Question
I own a small cabinet shop and have been in business for four years. Most of our work is mid to high end kitchens, bathrooms, entertainment units, etc. So far all of our customers have been homeowners or GCs. I never have any contact with any designers and recently I got connected with one. He referred his client to me and we sold the client an entertainment unit. Before I gave the price to the client, the designer asked me to put 5% in it for him. I did all of the drawings and the designer together with the client had some input when it comes to colors and general look, but nothing else. I did agree to that and this is a small job and not a big deal. Now this designer is talking about big referrals coming my way and I wanted to know is that normal in our industry that we are paying a referral fee of 5%? Any input would be appreciated.
Forum Responses
(Business and Management Forum)
From contributor K:
You said it yourself - you "put in" 5% for the designer. I am assuming this meant that you added 5% above what you normally charge. So, if that is the case, the client is paying the 5% and you got a job and future business coming your way. As long as you add the 5% above what you normally would charge, sounds like a win-win to me.
Don't forget to charge what you would if there was no designer. Your costs do not change and, in fact, depending on the designer/homeowner, they may go up. We have made endless color samples for some designers.
The biggest hurdle now is to learn how to ignore the fact that the designer is making $X amount while you do the drawings and all the work. I have learned over time to put some of the work back on the designer.
If the client has hired the designer and paid them to design, then in theory the designer already got paid once, and then a small residual from you as well. It may be no different than if we do the kitchen and then refer the tile man and ask for a little kickback or residual. Depending on how busy your shop is and what the future looks like, any referrals may be a good thing.
On a fairly large job the GC asked me to bid on a gun cabinet for himself. He then asked me to add it to the job price. I said here is the price of the cabinets, and here is the price of the gun cabinet - do whatever you want, but I'll have no part in it.
I had one designer tell me I did not need to pay her a referral as she was already charging the client for her time. We stopped paying her and I have noticed her referrals have slowed down, but maybe it's just the economy. I do have some tell me on certain jobs not to include them so we can give a better price to the customer. Sometimes we just ask the designer what they expect from us in terms of payment.
If a designer expects more than 10%, we tell them that for this to happen, they need to be in the billing process and get the order on their books. In other words, I quote and sell the order to the designer. I then work for her/him and expect payment from their business, not the end customer. Also, when this happens I do not end up being the bad guy for overquoting and losing the job so neither of us get paid anything. If the job gets over quoted, it is the designer's doing, not mine.
Lately we are finding that designers across the board are finding it more difficult to make the markups that had become the norm. They seem to be more content and thankful for these smaller fees coming in. Currently we have only two designers that buy and resale our product. They work extremely well with me and pay on time. They actually appreciate what we do and try to make my job as simple and easy as they can. The remainder of the designer business we do is through straight referrals. For instance, over the weekend a lady just faxed me the customer name and phone number for a potential client. We will today set an appointment, go measure, quote and hopefully get the order. If we get the order, I will bill the customer for both a deposit and the balance when through. I will then mail or deliver this designer a check for 5%, after completion. I can not find or advertise to get good qualified leads for any less. The great part is each order pays this fee for me. When I advertise, I have to come up with the money, and I still may not get my money's worth.
The first set of measurements is given to me so I save a trip to the site. Before final drawings are signed off I personally check site conditions and measure. We still make color samples for each customer but have more samples to start with. Before the customer's samples are made we are much closer.
That said, if I have been working with a designer that I like, and her client calls me, I either step aside or bid really high. I encourage my designers to let me know ASAP about possible upcoming projects so this does not happen. In 20 or so years, I have beat out two of my designers when bidding the same work. One threw a hissy fit and that ended our working together, the other said "well, that is bound to happen" and is still my best designer customer.
Now, if the designer is getting a fee already from the client for a project they are referring to you, and wants the 5% on top of this, you should absolutely list it as a line item, as it is considered double-dipping, and a way for the designer to seem less expensive while passing their pricing along to you to make the client pay in the aggregate. Additionally, if the designer is doing the design work, the argument could be made that you should adjust your pricing to reflect this.
Now, if the designer is not getting a design fee from the client, then it is a referral fee, and what you pay people to secure a deal is your business, and yes, the client pays, as it is the cost of the project.
Something to think about... There are only two people who pay in the end - you or the client, and if you don't want it to come directly out of your family's pocket, you would then have to pass that expense along to future customers. Would you then add that expense as a line item?
I have coworkers on the job that all try this too. The painter has a client that wants some cabinets; he wants me to add in 10-15% for him just for a referral. Funny, he has a problem remembering me if I send him a referral! I refer him because I know that the job he does will reflect well on me for making the referral, same for him when he refers me, that should be enough.
As for the double dipping issue, I'm not sure there's anything wrong with that. If the designer is acting as the GC, they're assuming more risk and have the hassle of dealing with the client. Some designers I work with often charge no hourly rate, and make all of their money via markup of products/services. Others only charge an hourly rate and refer subs directly to the client.
I could envision a hybrid model where a designer charges a modest hourly rate (compared to the designer who only works off an hourly rate) and marks up products/services to achieve their desired income. It's not necessarily gouging.
We get a kickback on Cambria tops we refer to our top shop. It is no different than if I use my showroom to sell it and mark up the price. In the end we do no work on the tops but get a 25% cut on top typically. It appears there is better money in stone tops than woodworking these days.
I used to work with a designer that did no design work, didn't attend meetings and put me in direct contact with the client. She asked for a kickback to be added to the price on a big job and I did add it to my price. That particular client contacted me later on for several other jobs at different sites where he was not working with the designer and I happily did the work. I think in this case the designer was thinking only of the current job and not trying to isolate me from the client in any way so no isolation was expected moving forward.
As for the galleries, they provide the other half of my workload and their 40% is harder to factor into my pricing because the work simply won't sell if I insist on getting 100% of what I really want for a piece before they add their commission. The pieces in the gallery do generate additional commissioned pieces which are more likely to handle higher costs but the gallery commission is still 40% even on those pieces.
For the 40% the gallery collects the money, has all contact with the client (eliminating any potential for me to sell directly to the client, which I would not do anyway), does a varying amount of design work (sometimes significant and sometimes not), and pays for a nice showroom to display my work to clients that wouldn't otherwise know I exist. In the end I think it's worth it for the exposure and sales.
Without the galleries and designers, some of us might not be in business; partially because we come to depend on them to generate work for us that maybe we should be out trying to generate on our own.
In this case, where it becomes an issue is if a designer secures business by dropping their percentage only to recoup it through your company. If they are not involved in the transaction (i.e. - no fiduciary responsibility), take as many referrals as you can from them, pay them the referral fee, and move on. If they are involved, you are simply better off selling your product to the designer and letting them mark it up to whatever, or adding it as a line item expense. If it were you, and the designer charged a fee already, you wouldn't be upset to learn that you paid more for a product the designer recommended because he was getting more money for designing your product when you are already paying him? That's like a business consultant working with your company recommending a plywood shop, and you have to pay more for the plywood to accommodate for a referral fee paid to him when you are already paying him. I don't see a designer as any different.
That said, just remember - someone has to pay for it. You have to decide whether it comes out of your pocket or the customer's. It is not some ethereal fee that disappears.
I'd rather work for a designer over a typical GC any day. In my experience, they're less likely to beat you down on price, better at paying on time, and more appreciative of the quality of work that I do.
5% commission for project management. Pre/post sale, they go between you and the client on all things. They keep client on track to keep meetings, samples, etc. to a minimum.
5% commission for design. They get the concept going, spec/approve your finish samples to client as well as your engineered shop drawings. 5% commission for CAD drawings. Good enough for sign offs. 5% commission for shops. We have never gotten drawings good enough from a designer to pay this. Once from an architect.
These things should already be built into your standard pricing so you don't charge more. You are either paying an employee to do it for you, or you are doing it yourself (and probably doing it for free).
Charging a client more than they would if they came to you direct and paying a kickback is immoral and illegal. Paying someone a commission out of your normal pricing for services rendered is okay and the way business is done.
These are my numbers based on what I think it is worth to me. Your mileage may vary. But for fact, there is a value there for any or all of the services they do for you. We have long term designers who submit all paperwork, get checks and hire no one but us for all their jobs. There are some clients we have never met or talked to ever, before, during or after a job. When you get one like that, treat them like gold and hold onto them forever, whatever it takes.
