Episode 048: Should You Price Your Design Fee Hourly?

 Show Notes

In this episode, I am sharing my view of flat-rate pricing versus charging an hourly fee for your design services. Although I am a huge fan of value-based pricing, there are some times when you will need to charge clients by the hour. The bottom line is you need to price your services correctly so as you start to work faster you make more profit. Then continue to analyze and increase your pricing year over year. This topic is one I LOVE talking about, so let’s jump in!

Learn more about my 12-month group coaching and mentoring program, the Interior Design Business Bakery.

About Michelle

Michelle Lynne began her interior design career after spending more than two decades working in Corporate America. She began in the home staging arena and has since built a successful, award-winning, full-service interior design firm, employing talented designers and serving clients across the country.

In the summer of 2018, Michelle began focusing on a big gap she saw missing in the interior design industry: teaching interior designers how to run the business of an interior design business. She now engages in private coaching and leads an in-depth, 12-month group coaching program, both options focus on teaching designers profitable processes, systems, strategies, and mindset needed to run a streamlined, profitable interior design firm. 

Her motto is simple: we rise by lifting others.

Connect with Michelle

You can follow Michelle on Instagram or join her Free Facebook Community! You can learn about Michelle's program, Designed for the Creative Mind right here. You can also learn more about Michelle's Interior Design Firm here.

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Transcript

I'm so happy you are here today. I'm excited because we are going to be talking about How should you charge by the hour or a value-based or flat fee? This is one of my favorite topics. And I'll tell you right now that I am a huge advocate for pricing with a flat fee of value-based. I'm talking a little bit about why I did start my business way back in the day on an hourly basis.

And let me tell you some of the things that came up that was so very difficult when I was charging by the hour, is that one, it was a nuisance to track. Now, it was very easy to explain. So I could tell the client I'm charging X number of dollars per hour and wherever you are, whatever you're charging right now, just know that we're not here to judge.

We are truly here to talk about some of the pros and the cons. Of each and why they may work out and what works for me doesn't necessarily work for everybody. So while I am a fan of the value-based fee, there are also times when we charge by the hour and play into that.

Let's just talk about straight-up design fees. It's easy to explain. I charge X number of dollars per hour, but it's a pain in the booty to track. Like how do you track. When you're, when you are thinking about a client and their project, when you're in the shower, I mean, that's just weird. Do you put that on the client?

No, you're or when you're being inspired by the color of a sunset or maybe some food that you're making or something like that, you can not track all of the times. Even if you did 20 bucks says you don't charge for all of it because you feel guilty. I can't believe it took me eight hours to find the perfect couch.

It might've taken me eight hours to find the perfect sofa, but it took you 30 minutes to find the exact right rug. So, so when you're going through it, you're probably going to undercut yourself.

Let's go back to that hourly rate. So whatever you're charging your client starts to look at you as a commodity. So they're going to shop for the lowest rate, but commodity means that you are comparable to another item or service of the exact same thing. We all know that's not the case. We know that you are.

Going about your business differently. You have different skillsets than other designers. You have a different approach and delivery of it. You can't compare say my design service to your design. Okay. Maybe you're 10 years longer in business than I am. Maybe you're 10 years, less than business than I am.

But if we're charging by the hour, they're going to be comparing us as though we are the same. Okay. So, so there's that another thing, when you are pricing by the hour, the faster you work, the lower your income.

So if you have been in business and you've gotten really good at it, You are going to be making less money. Therefore you have to pick up more projects and you know how hard it is to juggle multiple projects. I mean, I've talked to designers that are juggling 20 projects at a time, 20-25 projects.

They're all at different phases and some of them might be new, but new construction or some of them might be renovation. Some of them are decorating, but juggling even seven projects can be so difficult depending on the project. But your revenue is limited by time. So hourly pricing is great. And it's easy to explain.

It's also, how do you justify all the time needed? If it takes you 40 hours to fully develop a design for a living room, the client's going to wonder what all that entails. And what if you, and then are you going to bill them for all the conversations?

All of the email, all of the admin. So just all of that justification for me, like I said, this is this I'm telling you how I do business. It might not be the right thing for you, but the anxiety that it caused for me to send that invoice and wonder what the client was going to say.

What sort of pushback I was going to get. So in addition to that, I was billing after the services had been rendered. So if you're billing by the hour if you're not interested in doing a flat fee, at least bill in advance and then chip away from that.

Because if you serve, if you provide the service and then you don't get paid, there's no way to go back. And undo the service that you provided, but you can get paid in advance and at least chip away so that you're getting paid for the work that you're performing.

Hourly pricing. Again, it's easy to explain, but it's a nuisance to track. You never charged for all of the time spent clients shop for the lowest rate. The faster you work, the lower your income is. So your revenue is limited by time. And then you have to justify all of the time spent or needed.

