I just read an article by Warwick at Mihaly Slocombe about growing his architecture firm from 2 to 8 employees over the last few years.
I’m glad Warwick is asking questions like “Why have we grown? Why did we start growing? Why did we continue to grow? Why have we grown at all?”. In the architecture industry, these questions don’t have obvious answers — and it freaks me out that the roadmap for growing is so vague.
A large majority of architecture firms are really small, and stay really small; often as sole traders. In the a recent census and AACA report, there were 7,027 non-employing architecture firms, 6147 with less than 20 employees, and only 217 with 20+ employees. You’ll have a hard time finding a more fragmented industry than architecture.
Half of our industry are freelancers!
Warwick attributes this to an industry-wide shortage of business acumen. That’s part of the story, but my gut feeling is that even without business training, people will still find or copy ways to grow quickly in an economic environment where they‘re rewarded for it.
In my opinion, architecture firms don’t grow because the economics of architecture firms are shit.
Let’s talk about ways the off-the-rack architecture business model is a terrible way to get rich, then move onto a couple of ways we could turn this around.
You are low margin, low volume.
Architecture firm margins are tight, and they’re in the worst category in the chart above — Low volume, low margin. You don’t have many customers, there aren’t many out there, and you’re competing with lots of others (so prices are cut to the bone).
It doesn’t stop there.
Low barriers to entry
Architecture firms have a low barrier to entry. It’s easy to rent a space, hire graduates at the legislated rate of $49,295 per year, setup a squarespace website, and hustle-up your first few clients through friends and family.
It’s relatively easy for people to compete with you. The only thing holding back anyone from doing what you do right now is your Title as Architect.
While getting registered is tough— there’s also a million other types of professionals out there that a client can hire to do roughly the same thing (who aren’t architects) — so I’d consider registration a pretty flimsy moat around your business.
Architecture firms are low in differentiation, mostly looking, feeling and sounding the same as each other. It’s really hard to distinguish yourself. People can easily copy what you’re doing.
Economies of scale
Businesses can usually make things cheaper as they get bigger because they can do things over and over again. Architecture’s entire reason for existence is customised outcomes, and custom is expensive.
Architecture firms don’t have economies of scale. Unless you automate your staff, you’ll have to hire double the staff for double the customers. Then pay double the rent, and double the Autodesk/Adobe fees, and almost everything else.
What does that mean for you?
Architecture is a bad business and won’t make you rich. But so what, we all know that, don’t we? Even so, what you do is essential, and very necessary.
If we didn’t have architects, we’d all be living like this.
and working here.
So how can we fix the economics of architecture firms?
It’s simple. Make architecture a high-margin, low volume business.
Upsell complimentary services
You’re probably doing a lot of things for your client that they value a lot more than what you’re currently charging them for it.
You shouldn’t charge a client the same for this:
As you do for this.
Value based pricing model
In another informative Panfilo post, Warwick Mihaly discussed a fee model called incremental tasks where you break a project down into little pieces and make them optional.
He concluded that it’s awesome because “the architect is paid for the tasks she performs, no more and no less.” but killed the idea because “it’s risky for the design” as the client can reject important steps of the process that are compulsory for a quality building — that they either don’t understand or care about (but would definitely care about if they could see what a building without X looks and performs like).
That’s totally true, and if our goal is to increase margin without compromising the design, then we need to do that model a bit differently.
It’s called value-based pricing.
Basing a product or service’s price on how much the target consumer believes it is worth.
What a client thinks a render, or a model, or a town planning report, or a specification is worth — isn’t defined by a multiple of your cost of labour, or a percentage of their budget, or a number pulled out of thin air. It’s based on research, and asking your audience what they are willing to pay for certain things.
Never make core services optional. Just charge your standard rate for those. Then identify the parts of your service that the client values more than what you’re currently charging for them, and increase margin to match.
During the design process, you can always have a menu of awesome extras at the ready, that your client can request.
Attract higher-spending clients
The problem with a lot of architecture clients is that they’re quite cheap. For good reason. They don’t like to spend a lot of money because buildings are expensive and most people have to borrow money and a lifetime of financial horror to get one.
Getting them to spend lots of money on your high-margin upsells could easily make the average client leave, or look to the hundred other firms who will gladly do it for free.
But what if you can get higher spending customers?
In the residential category, you’ll want to target high net-worth public figures including artists, sports people, TV personalities, musicians, authors, politicians and executives— because celebrities don’t settle for average houses and they don’t have mortgages. They want something highly customised and they can afford to pay top-dollar for it.
But, there’s something even better for small firms if you follow the money.
While most small firms work on residential projects, there are a lot of big companies out there and they have terrible options when it comes to architecture. There are only 14 architecture firms in the country with 200+ employees, who the big corporates have always turned to.
But those big firms perpetuate big companies looking like this. Boring AF.
When they want to look like this.
Big corporations put competition for talent, and employee turnover as their two biggest challenges.
It’s not surprising since any millennial with computer-savvy and an idea for “the next Uber” is currently trying to do this.
Small architecture firms can help these big guys to stem the flow. Reach out to big companies with a clear pitch for how you can help them do it. They’ll love it, and you’ll make a killing.
There’s many ways to make architecture firms more viable. The most promising for me are upselling and higher-spending clients.
We need architecture firms to exist, but we also need them to evolve to the 21st century and market demand.