09/20/2011 06:55 pm ET Updated Dec 06, 2017

Designers With a Stake in Design

Starting a design consultancy is a very scary business. Beside the challenge of finding your niche and constantly building your client base, you have to survive the strong cyclical nature of the new product development business and promote your service without provable, objective metrics. Since thirty five to forty percent of new products fail, you are likely to be held responsible for the poor outcome of decisions that are outside your control.

Design consultancies traditionally have three revenue streams: Fixed fee, hourly billing rates and royalty agreements. High volume industries typically favor the fee-based approach, while low volume industries hedge their bets with royalty agreements. Each approach has its inherent risks and rewards.

Fixed fees ensure your earnings, however, since assignments are notoriously underbid and, in competition with other firms, you will only make real profit in cases where the client changes their original request and, unfortunately, this gives the client a bad taste. Charging the client by the hour leaves the client to carry the risk related to budget estimation, and most clients try to avoid this risk. Royalty agreements, where the consultancy has a stake in the outcome, can be a very lucrative proposition, however, you will need to be able to think both like a businessman and a designer in order to be profitable here.

John Caldwell has had his own design consultancy in Southern California for the past forty years serving the furniture industry, and he understands how to manage royalty partnerships. Although he started his consultancy while still at school, he wishes he had started out working in-house for his dream furniture manufacturer. By building experience while working with the best, he would have received fantastic experience that would have helped in establishing his firm.

Below is some more of his sage advice for those considering starting their own design consultancy:

1) Demonstrate the value of your design contribution.... Design arguments are not about how hot a design is, but how the design will increase Return On Investment (ROI), margins and market share. Your product concept needs to be differentiated along criterion that both the client and user will value.

2) Be pro-active. Tenacity is required to stay in business. Building a strong client base is a must, since eighty percent of your business will flow from twenty percent of your clients. You will need a broad portfolio of clients to balance failures with success - you can't be deterred by the failures. Clients keenly remember successes and failures and you will be sure to feel this memory in your wallet.

3) Don't over leverage your investments because you won't make it over the long haul without cash reserves.
Co-written with John Caldwell