You know it’s coming.  And, you better be ready…

You’ve convinced the (potential) client [hereinafter, PC] that you have the ‘stuff”- you can solve their problem.  And, then, the PC asks how much this is really going to cost…

Well, if you work on the project basis, you better have a good idea of what your costs are going to be, so you can price the service offered- at a profit.  If you charge by the hour, the PC is going to want to know how many hours you think it may take- and make even say your competition is only charging 0.9X per hour.

I know that our standard response is, “We do things well and we do things quickly.  Just because Dewy, Cheatham, and Howe down the block charges a lower hourly rate does not mean that they have the creative “juice” to solve the problem, or to the ability to get the task done in rapid fashion.”

I just finished a 7 year stint replacing the internal financial manager of the firm (who was being released for cause) at a rate twice what they paid that person and his predecessor- but I worked half as many hours.  Which means they got their firm’s ship of state right- at no additional cost.  (OK, we did receive an additional fee based upon the change in the bottom line- but that was profits that they did not have before we provided our services, so that really cost them nothing additional, either.)

But, what if you already are providing services and the PC says they need a discount?  How will you respond?  (This goes along with our discussion of post-mortem analyses, by the way.)  Most professional services firm will actually offer that discount.  We recommend you don’t- unless you consider these two factors.

First of all, what is the bottom line of your organization?  Say, your annual turnover is $2KK.    What’s your breakeven?   In this case, you have rent of  $ 175K a year, utilities (including non-chargeable phone services) of $ 75K, and payroll (including payroll taxes and benefits)  of $ 1.56KK.   Well, that means the best profit you can expect to eke out is $210K.  And, that doesn’t cover the cost of any meals you may provide, dues and subscriptions, supplies, repairs, new equipment to replace older ones, etc.

So, this client, which is 5% of your gross business (NEVER have any client at 10% or more of your gross revenue- or you are beholden to it) want a discount.  If you offer a piddling 5% discount, that means you have just decreased your revenue by  $ 5K- and your maximum profits will be $ 205K.  That’s more than a 2% hit to your bottom line- and I’m guessing that the $ 210 K potential is closer to $ 150K, when all is said and done (making this a 3.3% hit).

[Notice if this client violates the rule I stated above, and is 25% of your business, you are in a heap of trouble.   Because you are over a barrel.  Now, you are talking about a losing a big chunk of revenue – and that means you will losing money if the client walks.   And, that discount will eat up more than 10%- and probably 20% of your bottom line.]

But, what if you tell the client you will offer the discount for a set period of time- once?   At the very least, that gives you the opportunity to replace it with at least one, if not three new clients.  And, not be put in this position again. Or, you say, the discount will only apply if the client pays you a month or a quarter in advance.  So, you can possibly find a way to get a return on that cash so the hit will be smaller.

If you’ve been doing your post-mortems, you can also respond by providing realistic data to the client to prove your value.  It’s that step that we all we often fail to provide.  We know our inputs (our payroll, our rent, etc.), but not our value.   It’s why so many of us bill by the hour (the input)- we don’t know how- or fear the consequences- of valuing the output.

Billing by the hour is OK for short projects, but for longer ones, we have to recognize that we are considering ourselves akin to manufacturing.  Put in 3 hours and get 3 widgets.  But, I know- and I hope you are like me- that what I do in one hour is more than most finish in 3- so pricing by the hour cuts my value by 3, unless I am charging 3X the rate of my competitors.

By the way, that firm with whom I was associated?   Their staff of lawyers average 1000 hours of billable time a year.  That’s right- ½ of what most lawyers expect to bill.  And, we were profitable as heck.  So, remember that your compensation and that of your employees is not related to how many hours you worked, but by the value you provide your clients.

Share this: