Ch 7 - Handling Price Complaints
In today's economy, with consumer confidence low and business budgets limited, your clients are looking to spend less, save money, and get things as cheaply as possible.
At home, the consumer is experiencing a kind of "downward mobility." The new generation is the first that will probably have a lower, not higher, standard of living than their parents. People are strapped for cash, afraid to spend money, and price conscious. Some are downright worried about keeping their jobs or their homes.
At the office, the business buyer has a smaller budget than in years past, and for some products and services, the budget has been eliminated. Business buyers frequently "look good" to their managements when they can buy cheap and save the company money.
Since they don't want to sacrifice quality or take the risk of dealing with unproven vendors to accomplish these cost savings, they put pressure on existing vendors to reduce prices. In situations where acceptance of your price would have been routine years ago, now clients are haggling and sending more and more jobs out for "competitive bids."
Their intent is not necessarily to switch service providers, but to get you, their preferred vendor, to feel as if the client has many options and would go elsewhere if necessary. The idea is to make you more flexible and willing to haggle and negotiate, so they can get your service at a lower fee than you normally quote. If you subcontract to other service firms, you'll feel the pinch even more. As the prime contractor is forced to bid lower and lower to win contracts, their profit margins shrink. If they can buy a subcontracted service at significantly less than they were budgeted to pay, the difference is money in their pockets. So prime contractors are especially looking to get the "lowball" price.
Does this mean people buy on price only and that service, quality, and value no longer matter? On the contrary, more than ever clients not only want, but demand and expect to get, the best service, quality, and value with a low price. As Joseph Balaban, vice president of Database America observes, "For a service provider, there's the difficulty in keeping a client happy who wants to get it faster and for less, and whenever possible, wants more of it."
Handling price complaints and coping with the objection "Your price is too high" is not, as you well know, restricted to selling new accounts. In the service business, virtually every job or project is a new assignment that requires a proposal, recommendation, or at least a simple cost estimate. For any job that is not "standard" or quoted off a fixed rate card (and even for many that are), price can be an issue and a client can object and ask for a lower price at any time.
How you handle and resolve the price objection is extremely important because:
It determines whether you get the work or not.
It determines at what price (and therefore at what profit) you get the work.
The manner in which it is handled can strengthen or weaken (even destroy) your rapport and relationships with your clients.
How Service Providers Typically Respond to Price-Conscious Clients
Because of the weak economy, many service providers are more flexible and end up working for lower rates and fees than in the past. The benefit is that it helps them hold onto their most valuable asset -- their customers. The negative is that you end up working twice as hard and making half as much money as you used to.
What to do? Get used to it. The "golden years" of the 1980s are gone forever, and the tough, competitive "Age of the Customer" has replaced them. You are going to have to work smarter and harder and give better service than ever to get and keep clients.
And you'll have to do it at competitive prices. That's the way it is -- no words of comfort for you here. The service providers who are successful change with the times, accept it, and move ahead. Those who still think they can be prima donnas or charge outrageous fees are in for a rude awakening.
Of course, this does not mean you agree to provide whatever service the client wants at whatever price the client wants to pay. Rather, you must learn to negotiate so that it is a win-win situation: the client is able to hire you at a price he or she can afford; you get hired at a price that gives you a decent profit.
As I write this, a client called about a large job consisting of many individual tasks. I had given prices for each task and a total; she wanted to negotiate a lower total if she gave me the entire job as a package.
She suggested a figure; I countered; we split the difference. I added the condition that I would do the job at the reduced rate only if it was not a rush and I was given plenty of time. She agreed to that also; then she said, "I'm glad we were able to hammer this out. I wanted you to do the whole thing, but your original total would have busted my budget. Now I feel I'm not being squeezed as much. Thanks."
She gets the service she needs at a price she can afford. I get a large assignment, several thousand dollars in revenue, a happy client, and a good relationship that continues without disruption. However, most service providers are not very good at negotiating prices or responding to clients who say they want to pay less -- for two reasons.
First, we're not used to it. In the 1980s, many of us tended to quote fairly high fees and, because of the high demand for our services, could pick and choose, working only with those clients who met our price. So we did not have to negotiate fees or respond to the client who balked; we simply worked for those clients who instantly said "yes."
Second, in many service firms, the person selling the service is also the person rendering the service, so any challenge of fee is taken as a personal affront (though it should not be). In product selling, if the customer says the price is too high, the salesperson may negotiate, but is not emotionally involved in the cost negotiation -- after all, it's the TV set the client doesn't want to pay $799 for, not him.
In a service business, however, many of us tend to interpret the client's objection to our price as an insult or attack on our self-worth. After all, if the client says I'm not worth $500, isn't he demeaning my worth as a professional and a human being?
For these two reasons, most service providers react poorly and ineffectively to clients who object to the price for a particular project or assignment. The resulting confrontation usually loses the job and generates ill will that can damage or destroy the client/vendor relationship.
The rest of this chapter presents strategies for dealing with price-conscious clients effectively, meaning:
You maintain your dignity, "cool," and self-respect.
You do not offend, put off, or in any way argue with the client.
The client comes away with the impression that you are flexible, reasonable, and interested in helping them and that you have their best interests in mind.
You work out a mutually beneficial arrangement concerning fees to be paid and services to be provided for those fees.
Both you and the client are pleased, happy, and comfortable with the agreement, its terms, and the manner in which it was arrived at.
Let's get started.
How to Not Take Price Negotiations Personally
You must respond to the price-conscious client who attempts to get you to lower your fee in a professional and not an emotional manner. The best way to do this is to look at things from the client's point of view. When clients ask, "Can you do it for less?" they are not looking to force your fee down for the sake of "beating" you in a negotiation or bragging about how they hired a top-notch firm like you for a bargain-basement price. Nor are they saying that you aren't good at what you do or that your service is not worth what you charge.
Rather, they are indicating that, they cannot or will not pay the fee you quoted, for one of several possible reasons,
They don't have the money.
They have the money but want to hold on to it because business is slow or money is tight.
They are cheap and always like to pay as little as they can get away with.
They don't understand exactly what you do or why you are the tops in your field and can command the type of fees you do (this would apply only to new clients; existing clients, of course, already know you and what you do).
They think they might be able to do it themselves.
They think one of their other vendors might do it cheaper.
Another vendor has submitted a lower bid; the client would prefer to retain you, but needs your bid to be closer to the lower bid to engage your services.
They have been told by management to freeze spending.
The particular problem this project addresses is not, in their minds, bad enough or major enough to warrant the kind of money involved in hiring you.
In all these situations, can you see how reasonable it is for the client at least to inquire whether you can do it for less or reduce your fee? And do you see how, if they rely on you and trust you for advice, it's your duty to at least explore other options and see if you can meet their needs within their budget constraint?
Also, look at the list of reasons. Are they an insult to you or your skills as a professional? No. The client's haggling over fees should not be taken as a negative or an indication that they do not value you; on the contrary, you should be flattered that they came to you and want to seek a workable arrangement because you are their number one choice for performing this type of service for them.
To become less emotional and more professional about cost estimating and fee negotiations, take the attitude that it's an opportunity rather than a problem -- an opportunity to help the client meet a particular need cost effectively. After all, that's why you exist: to help your clients.
Don't Get Angry -- Be Empathetic
Don't get angry with the client who is trying to get more for less. We all are. Do you instantly agree to pay the $14,000 the dealer is asking for a new car when you know full well he can be negotiated down to $13,000 or $13,500? Of course not. And neither does your client. You're not a car, but it's the same principle: the client attempting to buy at a lower price is seeking to solve a problem and save money, not demean you or your trade.
Let's say the client says, "I can't pay that much." You can respond either rigidly in a non-cooperative manner or flexibly in a problem-solving manner.
RIGID: That's what it costs! I'm the number one person in my field and I am worth what I charge.
PROBLEM SOLVING: I understand. Can you tell me what budget you do have, so we can see whether we can get this work done within those constraints?
