Change Your Interior Design Fees from Hourly to Value-based Pricing
We are seeing a shift in the way we charge clients. Many are moving from hourly to value-based pricing. Maybe you have heard it termed as flat fees. Either way, it is a change that is being promoted and needs to be undertaken with care. Just choosing a flat fee or value price because the number seems right or because someone else is charging that amount is not going to ensure you are profitable on the job.
What are Flat Fees / Value-Based Pricing
Flat fees or value-based pricing is a pricing strategy. This means that this is the way your company has chosen to bring in income for the product or service you offer. A flat fee is a fixed amount that is charged for a product or service. Hourly rates and square footage rates are also pricing strategies. Flat fees are created by identifying the product or service value, allowing for what you don’t know, and the time it takes to accomplish the task, among other things. This means, you still need to know how long something takes and the process used by your company to create the flat fee.
Why change pricing strategy
Good question. For some, hourly charges may seem to work. But what if I asked you a series of questions such as: Do you charge for every minute you think about, strategize and actually work on a project? Do you feel great every time you invoice the client? Does the client love your answer that you don’t know how long it will take and the process will be open-ended based on the hours needed that you don’t know in advance? Do you cut down on hours billed because you have a hard time explaining why something took “so long” and you want to keep the client happy? Do you find yourself underestimating in general so appease the client?
My guess is that some of these are answered with a yes. And that is the problem with hourly billing. How about this: Do you have an accounting of every moment your team spends as you go through the project or do you have to struggle to recreate it after the fact? Or – your process is tightened up and what used to take you 4 hours takes 3 now. The value is the same, but now you make less because it took you less time. Doesn’t that feel wrong?
See where this is going? Hourly billing is difficult, and it allows the client to step in and oversee every moment you worked on their behalf. Many find it difficult at best and stifling to the creative process because you have to account for every minute. Even those where you are trying something that doesn’t quite work out. Talk about feeling like you are under a microscope.
How to change from hourly to flat fees
So, how do we make the shift from hourly to flat fees and value-based pricing? First, we must know what we are pricing. Value, quality, experience, expertise, time, etc. Each of these plays into the pricing strategy. Also, we need to price based on our internal processes, risk, and service levels. This means that we don’t get to ignore how much time it takes to accomplish something. We need to know and track our time within our processes. The benefit is that this data is only used internally, and we do not need to provide an accounting to our client for oversight. Freedom!
Benefits of Flat Fees and Value-Based Pricing
This is the best part. There is a benefit to both you and your clients. You benefit in the following ways: you will know how much money is coming in so you can manage cash flow, you will have thought through the offering and your process to deliver and will be able to manage at each moment, there are no big surprises if well thought out in advance, time studies can be used internally and not shared or nickel and dimed, no surprise invoices to send that make you feel ill.
Benefits to the client: they are able to budget, they are focused on the value-based outcome instead of how you spend each moment creating that outcome, we shift focus to the completed project, not steps, they don’t get a bill they are not expecting, price becomes secondary or tertiary to the transaction.
Pitfalls of using Flat Fees
Big Shout Out: Once you create a flat fee you are not done. Notice above I mention internal tracking of the process and time spent. This is necessary to make sure you are actually making the money you think you are on each project. Use the data collected to inform you on the next project. And most importantly when using flat fees, have a tight contract that manages the timeline of the project, decision making and the scope of work. If more work is added, create an addendum. Don’t feel compelled to keep adding scope to a flat fee contract.
Flat fees are great when done well. And they are a beast when calculated incorrectly. It is important to know the inputs into your pricing. Analyze and adjust as you go. Give it a try – you may see that after the work is done to calculate the fee that your creativity soars and your stress around billing is decreased. If you need assistance to create this pricing strategy, join The Designers’ Inner Circle today. I would love to help you make this move.
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