The IP is a value add component that should be charged back to the client if they want to own it. However there is some debate on how to explain this value to clients.
The dmzine annual survey shows that more than 90% respondents used an hourly rate to calculate the cost of a design project.
However we all know that even if you start the clock ticking when you first sit down to think about or research a project that you will inevitably spend extra time thinking about the project under the shower, in the car, on the train or wherever. These hours are not recorded but should form part of what is charged to the client.
Someone, somewhere, at some time decided that the value of design directly correlates to the time spent solving a client’s problem. Today, most design firms use an hourly rate to determine creative services. Although clients may agree to a retainer, fixed fee, or equity swap, nearly all of the 30 firms I surveyed for this story first estimate their fees based on some hourly formula.
Is the hourly model, then, really the best way to determine the value of design and branding services?
We all accept that it is the easy way to justify our fees. Clients find it easier to match a task up with a number of hours and multiply by an hourly rate.
A recent article by Ken Carbone showed how a number of design firms have approached this
Ken Carbone, joined forces 35 years ago with Leslie Smolan as the Carbone Smolan Agency, creating smart design for the liks of Canon, Credit Suisse, Westin Hotels, Kodak and American Express.
According to Ken the approach is tp prepare an estimate from the clients’ viewpoint.
“In my experience, that gap in understanding can readily be solved by estimating the value for a design program in the client’s own terms, based on values that reflect the client’s particular business or industry. This “value mirror” approach offers a client-centric model that works at any scale. The magic in this pricing model is that it’s built from the client’s point of view, based on his or her own definition of value.”
Ken outlines some fictional examples of how it might work.
An international law firm realised it was time to refresh its 100-year-old brand. With 500 partners in 12 cities globally, it’s a legal powerhouse with annual revenues exceeding $1 billion. A creative boutique agency with an impressive track record in the law profession, estimated its fee for a brand refresh to be close to a half a million dollars. A top lawyer in the firm was mystified: “How is it possible that a simple logo, some brochures and a website can cost so much?”
Using the value mirror approach, the designer responded by showing how it used the average billing rate of each partner ($1,000 per hour) multiplied by the number of partners world-wide who would benefit from the new branding program, to arrive at its fee. In essence, the cost would be equal to the value of one hour of each partner’s time.
After purchasing eight well-established luxury hotels in Europe, Asia, and the Caribbean, a Saudi real estate developer needed to name his new venture and create an integrated branding program to attract his well-heeled target audience. With an average room rate of $1,500 per night, these exclusive hotels needed sophisticated marketing materials. An agency was chosen to develop the branding program.
Forgoing the hourly rate model, the agency proposed a fee that was equivalent to the total revenue for 2,000 rooms across all properties multiplied by the average room rate per night for a single night.
The agency proposed a budget of $3 million dollars for a new name, brand identity, guest amenities, advertising, booking engine and online marketing would be a fraction of the cost the developer was estimating he would need to renovate the properties to his upscale standards.
A rising star in the fashion world was ecstatic when a major apparel company from Shanghai made a multi-million dollar investment in his young company. His backers chose an agency to rebrand the company. In their contract negotiations, the design team dispensed with the usual hourly calculation, choosing a creative model to estimate the cost for branding and design. The investors were accustomed to the cost of advertising in major fashion media. They had already budgeted $2.5 million for their annual media buy of 10 print ads in fashion publications. Using the logic of the value mirror on a new logo and “look book” all parties agreed that the design and branding fee would be the equivalent of one full-page ad in, say, Vogue for roughly $250,000.
The value mirror approach offers a new currency for designers and clients to use that demystifies the cost of creative processes. In these examples, the lawyer measures the design cost against his hourly consultation fee, the hotelier compares the expenses associated with a brand identity program with the cost of renovating a guest room, and the fashion investor understands the cost of rebranding because he already knows the rate for a full-page ad in a top-flight fashion magazine.
This approach also offers increasingly budget-conscious clients an alternative way to understand design expenditures.
I think we should continue to track time to measure profitability and productivity. This means estimating a project by calculating the number of hours it will take. THEN start looking for an equivalent cost that the client would better understand. That internal calculation shouldn’t be seen by the client.
By aligning design services with how clients measure their own business success we can show the value of the creative process in a tangible way that they understand and respect.
Greg’s passion is the research and development of methods that improve design management and the role of design in business.
Greg has developed a series of business tools to help designers manage their business better along with a series of workshops that show designers how to use these tools.