH, BUT WHEN PEOPLE ARE HIRING QUALIFIED DESIGNERS WHO WILL BILL TIME, THEY PAY THEM A FIXED SALARY IN 98% OF CASES. THESE SALARIES VARY GREATLY BY REGION AND DEMAND, FROM $90K IN SAN FRANCISCO TO $40K IN SMALL RURAL TOWNS. 

A RULE OF THUMB IS THAT A BILLABLE EMPLOYEE SHOULD BE ABLE TO GENERATE BILLINGS EQUAL TO 2.5X TO 3.0X THE TOTAL COST OF EMPLOYING THEM. SO, A $50,000 EMPLOYEE, PLUS 20% BURDEN = $60,000 X 3…THEY SHOULD BE BILLING AT LEAST $180,000/YR. AT $140/HR THAT’S ALMOST 1,300 HOURS, OR ABOUT 65% OF THEIR TIME, A FAIRLY COMMON NUMBER. 

Q: What is the general percent of gross profit for personnel?

A: THERE’S A RISK HERE THAT WE’RE NOT DEFINING TERMS EXACTLY THE SAME, SO TAKE THIS WITH A GRAIN OF SALT, BUT 46% OF CONTRIBUTION IS MY BENCHMARK FOR TOTAL PAYROLL AS A PERCENT OF “CONTRIBUTION MARGIN,” WHICH CAN BE DIFFERENT THAN “GROSS PROFIT,” BUT IS PROBABLY GOOD ENOUGH FOR THIS BALLPARK EXAMPLE.  

Q: What is the general percentage of gross profit for advertising?

A: HA! IT ROUNDS TO ZERO WHICH IS ONE OF MY PET PEEVES ABOUT THIS INDUSTRY...THAT FIRMS SPEND SO LITTLE AND SO INCONSISTENTLY ON ALL FORMS OF MARKETING.  MOST SMALL BUSINESSES SPEND BETWEEN 4-7% OF GROSS SALES ON ADVERTISING AND MARKETING. START-UPS OR HIGH GROWTH FIRMS MIGHT SPEND AS MUCH AS 10-12% OF LEADING (PROJECTED) REVENUE.

FEW INTERIOR DESIGN FIRMS CONSISTENTLY SPEND OVER 1-2% OF GROSS SALES. (YOU CAN DO THE MATH TO CONVERT THAT TO PERCENT OF GROSS PROFIT; MY BENCHMARK JUST HAPPENS TO BE BASED ON TOTAL SALES SO MAKE SURE YOU TAKE THAT INTO ACCOUNT.)

Q: What is the best way to spend advertising dollars?

A: I WISH I HAD THE MAGIC BULLET HERE… I FIND THE BEST WAY TO SPEND IS NOT ON SOCIAL MEDIA, THOUGH SOME PAID PLACEMENT (EVEN ON SITES LIKE HOUZZ) CAN GENERATE LEADS. MY FAVORITES ARE A GIFTING STRATEGY (TO YOUR TOP 20-40 OF ARCHITECTS, BUILDERS, FORMER CLIENTS, AND OTHER INFLUENCERS) EVENT STRATEGIES, AND DIRECT MAIL CAMPAIGNS. I’LL BE WRITING AND TALKING MORE ABOUT THE LATTER IN THE UPCOMING MONTHS. MY ONLINE COURSE, “THE 1-DAY MARKETING PLAN” IS A GOOD SUMMATION OF ONE OF MY PREFERENCES. YOU CAN TAKE IT AT WWW.INTERIORDESIGNMBA.COM WITH THE COUPON CODE, “EDGEFREE.”

Q: What is the general pricing that is done for “To the Trade” designers? Cost plus….?

A: I ASKED QUESTIONS ABOUT PRICING IN A NATIONAL SURVEY AND GOT 47 DIFFERENT METHODS! IT’S ALL OVER THE BOARD. AND IT GETS VERY COMPLICATED. AGAIN, MY COURSE ON STRATEGIC PRICING (ON THE SAME SITE) IS ABOUT THE BEST I CAN DO TO ANSWER THIS QUESTION  

Q: Any information that you could give me to discuss with my colleague would be so very much appreciated.Thank you in advance.  I look forward to working with you on my design firm, and making positive changes to grow my business.
A: JUST HAVING THIS MEETING AND CONVERSATION, AND FOCUSING ON SUCH VITAL NUMBERS IS A GREAT START. LET ME KNOW WHAT YOU DISCOVER!

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