How does ID firms make money?

As final project to one of my classes i must build a company and i would like for it to be a Industrial Design firm as i think it be
a interesting bussines model to work on, but to be honest i have no idea how does a company like Frog or IDEO (to name a few) makes
money. Do they work as a consultant? Or do they create patents and sell them? Or something else entirely?

Please don´t limit yourself just to answer the question directly, anything you could tell me about the workings of these kind of companies
would be helpful.

Traditionally in the US many design consulting firms charge on a per hour, or flat project fee based on estimate. Very similar in nature to a law firm.

In Europe, especially in Italy, a lot of designer work off a royalty model. Payment based on how many units sold. Sometimes there is a royalty advance, or a minimum royalty payment.

In the last few years more firms have using a partnership model where they actually get a small percentage of equity in the company when working with a start up business.

I would also add that many formerly traditionally ID firms have branched out to more design specialties such as digital UI, graphic, packaging—and put them under the umbrella of brand strategy—as more clients are looking for multifaceted yet consistently on-brand communication and innovations.

@DesignerInShangai

You said in your AMA that you had done freelancing, does it works the same way as “Yo” stated? The designer and the client agree on a hourly wage and they pay you the amount of hours worked, if so how does the client knows how many hours you worked in his proyect? or it´s proyect based? you present a design and if the client is satisfied with it, he pays you X amount?

Depends on the project/client. My biggest client now–the Fortune 500 company–has agreed to a set number of hours per week that I dedicate to its projects. The actual working time is flexible, as long as I get the work done–except for meetings obviously. This gives them the assurance that my services are consistently available. This is not unlike a law firm being paid on a retainer. Sometimes the hours are more, sometimes less, but I keep a detailed record of my work hours and I can see the average is correct. Beyond that, it’s really just trust–if they have to monitor me, then it’s wasted time and manpower for them, and that would also be a legal issue since that would imply that I’m an employee even though I’m not.

Smaller clients normally ask for, or at least are most comfortable with, a per-project estimate. In this case, I walk them through all of the possible issues that may arise and try to give them at least a rough range of hours I’ll spend on this project. Sometimes I break the project down into stages so it’s an easier pill to swallow; if they don’t want to continue further, it’s totally OK, and I’ll refer them to someone who I think would be better. This gives them a peace of mind but also prevents me from having to work way over the estimated hours. I also set an absolute deadline so they know if it goes over, I’ll bill more–but on a per hour basis. But I also pick my clients and projects–meaningful, fun, and worth the energy/time–so fortunately, I haven’t had any clients who didn’t want to work with me halfway through a project.

@duncanpa Could you expand on that, i kind of got you but think im missing something. What do you mean by the nature of the work for example.

Unfortunately I think Duncanpa might be spam…

Usually our firm does a fixed bid where we estimate how much it will cost to do the project and they pay us that amount to do a specific list of things. We try to be flexible with changes as we go along, but if they ask for things that are out of scope we’ll usually provide a quote for that additional work or sometimes do it at an hourly rate. As was said above, they trust that we are working the hours we say we are and we are expected to deliver what we say we’ll deliver. Very few clients will just let us float along at an hourly rate though, they like to know how much something will cost ahead of time.

Something we’ve started to do with inventor-type clients is discount our rates in return for equity or royalty. Most don’t have a lot of money upfront and hopefully it will pay off for us long term.

deleted that Spam, thanks for pointing it out Seurban, I missed that.

Modern Man finds this basic description of the prevailing business models for industrial design firms in North America vs Europe to be a potentially interesting point of conversational digression.

Modern Man believes the ways design firms make money significantly influence their design process and thus why there are general differences between how American and European design offices approach design. He also very much suspects that these differences in business model and process influence the ultimate results of their work.

I talked with one of the Alessi family a few years back and he said by giving the designers royal vs an upfront fee he believed they would spend as much time as the design needed to be exactly right vs stopping once a certain amount of hours were hit. Sometimes designers there work on an idea for years in the background of other projects until it is ready to be submitted for review by Alessi. Of course Alessi is working in a very mature market. This might more difficult in the tech space where ideas might have a short shelf life.

Modern Man is weighing whether to step/speak out of character as this is a particularity interesting subject to him. :wink:

Maybe make another account :slight_smile:

Modern Man is still debating it internally. Modern Man is leery of social media, particularly where it intersects the profession. He enjoys bringing a sense of humor to a field of interest, passion and work that brings us so much joy and agony. He also prefers to speak freely about all things design with reduced fear of potential repercussions from those in the business who may not agree.

P.S.

Would that be just a sock puppet or sock over another sock? :wink:

I hear you. Certainly my comments in here have come up in real meetings. It is easy to forget how widely read these forums are. There is a high percentage of people who just read them and don’t post, and of course search engines love them… while at times it might have been awkward, the reality is I still believe the things I wrote, and perhaps the self selected some better partnership opportunities.

I think your comments are appropriately humorous. Take a look at the really old days of the discussion forums if you want to see posts from people who could have really gotten themselves in trouble trying to be funny.

Speaking of ‘F-You Pay Me’, Italian companies honestly paying out royalties is another potential topic. Alessi is probably one of the best in that regard though.

I have no reason at all to believe what your friend at Alessi says isn’t true with respect to designers working on projects for them. But I’m also under the impression that how designers - most particularity Europeans compared to Americans - approach their work is more widely varied from designer or office to office and also among types of projects or clients.

I’ve heard from and about known designers who are in or more oriented to European industry who use the computer very little or not at all, or sketch very little, or do lots of quick sloppy sketches and firing them off to companies en mass. In other words, what is accepted design process is much more wide-open. One known designer I’m antiquated with says most well known European designers don’t sketch well or much. If a design publication requests process sketches for an article, they just hand the task off to an intern or underling to fake pretty looking process sketches after the fact.

Alessi is one of my favorite companies around, but while I admire its royalty model, I personally have found it to be tricky to navigate.

I think two of the key requirements for the royalty model is 1) the long-time reputation of the client and 2) its record of actually implementing and delivering on the royalty model. For example, many clients (especially start-ups) promise a lot—a percentage of a “potentially massive” future revenue—but it’s often hard to tell if the client is really dedicated to the project or simply daydreaming. Of course, that’s the case for many start-ups in general, but designers don’t necessarily have access to the start-ups’ financial data that investors do in order to make an educated decision on whether to collaborate. Next thing you know, you’re putting countless hours of work into a project that never even had sufficient means to succeed, even if you did create a great product.

I know this is slightly off-topic, but if there were any words of advice I can give to designers considering the royalty model (from my own experience only, obviously) it’d be:

  1. Check if the client had previously worked with other contractors on a royalty model—perhaps on another project—and actually PAID them.
  2. Negotiate a flat fee upfront that’ll be paid if the end product is never produced by a certain date. This last part is important, since a client can delay the launch date indefinitely and argue that since the product was never sold, he doesn’t have to pay you. Note that this is more of a consolation, since it would likely be far less than the fee that you were initially asking for.
  3. This might be hard to do, but it doesn’t hurt to try: negotiate ownership of the design if the project falls through. This serves two purposes: one, this prevents the client from getting cold feet near the completion of the design; two, it discourages the client from slightly changing your design and argue that he doesn’t need to pay your royalties because the design is now different. Then, if you really love your design and you think there’s potential for you to sell the idea to someone else, try to get a patent on it. That is, if you have the money to do so.
  4. Lastly, and this is probably the most important: be mentally prepared for not getting any financial returns out of the collaboration except experience and a good addition to your portfolio. Which, depending on your case, may not be a bad deal. :slight_smile: