Costing and pricing – a global issue

On our recent trip to Portugal we had the chance to talk about design studio management with a number of creatives.

Over a very pleasant lunch with the partners of Upstairs, an award-winning design studio in Lisbon founded in 2005 by Manuel Vital and Sara Gonçalves, we talked about many aspects of running a design business.

Manuel had recently reduced his design role to concentrate on business operations. He had many questions around how Australian design businesses managed job costing and pricing.

It’s a topic that comes up no matter who we talk to in any country, so I thought it worthwhile sharing my thinking on the topic.

Costing and pricing is the core of any design business

Apart from getting the design right, honing your costing and pricing is probably the most important part of running a design studio. Firstly it’s important to define the difference between job costing and job pricing.

Job costing is the task of calculating what the job will cost in hours and resources. Use your overheads to get at an hourly cost rate and then add a profit margin (at least 20%) to get a true cost rate. Note: it’s critical to understand your studio’s productivity rate; that is real percentage of each person’s time that is BILLED back to the client. If that’s incorrect, your figures won’t add up.

Job pricing is the task of costing a job to include the value-add to the client.

Jobs should not be quoted on the costing model – it’s just used to understand where you spend your time.

Case study 1

An example using two designers estimating to do a FMCG job for a client in the health foods industry.

Designer 1 knows the industry well.

She’s done a lot of work for that client and that industry. She knows using her knowledge bank of previous jobs, solving the design problem won’t take long. Added to that she has a library of images, so mocking up the solution will be easy.

She quotes accordingly.

Designer 2 is new to the industry and the client segment. With less knowledge, she allows time for research to get up to speed on the industry before she starts the design. She also adds time to find the right images to present the design alongside competitors. Her estimate of costs is much higher than Designer 1.

This mini case study is a great example of why Designer 1 should be adding in a $ figure to account for her pre-existing knowledge. She should be compensated for the added knowledge she has.

That said, both are still selling hours instead of value.

Job costing is easy, job pricing is a dark art

Job costing is simple as long as you get the maths right; include all the costs, ensure you have control of productivity and understand how many billable hours you can expect from a designer.

Job pricing has an almost infinite range of factors to consider. Each client throws up a different set of factors.

Case study 2

Consider the difference in costing a website for a two very different businesses.

Client 1 is business consultant who just needs a billboard in the ether to attract potential clients.

Client 2 is an online merchant who is selling imported products with a 400% markup.

The risks for each client are different, as are the rewards. The business consultant does not directly rely on the site for his income while the merchant does. That means he is taking a greater risk (for a greater reward).

How do you calculate the value of your design to each of them?

The client viewpoint

One way of looking at it is to take the client’s view.

The online merchant has a lot at stake and will be concerned about the design, functionality, ecommerce integration, SEO and SEM.

The consultant’s major concern will be that the design represents him correctly when he directs people to his site.

The merchant is going to need a lot more hand holding and proof that the site will perform. This moves the job to a higher level of consultancy and should result in a higher level of fees. Immediately this shows up in the costing of the job and will automatically lead to higher pricing.

How do you set prices?

In the Job pricing e-course I propose a ‘premium’ pricing approach. I think there should be a fair trade in risk and reward. Clients accept this principle with insurance premiums where they pay a fee based on the risk they pose to the insurer. The higher the risk the higher the premium.

This would seem to be a very good way to explain it to the client.

Begin by establishing what the risk is for the client. In the example above the online merchant will have projected minimum and maximum sales for the year. By exploring these you are able to determine the risk value to the client. The value of the design should be linked to reducing the risk by ensuring that the sales reach the maximum.

Does that mean you take a share of the risk?

Maybe. This could be one way of selling design value by getting a cut of the profits. Given you will have access to the ecommerce functions you will be able to see the sales and know if they have hit their targets.

You could set a ‘premium’ of sales above the minimum level; to be paid on an quarterly as your value add payment. It’s worth considering this approach as a way of showing the value you add for the client.

If you don’t want to share the risk you could calculate what the difference between the minimum and maximum sales would be over a 5 year period and quote for a percentage of that as the premium.

Of course this relies on you having a very open working relationship with the client. If the client isn’t open and doesn’t want to give sales projections you could do some projections based on industry data. the Office of the Chief Economist or IBISWORLD have such information.

If you want to get a grip on Job pricing it’s detailed in The business of design and in the Job pricing E-course

Got a question? Want to share your point of view? Please feel free to email me.

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Greg Branson

Contact Greg Branson if you would like to learn more about the many programs the DBC offers.

Greg’s passion is the research and development of methods that improve design management and the role of design in business.

Greg has developed The Design Business School to help owners manage their business better along with showing designers how to get more involved in the studio and develop their career path. Contact Greg.

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