For me, that's why hourly pricing just was not working for us. What does work for us at MLN interiors group is the value-based fee. Okay. Or it's a, or it's a flat rate, basically.
It's been a game-changer in our business and it's crazy. How scared I was to do it. So let me just acknowledge that it's a very scary process to change from hourly to flat fee.

We teach, we go into a lot of depth in this, in my paid mentorship program, the interior design business bakery and we do lots of exercises and we do a lot of. Of the client leading up to it. And then also the experience that we deliver is fabulous.

Once they have signed the contract and agreed to the price, one of the biggest reasons that clients dig it is because clients really do love the fact that it's just a flat fee.
And so do I from a cashflow perspective, but what it does is it removes the concern for the client of how much is this going to cost?

Because who likes to go into an open-ended purchase? How much is this going to cost? I don't know, but my hourly rate is X number of dollars. Okay, what do you think it's going to cost? It could probably cost, you know, let's just say 80 hours, times X, number of dollars. You're what you're doing is you're giving them, you're giving them the calculations and they're trying to logically figure out what you're doing.

Like what are you doing with your time and my money instead, if you just tell them it's going to cost you X number of dollars. It's just going to go ahead and sit with them and it's either going to be valuable to them or not.

There's a lot that goes into the process of warming up a client to receive a bill or an invoice for $10,000, $20,000, $30,000, $50,000 and more. It's not just here sign on the dotted line. So, I do a lot of teaching on that also for, I have a free workshop, depending on when this is coming out.

When this podcast is released, it's called Rolling in The Dough. So it's a five-day workshop that helps you qualify and close high-end clients. And we go through a lot of the steps that it takes to get to the point of them signing a large contract, but you have to know how to calculate your fees before you get to that point and slide that contract across the table.

You can tell them it's going to cost you X number of dollars and that's from, okay. This installs confidence to an agreed-upon amount, immediate. So you're going to have the people that are looking to hire you. They're going to be professionals, hire professionals.

And if you're charging, you know, a very low hourly rate and very low is relative. But what it does is it lowers their expectations of you and they treat you more like the quote-unquote hired help, and there's nothing wrong with being the hired help.

So please don't email me any complaints on that, but it takes you from being brought in the kind of like a, it is a service, but as a servant spirit treatment, and it elevates you to an equally professional and I've been treated both ways.

And I don't have any issues with it, but I can tell you that it is much more fun to be treated as a valued professional than it is to be somebody who just shows up hourly. It doesn't have the same level of respect. I don't know how to describe it better than that.

Again, for those of you who've been around, hopefully, you know, my heart and I'm not being disrespectful for the service industry, because this is a service luxury service that we provide.

So I'm going to trip over my own tongue on that here on the podcast and just leave it unedited, but hopefully, you guys understand the gist of what I'm trying to say. Okay. So we want to be treated as a professional and this install, instills confidence upfront to this professional, but it's also a familiar pricing model.

So for example, you're your smartphone subscription. Okay. It's a set number of dollars every month. We're not going back and forth and doing those minute things as much internet. Okay. You can be on the internet 24 hours a day, but you're still, or two hours a day and you're still paying X number of dollars per month.

It's the same thing to my hairstylist. You might be shocked if you've never seen me know that this is not my natural hair color. It's true. It's not, but I don't. I can go to my hairstylist and I know exactly what I'm going to pay for, you know, cut color, highlights, low lights. It's a fixed number. Whether it takes her two and a half hours, or it takes her three and a half hours.

It doesn't matter. This is what I'm paying. Okay. It's the same thing. If you go buy a car, you know exactly what you're paying and exactly what you're getting. Now, you could negotiate some of that by saying you don't want the heated seats, or you don't want the leather seats. You don't want, you know, the fancy sound system.

So you can pull some of that, but that's the same thing with your pricing is if you're trying to get a project done and you're pricing it out and you say, okay, so for these three rooms, it's going to cost X number of dollars. And they say I don't want to pay X number of dollars as a flat fee.

Then you can say, great. What room do we want to remove? Okay. So it's the same thing when you go buy a car. Okay. If you don't want the leather seats, we can take some money off and if you don't want to heat it, then we can take some money off, blah, blah, blah, blah, blah. It's the same thing. Okay.

So the shock value there is going to be decreased because then it's also, you're not, it's not going to be that never ending invoice. Every month for the next two years. When is this going to end? Holy cow. I can't believe I paid you a bazillion dollars. Okay. So you get from point a to point B, which is a signature and payment, a lot faster.

Speaking of faster, if you work faster, you make more money. So if you charge the equivalent of what you would have charged for 40 hours, but you get things done in 32, then you've automatically you're coming out ahead twice.

Now I think the biggest obstacles. To overcome. If you are going to switch from flat fee to no switch from hourly to flat fee is it's the fear of miscalculation. Okay. And the fear of losing money, if you miscalculate that fee. So when you roll into that, then you just have, and there's no way I can teach how to do this on a podcast.

