How do design businesses make money beyond billing for time? David Sherwin explains how you can create revenue for your design firm through alternative means.
Every design business sells some kind of product, which earns money for the company. This revenue contributes to the ongoing operation of your business and the creation of profit. No revenue, no cash flow. No profit, no long-term stability for the business.
But selling products isn’t the only way that creative businesses stay afloat. Let’s take a tour of the ways design firms make money, including billing for time, investing in real estate, selling physical products and licensing software or intellectual property.
1. BILL FOR TIME
Historically, most design firms have made their money from billing for time. If the creative business is able to consistently bill the appropriate number of contracted hours per person on staff, their revenue will yield profit year after year. This falls in line with other professional services providers. For example, lawyers bill clients for the hours worked toward a desired outcome or product, such as winning a case or striking a favorable plea bargain.
A design business can produce novel ideas or inventions that can be patented or trademarked, then licensed to customers or per-project clients.
2. MARK UP PASS-THROUGH SERVICES AND PRODUCTS
Few designers will have a Heidelberg offset printing press in their studio for printing a brochure or a server farm in their closet with a 99.999% uptime guarantee. Design firms must pass the costs of services or products required to create a website or application, printed materials and other project outputs to clients.
Revenue is earned on pass-through services and products via a markup on their total cost. Any markup must also account for the payment of local, state and federal taxes on those services and products, when appropriate. Here are some examples of pass-through services and expenses:
• Purchasing media space in mobile properties and online, in print publications, on billboards and out-of-home locations, and on television. A design business may earn a commission on the overall cost of a media buy that they facilitate or coordinate with a third-party firm.
• Purchasing printing services through a commercial printing firm. The overall cost of printing services, plus delivery, should be marked up if the design business is paying for the printing.
• Retaining a professional photographer or illustrator to generate assets that are then licensed to the client. When working with higher-end photographers and illustrators, you license the rights to use the generated assets for a fixed period of time to a client. If the client needs the rights for those assets after the time has elapsed, they’re billed for additional usage rights (with a markup). Some clients seek to “buy out” the rights for assets generated, and it is possible to do so, but most photographers and illustrators will add a multiplier to their price to cover the future revenue they’re forgoing.
• Hiring acting, modeling and voice-over talent. Don’t forget to include time you’ll need to bill for selecting the appropriate talent and directing them.
• Costs for catering, props and other materials used in the generation of photo or video assets.
• Licensing the use of artwork and fonts from a stock provider or third party. A good baseline for markup on these items is 20%. Be aware that licensing agreements with many stock websites cannot be transferred to a client; in those cases, you may need to have the clients make the purchases as part of their own corporate account.
• Using professional copywriting, editing and proofreading services. Markups on these services may need to be handled more like billing the cost of a staffer: one and a half to three times the contractor’s hourly rate.
• Working with a professional photo retouching service or color-correction artist. The same markup rules apply here as for writing services.
• Helping to coordinate or manage website/application hosting. You may need to negotiate with your hosting provider to secure a wholesale/reseller agreement, which will allow you to resell their services without charging the client more than the market cost for commodity services.
• Purchasing domain names and online services that support the creation of online products, services and properties. Your markup should reflect the time and energy required to secure and transfer those services and the associated rights to your client.
• Travel expenses related to project activities, including plane and train tickets, mileage and gasoline costs, food and beverage per diem, and related costs the client agrees to bear in the signed contract. Travel expenses aren’t usually marked up.
Additionally, design businesses may retain the support of subcontractors, such as freelance talent or another design or development studio, if the work outstrips resources available in the studio or requires a skill set that may not exist in the studio. This may include front- and back-end development, usability testing, testing and quality assurance on websites, and motion graphics and animation.
3. MAKE CAPITAL INVESTMENTS
Money spent on a studio space is often the largest expenditure, independent of paying for staff. Why not make that money an investment in your business? You can turn an overhead expense into a long-term investment vehicle—especially if the space is in a neighborhood or location that adds value over time.
Design firms also hold smaller-scale assets: computers, furniture, peripherals, artwork, automobiles and other tangible items. These are then depreciated as part of the studio’s balance sheet and can be sold to earn revenue as necessary.
4. LEASE AVAILABLE SPACE AND RESOURCES
A design business may have resources at its disposal that can be leased or purchased by clients or by customers. By leasing part of an office building, home or other physical location to another business, a design firm may even be able to pay its own mortgage. If a design studio has seats open on its studio floor, it may lease these spaces to other designers or freelancers.
Additionally, design firms may lease their “public” spaces to other businesses or third parties for the purposes of conducting meetings and events. For example, pinch/zoom (www.pinchzoom.com), a design studio in the Fremont neighborhood of Seattle, has a rentable space called the Watercooler that can host small workshops, seated events and mixers.
Many design studios have galleries built into their workspaces that contribute to the business’ operating revenue. Such galleries help cover overhead and expenses, as well as contribute to the overall studio culture. If the studio is open to the public, the open space may also be used to sell or promote products, artwork and other resalable items.
5. PRODUCE AND SELL YOUR OWN PRODUCTS AND SERVICES
People at design businesses generate ideas at a prodigious rate. Some of these ideas may apply to client projects, while others may inspire anything from artwork to online subscription services.
Physical products. Design businesses can create, produce and sell products. This is often in partnership with other companies or vendors that can help facilitate the production and shipping of those products. Design Commission, for instance, came up with an idea for UI Stencils (www.uistencils.com). These stencils are pieces of metal that have been chemically etched with the appropriate icons for drawing user interfaces for websites, iPhones, iPads, Android phones and many others. The stencils are produced on demand, avoiding the need to make a capital investment in a few hundred stencils before opening for business. Based on the success of this initial product, the studio has diversified from stencils into pads of grid paper and small whiteboards with markers. The sales of these products now account for a portion of the overall studio revenue. Another of Design Commission’s ventures, www.luxeplates.com, was developed with the same revenue-generating philosophy.
