In the course of helping interior designers take ownership of their businesses, I employ plenty of methods. However, there’s one tactic that consistently gets remarkable results, especially in relation to the effort required. It’s moving away from hourly billing.
Right away, designers find that making this change gives them more freedom than they’ve ever had in their work. They tell me that it has allowed them to be the designers that they’ve always wanted to be.
Compared to other mindset shifts that successful designers must make, such as big picture thinking, goal setting and defining a unique style, choosing to bill by project is delightfully simple.
However, too many designers still stick with hourly billing — the default option — because they’re not sure how to make the jump. They may not know how to execute project-based billing, or they may worry about how their clients will react.
The good news is that by the time you’re finished reading this article, you’ll have everything you need to get started transitioning a pricing structure that will save you hours and bring a sense of clarity and calm to your design process.
How Hourly Billing Hurts Your Brand
The ultimate goal for most interior designers is to build a thriving business that pulls in upwards of $250K in revenue each year. Meeting that goal means landing bigger and more profitable projects, which typically requires appealing to the luxury market.
Clients in the luxury market are much more concerned with the end product than the price. In fact, they’re often willing to pay whatever it takes if it means getting the look that they want.
That doesn’t mean you can charge an outrageous amount without providing a lot of value. But it sends the wrong message when you send an invoice that piddles around with details they care little about, like what you were doing, and when.
When your clients hire you, you want them to be paying for your design talent and your aesthetic eye, not the manual labor you’re doing (hauling furniture, rearranging accessories). But when you bill hourly, you’re giving the impression that you’re a tradesperson.
You need to take yourself out of the realm of tradespeople and into the realm of artists. Would a commissioned artist bill by the hour? Nope. Artists focus on making the best piece they can, and are more concerned with the quality of the end result than all the details of when and how it got done.
That does not mean you completely disregard how long a project takes or is estimated to take. You can certainly track time for your own purposes to check on profitability for your own reporting, perhaps in larger time increments like days.
But, the fact is, that the best clients don’t need to know how the sausage is made; they simply want to eat a delicious breakfast.
How Hourly Billing Stifles Your Creativity
As designers, you know how important it is for you to get in the zone creatively. The artistic side of your brain often needs space to think uninhibited by the confines of budgets and ticking clocks. If you’re like most designers, that’s when you get your best work done.
Hourly billing keeps you constantly thinking about those things, whether it’s wondering how to categorize the task you’re working on, or worrying that a certain task is taking longer than usual. This may not seem like too much of an inconvenience if you’re used to it; however, once the weight of hourly time tracking is lifted, you’ll begin to understand how much it was holding you back.
Project-based billing does more than save the mental energy wasted with hourly time tracking. It also cuts down the time you have to spend preparing invoices, explaining them and following up on them. That’s because there tend to be fewer invoices, and the ones you do need to create are much simpler by comparison to hourly summaries.
It bears repeating: The best clients would prefer that you spend as much time as possible on the creative work. Time spent on detailed invoicing costs both of you.
A Better Way to Invoice
So, how do you decide what to charge if you don’t use an hourly rate? I suggest charging the amount that will result in a profit margin of at least 22 percent, and ideally about 33 percent.
For those of you new to this concept, the “profit margin” is calculated by finding the net profit as a percentage of the total revenue. Here’s an example: If you spend $20K on a project and charge the client $25K total, profits would be $5K. The $5K is 25 percent of $20K, so the profit margin for that project would be 20 percent.
If you’re less experienced, you can charge closer to 22 percent profitability. As you grow, you can move up to the 33 percent range. You can also adjust this rate based on factors that you determine personally, such as project difficulty and your client relationships.
I believe that this range is fair, and it gives you a healthy chance to stay profitable and adjust for any unexpected project problems. This pricing also doesn’t usually raise any eyebrows on the client’s end when it’s blended into the cost of the total project.
Charging this way might seem a little arbitrary at first, but not when you consider this: It’s no more arbitrary than setting your own hourly rate. After all, when you establish your hourly rate, what are you basing that on? Comparisons to what other interior designers charge? Or perhaps you’re estimating what salary you think you deserve at this point, or what seems reasonable for a person to earn and working back from that.
I humbly submit that those factors are much more arbitrary than percentage of profits.
Listen: If someone wants a beautiful living space, and you’re able to deliver that for them just the way they want for a price they feel is reasonable, the amount you earn personally and how that compares to what other people make isn’t exactly relevant.When it comes to pricing, what matters most is that clients feel they’re getting a great value for what they paid. Click To Tweet
I believe this perspective shift is key in what makes designers successful. Interior designers who charge hourly are typically looking for a way to pay themselves. Those who charge by a percentage of profits are taking a big-picture view and acting as CEO. After all, you need profits to grow your business.
If you want more personal guidance from me on how to structure your pricing, along with templates for formulas and proposals, reserve your spot today in the Master Class Pricing for Profit Margin. We go over all of these issues in depth, as well as forecasting tools, worksheets and more. Hope to see you there!