Again, another plug for my interior design business bakery. We've got a ton of exercises and we go through and we collect data and information and so forth as we do this over the course of a year. But immediately you can calculate it by, I mean, you could today go figure out how many hours you're working on designing an average living room.

Take the hourly rate that you're charging and flip that into a flat fee. Okay. That's the super-duper itty-bitty basic. Put your toe in the water way to do it. Okay. What you need to do ongoing is collect data to analyze and increase your pricing year over year. Now we base our pricing on the square foot and the layers of complexity that go into each room.

So there's a lot more that goes to it, but I'm hopeful that I might have. Quote, unquote, convinced you to seriously look at the option of a flat fee to present to your client. It's also fabulous because you get you can budget out your year. So this podcast will be coming out January, February ish.

I would challenge you to go grab a spreadsheet or a calendar or a blank piece of paper, whatever works best for you and take a look at how much revenue do you want to create this year. Okay. And it doesn't matter if you're listening to this podcast and it's August, it doesn't matter. So go get the same thing, figure out what you want to make in the next 12 months.

If you want to make, and I'm just saying this, because it's an easy number for me to calculate right here. If you just want to create revenue of a hundred thousand dollars, then what you're gonna do is you're going to take a look and say, okay, so I need to have. Five projects with a $20,000 design fee.

Or I need to have one project with the $50,000 design fee and five projects with 10,000, or I need it, it's a combination. So whatever you're comfortable with wherever you are in your business. Okay. There was a point in my business. I had no confidence that I could charge 50 freaking thousand dollars for my idea.

And then of course some implementation, but it just, I'm just telling you here and stuff from a bragging perspective, it is a possibility perspective. The first time I slid a $10,000 design fee across the table for the contract, I nearly peed down my leg. I'm not kidding. And looking back. How that client got ACE deal.

Now it would easily be 60, 70, $80,000 of a design fee for my team for what we implemented there. So just know that you're not alone where you start and learning how to calculate these details.

But you have to start. And so going back to the whole annual 12-month budgeting thing, it's fabulous because you're writing these things down and then they're going to happen because once you put it out there into the universe, you're sending out this energy, you're going to be shocked at how.

But from a budgetary standpoint, you can also take a look and know that these are the goals that you have and how can you break them down into smaller bite-sized projects in order to get there? Did you ever think you'd be able to budget and forecast your fees? I'm telling you it's possible.

So as a recap, The value-based pricing. It's a logical perspective and it removes the concern from your client. How much is this going to cost? Because you're telling them straight up. Okay. You're earning their trust. You're instilling confidence into the client that you can get the shizzle done. And this is what it's going to look like.

It's a familiar pricing model to most people. Okay. The shock there is, reduces the client shock. Okay. But you also have the ability because you can't say I can get that room done. It's going to take me 40 hours. Okay. Or I'm going to get this house done and it's going to take, let's just say a hundred hours.

And for the record, I'm just making these numbers up 40 hours. Yes. It could be very reasonable for a living room. It just depends on what the client's anticipating. So don't use those numbers. If you're new as a measure for your time. But let's just say you're calculating a house and you've got these three, four rooms and they are shocked at the fact that it's going to cost $20,000.

Then what room do you want to take off? We can bring it down to 15. We can bring it down to 10, whatever you're most comfortable with. Okay. And hopefully, as you're going through your sales process, you're peppering in. Numbers that the client is that it could look like so that you don't walk them through this entire process.

Them thinking that you're charging, you know, a low, I don't know what to say, that you're charging, you know, $20 an hour or whatever that they're anticipating their total's going to be $2,000 for their whole house.

So you're just going to pepper that in, in your conversations, as you're leading up to the design fee again, my free workshop walks, walks you through all of this, but again, it's work faster, you get more profit and then you can continue to analyze and increase your pricing year over year.

That's what I've got for y'all today. The pros and the cons, the differences between hourly versus flat fee It's been a game-changer for my business. Plus you don't have all that administrative work. Yes. So for the record, you still need to track your time, but you don't have to send an invoice every darn month and work on collecting it.

So you're saving time. You're not working as hard with all of those, with all of those details. Usually, I wrap up by thanking my guests for being on the show today. So I'm going to think myself, thank you, Michelle, for being on the show today. Oh, I have really enjoyed it.

Yes, I am a dork. I'm very comfortable with my dorkiness, but if you need any more information if you can benefit from more resources surrounding the business of running your interior design business.

Join my growing community on Facebook. Yes. I know it's Facebook. It might not be your favorite platform, but it's a great platform for the group and it's called the interior designers business launchpad. So while I don't take myself very seriously, I do take business very seriously and we are there to share.

I look forward to seeing you there. And if you're wherever you're listening to this podcast, drop a review, please. It definitely helps us stay relevant. So until next time, take good care.