To share or not to share – that is a common question in the design industry regarding discounts. Let’s address options for you as the CEO of your company, including possible legalities you may not have considered.
What are trade discounts?
Trade discounts are a reduction from the retail price offered to resellers. In this case, that reseller is an interior designer who will be using those goods in a project. A trade discount is offered to the designer to thank them for selecting that merchant’s products and as encouragement for additional business. So, your discount is not something owed to the client. Access to resources and the relationships you develop are part of the value you offer to clients. You and your business can sell these discounted goods for market price – think of them as a form of additional revenue.
When starting your business, you most likely made a list of prospective suppliers with whom you would like to work. Then you approached them to find out what kind of trade discount they offered and what the requirements were for receiving that discount. Some options will give you a deeper discount (i.e., they require a minimum annual purchase, or for you to be a stocking dealer, which may mean you need to hold inventory for resale and have it displayed in a retail space, etc.).
When you develop relationships with third parties, there is value in that for the client. Those relationships can offer your clients access to exclusive products, quality assurance, streamlined procurement, more timely deliveries, etc. Your relationships also mean that those resources are more likely to quickly address problems. They want to continue to do business with your firm. There is great value for your client in your relationships with your resources.
Seek counsel from legal and accounting professionals
Be sure to consult with your CPA regarding passing on trade discounts. In addition to the trade discounts offered by “to the trade” sources, there are also retail establishments that offer designer discounts – usually 10%-20%. If you want to specify some pieces from these establishments, ask yourself if you can find similar products from your regular resources. If not, then consult with your CPA. Most CPA’s will advise not putting the order through your books if the discount is 20% or less. Specify the items and let the client take it from there. They will then do their own purchasing, arranging delivery, dealing with any problems, etc.
Also, be sure you seek legal advice no matter which way you decide to proceed. It is important to have an attorney with whom you work on a regular basis who understands the business of design and your business model. We are not legal experts, and just as clients look to designers for their expertise, you should work with an attorney for their legal expertise.
What constitutes officially being in business in your state?
Often, designers feel that if they offer to share their trade discount with clients, it is a nice gesture and will make clients feel they are getting special treatment – a special discount for working with you. But ask yourself: is that really how you want to position your business – and are they really your ideal clients? Perception is key, and you will be perceived as the discounted or cheaper option, rather than the firm that offers the most value. Once you establish yourself that way, it’s very difficult to switch gears.
It can also be more costly than you may have expected. I know of a designer who passed on her full discount to her clients. She charged higher design fees and felt she could make her money completely with those fees. She charged her clients sales tax on the wholesale cost of the products purchased and had run her business this way for a number of years. Then suddenly, she heard from the state entity to whom she paid her sales taxes. They stated that in their eyes, she did not seem to be truly running a business as she was not showing any income or profit from sales of goods. She was just passing on the price she paid. The way they saw it was that these were profits that she would then have been paying sales taxes on in addition to the taxes on the wholesale cost of the goods. So, they chose a percentage that they decided was realistic. They then went back to her prior years in business, took the entire cost of goods sold, added the percentage they had set, and charged her for that additional sales tax on all past years of goods sold. The goods sold were high-end, expensive items, and having to pay those additional years of back taxes put her out of business. Don’t let this happen to you!
Identify your ideal clients
Who are your ideal clients? Be very clear, or you won’t know to whom you should direct your marketing and the most effective way to do so. What are the reasons that your ideal clients choose to work with you? What do you offer that sets you apart? Hopefully, it’s not just discounting your prices! What is your unique selling proposition (USP)? Discounting your services usually leads to repeated requests for additional discounts and a focus on price rather than your design. Too often, businesses feel they have to come in with the lowest price rather than focusing on the value they offer. If your client is focused only on price, they are not your ideal client. The reality is that interior design is a luxury business, which means it’s not affordable for everyone. And especially if you want to work with affluent clients, you won’t want your business to be based around discounts or price.
Clear communication
Have a clear contract that states exactly how you work. Use your website to share answers to questions prospective clients may have. By doing this, you can help filter clients who are not a good fit. Both on your website and in other marketing, focus on value-based design. As well as having a clear contract, make sure you have clear policies and processes. This will create the value of consistency for clients working with you as well as for your team.
Yes, it is important to pay attention to your clients’ budget, but they will respect you much more if you are honest from the beginning about whether their budget will cover everything they want. If it is an ideal client, they will appreciate options and the reason behind the price difference in items. Are there areas where you can suggest less costly options? That is one of the areas of value you offer – your knowledge of items and alternative options. They will also appreciate you explaining why certain items are more expensive (i.e., custom design, type of construction, imported items, etc.). Then point out items that may be more for show and don’t have to be as solidly constructed (i.e., sofa in a room that is rarely used vs. one in the room with kids and animals!). Essentially, use your expertise to find where compromises can be made while sacrificing very little.
Paint the picture effectively
Once you establish that someone is an ideal client, it’s up to you to do an excellent job of verbally as well as painting the picture of their vision. Engage them in the vision of what the final result will mean – appeal to their senses and emotions. It might be a second home they want designed for family time and special events, entertaining friends and family. Then that is what you need to focus on. When you make your presentation to them, if you have done an effective job of helping them feel and see the final result, their first question will not be “What is the cost?”
Know your value – don’t negotiate your process
Be comfortable with your value and processes. Remember that not every client is ideal for you – nor are you the right fit for every client. If you understand that, you won’t feel you have to adjust your processes or pricing just because a prospective client said so. Do you want a client who pressured you to share your discount or lower your pricing? That client will brag about the great deal they got, and you will be saddled with a reputation you do not want! You’ll forever be the designer you go to when you can’t afford another one.
Some designers share some of the discount with their clients. They may price it as “retail less a specified percentage”. One problem with that is the fact that you probably have different discounts from various resources. Some will be less than others, and that means that your “retail less percentage” will vary. Are you planning on billing for the extra time, having to adjust pricing depending on the resource? Wouldn’t you rather focus on the value your firm offers rather than negotiating your process?
Don’t forget that even when you are sharing your discount, you also still have contact with the supplier managing the entire purchase – receiving, delivery, warranties, possible returns, damage, etc. That is value! Especially if your firm becomes known for smooth, effective design processes and procedures that lead to outstanding design results – not cheaper pricing. Be aware that discounting can lead to never-ending adjustments of your pricing to be the lowest cost. Is your ideal client really one who always asks what discount or “special” price you can offer? Is that why you entered the interior design field? No! You did it to change people’s lives by giving them their dream home, and clients are often willing to pay the rates you deserve for bringing that dream to life.
Remember, you may love design and enjoy the work, but it is a business – and you are in business to show a profit. Focus on value-based pricing. Be respected and paid for the value you bring to the table. Otherwise, it is just a hobby, and you won’t be taken seriously.