“So, how much will you make on that?”
Have you ever heard that one? Strange, isn’t it? Your customers don’t ask that of their doctors or lawyers, and probably not even of their real estate agents or stock brokers.
It seems perfectly reasonable to them that a real estate agent makes more selling a $5 million home than a $1 million dollar home.
But why you would earn more on a $45,000 dining room table than a $10,000 dining room table causes their heads to burst.
Yet if you typically mark merchandise up, say, 40%, the fact is your contract calls for you to earn more on a $45,000 than a $10,000 table, even though your client might argue that it took you no more time or effort. (And in many cases, they might be correct.)
And what if that dining room table is just one of the ultra-expensive items that your client is worried about, along with a rug, some accessories, a sofa, and a few other pieces?
Do they expect you to price each one individually? To have different markups? (Always called “management or purchasing fees” in the presence of the client.)
The Golden Rule of Business
The problem potentially gets worse for you due to the “golden rule of business.” That rule stipulates that “he who has the gold makes the rules.” Which means that most designers faced with this client demand will cave to it and greatly reduce their profit on certain pieces, or on an entire job. It’s a classic case of “buyer power.” As a small business owner, you almost always need this big, wealthy customer more than they need you, which means in a negotiation…you lose.
Strange, isn’t it? Your customers don’t ask their doctors or lawyers how much they’re making on a transaction, and probably not even their real estate agents or stock brokers.
Arguments You Can Use
But there are some arguments and strategies that you can use to your advantage. Some may be presented to the client and some may be more to buttress your own self-confidence level.
Let’s consider the realtor. Why do they earn tens of thousands more on higher priced homes when the amount of work done is precisely the same? They’re still just selling one home at a time, aren’t they?
And why does the stock broker make more on a $1 million trade than a $10,000 trade? It’s still just one trade, isn’t it? It didn’t take him any more time or effort.
And why do investment bankers and business brokers make more for selling a $100 million business than they do for selling a $1 million-dollar business?
Your challenge is somewhat more complex as rather than one transaction price, you have prices for multiple items and each could have a different markup. To avoid problems down the road, it is imperative that you carefully explain your pricing policies in your contract at the outset of a project.
For example, imagine this conversation between you and a customer who has challenged you on fees and why you’re making so much more on expensive items.
“This paragraph explains our management fee for merchandise purchases. We use our trade resources to find the lowest possible prices on products we order for you, and then attach a 40% management fee. That may sound like a lot, but keep in mind that we buy well below retail, and the management fee includes sourcing, ordering, expediting and tracking, receiving, storing, installing, and warrantying the merchandise. This is standard for the industry. And yes, just like a realtor or a stock broker, we earn a larger fee when you choose a more expensive alternative, but we are also the experts making sure that choice is a good investment and contributes to the design sensitivity. The easiest way for us to justify this fee is to say, ‘If you want to purchase your own merchandise, you are more than welcome to.’ We find that even the few clients who try this once, rarely ever try it again and they wonder why we charge so little!”
Now, four months later when the conversation about the $45,000 dining room table comes up, you can say:
“Bob, you may recall that when I went through our contract with you, I addressed this specific scenario, and how our firm makes almost nothing on some orders, a little more on others, and quite a bit on a few. That’s how our average margin on a job allows us to stay in business, which is why all interior designers operate this way. If we had a different management fee for every single item we ordered, it would be a multi-page spreadsheet that would create total chaos for us and our clients.”
Confronting Reality and the “Shepherd Scale”
While this line of thinking will help, it doesn’t mean that a tough client won’t continue to negotiate. I can already imagine one saying, “Ha! I never pay my real estate agents or stock brokers full commission. They always come off…”
And, alas, in the real world, so will you in many cases. After all, you don’t need to let your ego get in the way of a nice bottom-line profit. A couple of ways to approach this, and remain consistent to the positions described above are:
- Put a cap on your total profit from merchandise purchases. If the budget is projected at, say, $400,000 to $600,000, and you expect to net 27% (a 37% management fee) you would expect to earn $108,000 to $162,000. You could offer to cap your management fee at, say, $125,000 and resell at your cost over and above that.
- Point out that in a normal design project, there are only 3-4 pieces that are likely to have such wide variability as the dining room table described above. Offer to calculate your management fee on the lower end of the budgeted item and charge that, regardless of the actual purchase price. But only do this on the 3-4 items, not the entire job.
- In the world of mergers and acquisitions, there is something called the “Lehman Scale.” It determines the broker’s commission when they sell a business and gives them a high percentage for the first million in value, and then lower percentages for each increment afterwards. Applying this principle to interior design, we might devise the “Shepherd Scale” as something like:
- First $200,000 of purchase budget = 40% management fee
- $200,000 to $400,000 of purchase budget = 30% management fee
- $400,000 to $800,000 of purchase budget = 20% management fee
- Purchase budget over $800,000 = 10% management fee
I have only recently had my first coaching client use this method with apparent success, and you will have to do the math on your own project. But some clients might like the logic of such a scale, and it again helps them to understand there is some “industry standard” at work and you’re not trying to gouge them.
A Never-ending Conundrum
Pricing is a never-ending conundrum as you know. You’d love to attend a seminar or read a book and find that one-size-fits all, set-it-and-forget-it pricing model. But of course, it doesn’t exist. You must have guidelines and know where to draw the line, but especially when you’re dealing with the “whales” that will make or break your success, you also have to be ready to negotiate. Hopefully these pricing ideas will give you some help.