Running your interior design business without tracking any performance metrics is like going on a long drive without using a Maps app—you’ll get to your destination eventually, but you won’t be aware of roadblocks and more efficient routes! In business, keeping track of where you’ve been and where you are can paint a picture of where you’re going. Whether it’s about your profit, the effectiveness of your marketing, or your client satisfaction, these are the most important KPIs (key performance indicators) to track in your design firm. And the best part? Most of them are simple, only requiring a couple of easy numbers to calculate!
Financial KPIs
Finances keep your interior design business afloat. Keeping a close eye on your financial performance metrics is critical, as you can often spot an issue before it becomes a massive problem. If you want to get more in touch with your finances, read our article The Financial Metrics Every Interior Designer Should Track.
Gross Profit Margin
Gross Profit Margin is your total revenue minus cost of goods sold, then divided by the revenue again. Essentially, you start with your total income, then take away the amount you spent on your projects (materials, paying contractors, etc.), and then divide that result by your income again. This will give you a percentage. This percentage is more important than just looking at raw revenue. It begins to paint a picture of how financially healthy the business is. Most businesses fall between 5-10%, but interior design businesses tend to fall within 35-55%. Why the difference? Compared to a business that sells products, interior designers tend to make most of their money on their time rather than making a profit on selling or reselling items. That said, it’s still a useful starting point for determining how profitable your physical goods are. A low gross profit margin could indicate that you need to increase your markup on furniture and materials.
Net Profit Margin
Net Profit Margin may paint a more accurate picture for interior design firms. This percentage is achieved by dividing net profit by total revenue. You first find net profit by deducting all expenses from your total revenue. This includes the cost of goods sold, like in the Gross Profit Margin, but it also includes operating expenses like rent, salaries, and more. The resulting percentage is how much profit you make compared to what you spend. Interior design firms generally have a net margin of 15-30%, and you can use this indicator to understand how effective your business strategy is. If your margin is too low, you may need to raise your rates or find other areas to increase efficiency.
Revenue per Employee
Revenue per Employee can sound scary, especially for employees who aren’t directly contributing to the bottom line, like administrative staff. But really, this KPI is useful for signaling when it’s time to hire or fire, in addition to getting a look at overall productivity. This is calculated simply by dividing total revenue by the number of employees. The resulting number is fairly meaningless without context, and is most useful when measuring against other companies in your industry. Since this isn’t always readily available information for small businesses like interior design firms, you can instead track this number month-to-month and use it to make data-driven staffing decisions. A decreasing RPE may indicate that you need to downsize to keep revenues up, while an increasing RPE may mean there is room to grow your staff. A decreasing RPE can also tell you that your employees are working inefficiently, and you can look for ways to restructure or retrain your team, and find out what their roadblocks are.
Profit per Project
Profit per Project is probably already one of the KPIs that you’re using, at least somewhat. You get this number by subtracting the total costs from the total revenue of a project. This can be difficult to do accurately. You’ll need to factor in not only materials and payments to contractors, but also the hours each employee billed to each project, as well as other indirect overhead costs (rent, utilities, etc.). This is why it’s important for employees to track their billable hours, as it gives you more detailed information when making calculations like this. A negative profit per project is obviously a major red flag, but you should be aiming for around 20-30% profit at a minimum. This means that you’re growing. But of course, you want to reach as high a profit per project as possible. Raising your rates and increasing your markups are starting places for increasing profit, but creating more efficient systems so that billable hours are used more effectively is also a good strategy.
Marketing and Sales KPIs
Gaining and retaining customers is how you make money. It’s critical to know if your marketing efforts are attracting clients efficiently, and if your sales methods are getting them to sign. Dive deeper into marketing for interior designers with our Ultimate Interior Design Marketing Guide.
Customer Acquisition Cost
Customer (or in this case, client) acquisition cost is the total cost to gain a new client. This helps to assess how efficient your marketing and sales efforts are. Add up the amount of money you spend on advertising, content creation, marketing and sales salaries, website development, and any other expenses that contribute to attracting a new client. Divide this number by the number of new clients acquired, and you’ll see how much it costs, on average, to gain a client. Again, this number doesn’t mean a lot with no context. But you can compare this amount to the revenue and profit you make from the average design project, and see if you can change your marketing or sales efforts.