Design studios can receive more than just revenue from selling products. Full Stop Interactive (www.fullstopinteractive.com) created a line of design-related T-shirts called United Pixelworkers. “Selling T-shirts to designers has enabled us to more than pay the rent and expenses for our office every month,” co-founder Nathan Peretic says. “And best of all, it’s created a number of connections within the industry. Those connections have an inestimable value.”
Software as a service. Thousands of individual designers and studios worldwide earn money by generating software. Studios can design and develop software products and online services for a variety of devices and platforms. A business can earn revenue from these products and services through a variety of revenue models: a single cost for an application, an ongoing subscription fee for use, by offering an application for free, or by selling advertising and reports generated from metadata collected from product use, just to name a few.
For example, Seattle software design firm Jackson Fish Market (www.jacksonfish.com) created a storybook app called “A Story Before Bed” that can be used online or downloaded to an iPhone or iPad. The application allows users to record themselves reading the book, and then play back the recording. Jackson Fish Market offers this functionality through a variety of annual subscription models.
The company also explains its unique approach to how it delivers the available children’s books in a blog post: “To make sure we had a nice starter collection of books beyond those we got from our excellent launch partners, Jenny Lam, chief designer and co-founder of Jackson Fish Market, led a heroic effort to produce all the Jackson Fish Market titles you see in the bookshelf. ‘The Frog Prince,’ ‘The Emperor’s New Clothes’ and others were all produced by our crack team of authors and illustrators. Jenny led the whole effort. If Disney can create a great business based on public domain children’s fairy tales, then so can we.”
By holding exclusive rights to this content, Jackson Fish Market created a vertically integrated publishing platform in which they can fully control how revenue is generated both for their firm and for the authors that they represent.
Other examples show how designers can disrupt or reinvent industries with their design savvy. Design studio 37signals (www.37signals.com) transitioned from billing for time to fully supporting a range of productivity-geared software products, such as the projectmanagement tool Basecamp and the group-chat tool Campfire. Their success in this area emerged from software products they created for their own needs, which they discovered other businesses also needed and would willingly pay to use.
Design news and thought leadership. Some design businesses generate thought leadership, such as blog posts, e-books and other digital products that can be sold online through subscription, or be supported by online advertising on their sites, applications and through RSS feeds. Many popular design blogs partially support themselves through this model.
Tina Roth Eisenberg’s Swiss Miss blog (www.swiss-miss.com) started in 2005 as her personal visual archive. It has since grown into one of the world’s most popular design journals. Swiss Miss is supported by revenues from site advertising via The Deck, an exclusive advertising network started by Coudal Partners, and RSS feed sponsorship. The revenues from Swiss Miss help support Eisenberg’s other business efforts.
Educational events and training. Design businesses can provide training as a service to help designers and businesses do their jobs better. This takes the form of hourly or daily consulting, prerecorded or live webcasts, or producing and hosting live events. Studio members can write, blog, teach, speak or facilitate events as part of how they earn revenue, either for their businesses or as individuals. Adaptive Path (www.adaptivepath.com), a user experience company headquartered in San Francisco, holds regular events such as UX Week and UX Intensive. These events give the firm a chance to share tools and techniques that they use in project work to help them earn revenue independent of client work and to attract new clients.
6. MONETIZE INTELLECTUAL PROPERTY
A design firm can produce novel ideas or inventions that can be patented or trademarked then licensed to customers or per-project clients. The generation of these patents and trademarks occur as part of delivering products and services (as described earlier) or in the process of fulfilling client work. Depending on how a design business structures its contracts with the client, it could negotiate co-ownership of any unique inventions spawned from client work.
7. SUPPORT A SPIN-OFF LINE OF BUSINESS
Some design studios support side businesses that have little to no association with traditional design services or the generation of design-related products and services. Running these side businesses, however, can require a dedicated staff with skill sets that can’t be billed by the design business if extra resources are required for project work.
Designer and founder of the studio Helms Workshop (www.helmsworkshop.com), Christian Helms is also a co-founder of Frank, a hot dog joint in downtown Austin. Helms was able to bring his design sensibilities to the holistic restaurant experience, as he noted in an interview: “I always joke that the design strategy was ‘circus comes to town, broadsides hot dog cart.’” Helms still works with design clients and on other projects rather than exclusively running Frank.
8. TAKE EQUITY IN A CLIENT BUSINESS
When working with startups or other young businesses, designers can be offered stock or partial ownership in return for their services. In some cases, this is in lieu of cash payment. In others, the design business may have intentionally asked for equity alongside payment for design services or the provision of unique intellectual property or services.
If you’re considering taking equity in a client business, be thoughtful about the amount of time (and direct revenue) you can forgo to aid clients with their needs. The value of your investment may never be realized; the company could go bankrupt or the shares could become diluted after future rounds of investment.
If you choose to go down this path, consult with an accountant. You need to know how any tax liabilities would impact your business if you decide to sell your equity stake or if your share grows in value year over year.
Designers can earn revenues by selling a line of business for their firm or by selling their entire share in the business. When first starting a design business, design partners may not want to discuss the fact that there will be an eventual point in time—whether it’s years or decades away—that they’ll need to exit. Be as honest as possible with your business partners regarding your long-term plans before you enter any venture. By setting clear expectations regarding what each person wants from the business from a personal and a monetary perspective, the partners can openly discuss and adjust their goals as business conditions change.
Editor’s Note: This article was originally published in the September 2013 issue of HOW Magazine.