Eric Karjaluoto

How We Fixed Our Studio’s Cash-Flow Problem

Over the past three years, almost everything changed at smashLAB. In future posts, I’ll tell you more about that. Today, though, I’ll share a simple approach we implemented in the way we sell our services. Through this, we transformed our studio’s sales requirements, client relationships, and financial outlook.

The way we used to do it

For our first ~12 years, we framed our work in terms of projects. When a new client came to us, we asked what they wanted, and determined a reasonable sum for that thing. We typically based the price on how much labor the last similar project took to produce. (These numbers varied, based on how easy/difficult we thought a particular project might be.)

Here’s a general frame of reference: Logos were around $5,000. A naming process was about the same. Corporate identities started at $15,000 and went up to approximately $100,000. Meanwhile, websites ranged from $25,000 to $250,000. The higher priced ones involved more detailed costing, based on deliverables.

If you run a design shop, these numbers probably sound normal. If you don’t, they might seem high. I don’t blame you for thinking so. I appreciate that $5,000 for a shape or name seems like a lot. Factor in meetings, variations, revisions, rent, overhead, health benefits, and Christmas bonuses. Once you do, such numbers no longer look so inflated.

The problem with this approach

We landed a fair bit of work over the years, but it wasn’t easy to do so. You scare away some prospective buyers when you reference numbers in the tens-of-thousands. Meanwhile, these projects weren’t always profitable. We priced everything at a fixed cost. This meant that so long as project scope didn’t change, the price quoted was the number on the final invoice. This principle, albeit well-intentioned, cost us a lot of money.

This approach also cost us new work. Some groups bid low on jobs—just to land the work. Later, they came back to their clients with substantial overage charges. I think this is unethical. Nevertheless, we would have landed more work had we followed their example.

To my point, though: imagine working on a project, in which the assignment is only complete when your client says it is. Now, imagine that the price remains the same—regardless of how long it takes to hit that magic spot. Sort of frightening, huh? Sometimes we fared well, but those were rare occasions. At others, we broke even. Often, we ate many hours—and resented the fact that we had to.

The biggest problem with this project approach, is that most design work isn’t well defined, at the outset. A client might ask for a new website, but in fact need to rename his/her entire product line. In such an event, on a fixed-cost job, we needed to re-negotiate the entire project. This is uncomfortable, time-consuming, and a drag for the client. (I.e., “I’m already paying you $50k for this website, and now you want another $5k, just to come up with some ‘names’?”)

Alternately, you start a project that seems big, and later find a simpler way to complete it. What do you do in this case? Take the short path, and return the surplus funds? (What if you lost money on the last three jobs you did for this client?) Nope. In this situation, most stick to the proposal, pocket the cash, and keep their mouths shut.

Scoping before we prescribed a solution

Sometime around 2008, I realized that we needed a better way to scope projects. So, we encouraged new clients to pay for a fixed amount of assessment and strategy. For somewhere between $5,000 and $25,000, we worked with them to understand their situations. The process involved itemizing issues and presenting potential solutions. (And producing dense—and actionable—reports.) This approach worked well, and resulted in better design solutions for our clients. In fact, I learned that if I could get a group to commit to this planning process, we’d win any future work they had. We’re just that good with strategy.

The problem? We were still thinking about every job as a project. This involved a lot of guessing. How could I tell whether a client needed $5,000 of strategy, or $25,000? Honestly, I couldn’t. Instead, I got a sense for expectations, eyeballed the work involved, and picked a number that seemed right. We’d then shape how much time we put into that thinking and report, based on the price we had agreed to.

Fixed-cost jobs are commonly based on the notion that designed things have a common cost. I’m not sure I agree with this logic, though. I’ve built logos that took over 100 hours to complete—and, I’ve built logos that took only 15 minutes. (Often, the faster version is better.) Proponents of value-based pricing argue both should cost the same, or close to. I argue that if you make me work 100 hours on your thing, I want to get paid for those 100 hours. And, if I only work 15 minutes, I should only charge you for those 15 minutes.

Clients tend to like the idea of fixed cost pricing, because they know exactly what to expect. They don’t want the surprise of an inflated invoice from an unscrupulous designer/shop. I get that. But, if you’re that scared of your designer screwing you, I say you picked the wrong designer. A contract isn’t about squeezing the most out of the other party. Rather, it should be about how each group gets what’s fair for the work/money provided.

Testing a different approach

So, we tried an experiment. Instead of presenting our work as project-based, we started talking about services. Put differently: instead of selling our clients things, we allowed them to rent our knowledge and skills.

To start, I called a few groups I wanted to work with, and presented a scenario. I itemized a few of their design problems. Then, I explained what it’d take for them to hire, and pay, a good designer to solve these problems, on site. (I also noted the challenges involved with managing such individuals, for those who don’t have a creative direction background.) Then, I explained how they could instead hire us as an external design department. Whenever they had a design need, they could pick up the phone and call us. We’d then fix that problem in the best/fastest manner we could.

To get started, we asked these organizations to buy a block of time. Most started with 50 or 100 hours. We then worked off that time, as needed. Once we’d exhausted those hours, they could buy more, or call it a day. We explained that if they ever wanted to quit early, we’d just write a check for any unused time.

Since starting to work this way, I saw for myself how much better an approach this is. In fact, I’d never go back to the way we worked before.

They win

For clients, there are a few immediate benefits to working this way. First, they can test us, before making a bigger commitment—as the initial outlay is pretty low. Additionally, since our work isn’t framed by a fixed deliverable, they can tap us for a wider variety of assignments. And, by purchasing blocks of time, they lower risk. I.e., instead of committing $100k to a rebrand, they can spend $5,000 at a time—and see how the work/relationship progresses. (This affords our clients a lot of control.)

The biggest advantage to working this way? We get to work more closely with those who hire us—and we share a common goal. As a result of this approach, our clients are happier. They also seem to be more open in discussions. We no longer worry about doing exactly what we first proposed. Instead, we concentrate on what our client needs. I believe this results in a better end-product.

Those who hire us to work in this way seem to like this set-up. As a result of these long-term relationships, I no longer have to pitch our company. In fact, we are not taking on new work at this time, as we’re sufficiently booked. (I turned away a potential project with Microsoft, last week—and I never thought I’d do that.) I know this will change in time, but for right now, we’re in good shape.

We win, too!

For us, the benefits include achieving a more even cash flow, and getting paid for every hour we work. (I don’t mind making revisions, so long as I’m paid to make them.) Equally nice: we’re paid in advance. This is easier than waiting until the end of a job to get our last installment. (Knowing that most accounting departments will stretch payment of bills by another 30 – 90 days.)

From a financial perspective, our studio has never been healthier. Our bank balance is solid, and we carry zero debt. Meanwhile, we put an end to the feast/famine cycle that I believed unavoidable for our type of work.

The best part? My stress level is at an all-time low. And if you know what I was like four years ago, you’ll appreciate how big a change this represents.

If you’re struggling to make ends meet; if you’re still chasing RFPs; or, if you only have a few months of cash in the bank—I assure you there’s a better way. Stop scaring clients off with undefined projects, and big price tags. Instead, give prospective customers an easier way to tap your skill-set. In doing so, you allow them to experience the value you provide, first-hand. This will change your studio, client-relationships, and life, for the better.

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