The following story was written by John Scarrott of the London-based Design Business Association.
Photo by worldoflard
I was chatting to one of our ‘experts’ at the DBA Design Effectiveness Awards when he recounted the following story to me. I’ll tell it from the expert’s perspective.
“One of my clients, a small design agency of five people, was asked to quote on a piece of work. They’d not worked for this client before. They took the time to carefully cost the project, based on their normal charge-out rates, and the time and level of commitment required. The price came to £100k.
“At this point the agency experienced what I would describe as a ‘slight degree of nervousness.’ It seemed like a big number to them; a lot of money. It was. In fact as a project it would be one of the biggest they had undertaken. But, they took a deep breath and sent the proposal off.
“The client came back the next day with the following news: “We’ve only got £50k in the budget.” The agency rang me. Their first reaction was, “There’s £50k we could have.” Mine was a little different — we couldn’t accept a £100k project for £50K. They were initially hesitant to accept my advice to turn away £50k. I reminded them that we had carefully worked out a financial plan for the business based on sound principles and we should stick to it.
“They contacted the client via email, thanked them but said that they couldn’t do the work for the budget, concluding that it would be lovely if they could stay in touch. No counter-offer. The end.
“Actually not, as it turned out. Things did go quiet for a couple of days. But then the client picked up the phone and said they’d found some budget for the project and could pay £95k if that was acceptable to the agency. Which, of course it was.”
Listening to this story, it struck me that that the agency’s relationship with the expert was key, and they’d built a positive and trusted relationship together. So I asked our expert what the key issues and turning points were. What gave the agency the confidence to know what they were doing was right?
1. The size of the number, it felt big!
A perfectly valid thought. But not a fact. The important point was that there were sound business principles behind the calculation of the price. It had been worked out. It was a genuine figure. There was no smoke and mirrors, no figure added on as fat (see 5.). They knew they’d done their numbers properly and this gave them a mindset of certainty and confidence in what they’d suggested.
2. They have a financial plan that underpins the business.
Sitting beneath the studio is a financial plan. This involves delivering income to cover overheads and make a profit. They know they need to bill at £X per hour to be profitable at the end of the year. If they have that plan and someone says “I won’t pay that” and they take what they offer, they’ll never achieve their plan. The more times they do this the further away they get from achieving their plan. They may actually lose money. I’ve heard tales of serial acceptors of these offers, eventually folding as businesses. This happened to one of the best creatives, a household name with books on shelves. No one wants to go the same way.
3. Imagine the atmosphere in the studio if they’d taken this job for £50k!
How are they going to feel? How will the team feel? That they’re working “£100k hard” for a £50k reward. They can’t pull their effort back to £50k because the client’s expecting a £100k job. So they’d be stuck working their backsides off on a job that takes them further away from where they want to be. The effect on team moral is going to be bad, and they want to enjoy what they do, not suffer for it.
4. They’re consistent.
They have a plan and they keep to it. They could add on some fat to the bill to negotiate but they choose not to. This instills a sense of self-worth that is important to them as an agency. It allows them to stay in rapport with their clients by being clear about where they stand.
5. They don’t add margin only to cut it later.
What if they add some money on top, say 20% and then let that slide in the negotiation? How does the client know that they’re supposed to stop there? If they give 20% what’s to stop the client chipping further?
6. They’re confident in their ability.
They know their ability and they stand by it. They know that what the client is paying for is better than they could get elsewhere. They’ve created a niche of expertise for themselves. This is another foundation stone for their confidence.
7. They understood the myth of “We’ll just do this one.”
It’s always a tempting thought. Could £50k now be better than nothing? What about up-selling the client in the future? These things get questioned, but what stops them is the knowledge of what could happen. A better opportunity could come through which they can’t accept because they’re doing the £50k job. They know getting the client to pay more next time will be an uphill battle that in all likelihood they won’t win.
Of course if you try this the next time you’re asked to cut the price you might send the email and never hear from the client again.
It might be the best thing that never happened to you.