Running a creative business is great fun, until the subject of money comes up. If you don’t charge enough, you go broke, it you charge too much, same result. How much should a design firm charge? How do you negotiate fees? How do you manage for profit?

Positioning For Success – Laying the Foundation for Profits and Growth
Ted Leonhardt began his remarks at a recent workshop held at Seattle’s School of Visual Concepts by pointing out that you can’t start managing for profits until you have some profits, and that means winning work in a competitive field. Creative services have become a commodity, so to rise above the pack you must position your firm in a manner that demonstrates real benefit to your clients. The path to higher fees is in identifying a client need that others are not meeting, and offering a service that meets that need.

A creative firm with a singular offer that provides real value to clients can charge a premium for their services. How do you position effectively? History shows many ways, but the first step is always the same. You must identify or create a unique client need:

•Lester Beall created the need for graphic design by showing corporate America the benefits of Identity Programs in the 1930s.

•Raymond Loewy created the need for industrial design by promoting the benefits of Streamlining in the 1940s and 1950s.

•Rodney Fitch built a London powerhouse by targeting the needs of high-end retailers through the creation of destination retail in the 1960s.

•Landor Associates moved clients from Identity Programs to Branding through the development of an effective analytical process that delivered measurable results in the 1970s 1980s.

•FutureBrand went a step further by creating the brands of tomorrow in the 1990s.

•Desgrippes Gobe moved the branding offer further upstream by identifying the need for an emotional connection to consumers through Emotional Branding in the 2000s.

Today, smart design firms are targeting smaller and more precise niches (sports marketing, real estate, luxury brands) and combining traditional design skills with specialized skills and proprietary processes that provide clients with real, and often measurable, results.

Examples include a design firm that offers writing with design, providing clients with a strategic messaging service that crafts communications for highly specialized financial services, or a firm that has added research services to packaging design to make the package more effective on the shelf and the ROI more significant for the client.

Another way to specialize is by product category or consumer segment. A firm that understands baby boomers, or one that specializes in “green” products can have a very big advantage in pitching clients with those specialized needs. And they can charge more for it.

Understanding How A Firm’s Finances Work
Ted used the financials of a real, operating design firm to explain how the numbers work. The operational expenses, employee salaries, and other overhead costs were listed against billing rates of each employee. These rates, as well as the percentage of billable hours each employee works, are two key variables that effect a firm’s profitability.

Ted’s advice? Charge more. Charge what the market will bear, which may be more than you think. Design fees are very small in the scope of a client’s expenses and profits. Ted pointed out that “it’s the potential for major client profits that fuels design firm fees”.

Design firms that are growing are doing profit-focused work in categories in which their services deliver significant ROI for their clients.
Some examples:

•The $20k packaging fee that returns $200m in sales for the client.

•The $50k wayfinding fee that grows retail traffic and increases a city’s tax base by millions.

•The $50-$100k annual report fee that presents a multi-billion dollar corporation to its investing public.

•The $100-$200k branding program that lays the groundwork for billions in new sales.

•The $200k-$1m communications strategy that insures the success of the multi-billion dollar merger.

Firms focused in these categories present the benefits of their services in terms that their clients understand: a real return on investment that pays off in significant multiples of the original design fee.

Top Ted-isms:
•“No discounts.” Ted prefers project fees to retainers for this reason. Retainers commit your firm to a scope of work, which is nearly impossible to predict over a long period of time. Worse, it puts you in a position to negotiate a discount because clients expect a price break for the reliable cash flow they are providing.

•“Mark-ups are good.” Marking up hard costs is a fair practice. They compensate design firms for some of the costs and risks involved in passing vendor charges through your books.

•“Change orders are good.” But, only if you have clearly described the scope of work in advance. The client must agree that the change is outside the original scope of work.

•“Get paid in advance,” as often and as much as possible. Clients understand your need to cover hard costs.

•“Stop hourly billing.” Hourly fees are an internal tool for measuring profitability. If you tell your clients how many hours you think it will take to complete a project you’re opening up yourself to a million questions. Use phases to describe and break down your scope of work.

Pitching
When you have a unique position, pitching becomes easier and more effective because you are responding to prospects who are “pre sold” on your value. To build your reputation you need to get the word out in a way that underscores the value of your service. Methods such as cold calling, mass mailings, and advertising devalue the uniqueness of your services. Instead, use press releases that describe the value of your approach, pursue public speaking to targeted interest groups, and create a continuous stream of case studies that document your results, all of which tie back to your position.

Once a prospect has requested a proposal, show through your response how your approach will deliver results for them. Know your prospect’s business including their history and the driving forces that have shaped their business. Understand why they are interested in working with you. Know their current issues. Show them you understand where they’re coming from, and your recommendations will mean more.

Negotiating
Negotiating a price makes most people uncomfortable, but understanding that it is a fundamental part of the process can take some of the anxiety out of it. Design firms and advertising agencies must identify and fill new and valued client needs to break out of the pricing parity pack.

These ideas from Ted Leonhardt were presented at an all-day workshop, “How Much? Pricing and Negotiation,” at Seattle’s School of Visual Concepts. This workshop is one of more than 100 SVC has presented since starting its professional development program for design, advertising, and marketing communications professionals in 2003. Current workshop offerings can be seen at www.svcseattle.com, or by requesting a catalog at 206 623 1560.

As founder of Seattle’s The Leonhardt Group (now Fitch) Ted, and his wife Carolyn, grew their design business to $10 million in annual sales before selling it to Cordiant Communications Group in 2000. Ted then became the Chief Creative Director for Cordiant’s International Design and Branding Group, Fitch Worldwide, where he managed 570 employees in 25 offices around the world. His next stop was as President of Anthem, a global network of packaging design agencies. In the past year he left Anthem and now consults on issues of acquisitions, strategic positioning, sales and marketing to a variety of design firms and creative organizations. For more information, visit www.tedleonhardt.com