Customer Lifetime Value
You can also use customer (or client) lifetime value to see how your client acquisition cost stacks up. CLTV is how much total revenue you can expect from an average client over the course of their relationship with you. This is a forward-looking number, and requires a bit of guesswork if you don’t have a long history. It takes into account not only the initial project for the client but also additional projects, upselling opportunities, and referrals. If you have a long history of clients, including ones who have done business with you repeatedly, you already have the data required to calculate CLTV. If you don’t, you’ll need to take a realistic estimate of how much repeat business you expect. Interior design is a luxury business in which many clients only make one purchase, so this can sometimes be a very easy calculation! Simply factor in the revenue from their project. Compare this to the client acquisition cost to get a ratio. A CLTV to CAC ratio of 3:1 or higher is considered healthy.
Conversion Rate
How well are you turning inquiries into paying clients? Your conversion rate is simply the rate at which your casual inquiries or leads turn into paying clients. You’ll want to track this over time to see the effectiveness of your marketing and sales efforts. Don’t worry if your conversion rate feels low—it probably will. Depending on the industry, 2-5% can be common, and 10% is considered good. If your rate feels low, streamline your sales funnel and make sure your marketing messaging matches your actual offerings.
Operations KPIs
Operational metrics, while less flashy than financial or marketing KPIs, are still important for assessing the efficiency of your company’s back end. These metrics will give you valuable insights on employee and project efficiency.
Hours Tracked vs Hours Billed
It’s important for each employee to track their hours and to separate out those tracked hours between billable hours and non-billable project hours. This can give you a picture of how many hours are going directly toward projects and how many hours are going toward administrative work or other tasks. This can be used alongside your profit margin to identify if your company works efficiently.
Project Timeliness
Are you delivering on time? Or are you consistently ahead of schedule? Keep track of your time estimates and how accurate you were. You may find certain areas of a project are easy to accurately estimate, while others are often less accurate. If you’re struggling with this area of your business, consider project management software and fallbacks for common delays.
Client Experience KPIs
Interior design is a client-forward and relationship-based industry, so KPIs related to the client experience are incredible important. Clients are your business’s lifeblood and are how you can acquire your best new leads.
Net Promoter Score
Net promoter score is a simple metric of how likely a client is to recommend you. Have you ever been asked by a service provider or software how likely, on a scale of 10, you were to recommend the product or service to a friend? That’s what NPS is! Asking this simple question after project completion can help identify potential referral sources. If the client gave a 9 or 10, that means they’re a Promoter and will likely recommend your company. 7 or 8 is passives, who feel neutral about recommending you, and 0-6 is detractors, who are unsatisfied and may even discourage others from working with you. To get your net promoter score, subtract the percentage of detractors from the percentage of promoters. As long as your score is positive, you’re in good shape, but you should make sure to raise that score by always targeting your ideal client. On a more detailed level, you can focus on getting referrals out of your Promoters, and not bothering to waste time with those who are less willing to recommend your services.
Referral Rate
The referral rate is how many of your clients come from the recommendations of past ones, as a percentage of all of your clients. A higher referral rate indicates a lot of brand trust and loyalty, and may also point to your client satisfaction, especially when it comes to post-project engagement. This is where gift-giving and other gestures can make a big impact. If your referral rate is low, consider keeping in touch with clients after a project ends, or simply by asking for the referral! Just bringing it up can prompt a client to reach out to a friend or family member.
Armed with these useful, simple, and trackable KPIs, you’ll be able to run your business proactively, rather than reactively. And despite all of these suggestions, you don’t have to use every last one. Only track the metrics that are right for your needs and your weak points. Then review these metrics monthly or quarterly. If something changes, look deeper into it. Depending on your current tools, you may be able to create dashboards with the help of your bookkeeper. If not, assign someone to update a spreadsheet on a regular basis—the most important step to take is the first one!