Back in 2009, when American automakers were in the midst of controversial government bailouts, Harvard Business Review’s bloggers Karen Berman and Joe Knight posted a poignant reader question that I always loved:
“I have a very specific question for both of you. Why do you think GM collapsed?”
Their answer was simple: GM stopped making a profit.
Of course, today things are quite different. The Bloomberg headline last July announced, GM Beats Profit Estimates Ahead of New-Model Wave. Complicating business is often one of the biggest distractions to growing a healthy company. Many designers have trouble simply communicating with design clients. In the September issue of HOW magazine, David Sherwin, Principal Designer, at frog, provided readers 9 Ways to Increase Profits. If you’re looking for monthly inspiration in the design business, HOW magazine has it covered. Here’s an excerpt to give you an idea of the topics you’ll get each month:
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 design 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 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.
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 busi-ness 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 xed 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.
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.
David Sherwin, Principal Designer of frog, will also be leading a session at HOW Interactive Design Conference November 5-7 in Chicago — Using Storytelling Techniques to Create Better Interactive Experiences
Plot, genre, character, and conflict are terms you usually hear in association with the latest Hollywood thriller or blockbuster novel, not breakthrough interactive experiences. In this session, attendees will receive a set of story experiments, which they will try after the conference to strengthen their storytelling abilities as part of their interactive work. Ready to sign up and save $100?