The first response would probably be given in anger, or at least in a terse, stiff tone of voice. What's wrong with it? First, it is haughty. You come off as having an inflated opinion of yourself or being arrogant, which turns people off. Second, it's so final that it leaves you and the client absolutely no room to maneuver.
For most services, coming up with the initial fee you quoted the client is a matter of educated guesswork anyway, and the price could easily have been lower or higher, depending on who estimated the job. When you are completely rigid and unyielding, and unwilling to consider even the possibility of being flexible about fees, you make it extremely difficult for clients to continue to do business with you.
Most products are standard, off-the-shelf items with no difference between them: TV set number 500 rolling off the production line is pretty much the same as TV set number 499. But services are much more flexible, and you succeed in selling services and satisfying clients by tailoring your service to their needs. The price you charge is one aspect of your service, so why not be flexible about that as well?
As you'll see, I don't mean working for $10 an hour when your regular rate is $100 an hour or doing a $5,000 job for $2,500. There are easy ways to make a profit equal to or just slightly less than your normal margin on these fee-negotiated jobs, and you can cut costs by tailoring the package of services you sell the client, not selling yourself short.
How to Evaluate What the Client Says in Response to Your Cost Estimate
Many sales training programs teach you that the client is lying and your job is to uncover the real reason why they are trying to get you to lower your price. My experience is to the contrary, as the following scenarios illustrate.
"We Don't Have the Budget"
When the clients say this or tell me "I can't afford it," nine times out of ten they are telling the truth or at least the truth as they perceive it, which is really the same thing.
You can't change factual circumstances restricting the client's purchasing power. For example, if a large corporate client stops hiring you because management has put a halt on all spending for outside services such as yours, there is nothing you can do to cause that company to unfreeze the budget. Therefore it's pointless to argue or plead your case.
"Our Budget is Frozen"
When a client tells me this, I express empathy; then I ask how long the budget freeze will be in effect. Usually they will give a date or time frame after which they expect to have money to spend again. I make note of that date and re-contact them to discuss the project at that time.
"The Project Is on Hold"
Another client comment many service providers take as a threat to get them to lower prices is to say, "The project is on hold" or "We can't move forward until such and such happens." Service providers tell me, "The client is just saying that, so when you thought the job was a done deal,' you're suddenly unsure whether the project will come through at all. That unsettles you, and the client can say you have to be more flexible or lower your price if the project is to get back on track."
Again, baloney. When a client says "The project is on hold" or "We can't move forward," they mean just that. Your price is not the issue. The best strategy is to ask what the cause of delay is, and whether you can do anything to help move things forward. The client will say there is nothing you can do to help, but appreciates that you care enough to try to solve their problem.
"I Have to Get My Manager's Approval"
Another thing clients say that many service professionals think is a ruse to induce lower fees is "I think the price is okay but I have to run it by my manager." The service provider believes this is an imaginary "good cop/bad cop" scenario where the client says, "I feel your price is fair, but my boss hit the roof. Can you do it for $750?"
Again, my experience is that clients are not lying. Most corporate people have to run a price by at least one other person, if not an entire committee, before signing off. And with consumers, you can sell one spouse only to be told when you come by to close the deal, "My husband/wife thinks it's too costly/doesn't want it" and so on.
If the decision is made by committee, it's desirable to meet or talk with each individual on the committee. That way, you can find out who has the objection to your price and deal with that person individually; once he or she is sold, the rest will sign off.
Why Clients Sometimes Suffer From "Sticker Shock"
"Sticker shock" is the shock the consumer experiences when shopping for an item, looking at the price tag, and discovering it costs much more than he or she thought it would. Clients getting estimates on your services can also suffer from sticker shock when your quote, although fair and reasonable, is more than they had imagined it would be.
Do not be offended if the client exclaims "That's too much!" or says "That seems awfully expensive" immediately after you quote your fee. They have made the very human mistake of giving you their gut reaction instead of thinking about it and phrasing their objection in more agreeable, less confrontational terms.
Keep in mind that money's tight and you're expensive. Many of us are well paid, and our clients are sometimes jealous, offended, or even outraged at what we charge-not because the service isn't worth it, but because we seem to be making "too much money."
Often, it isn't so: The client, hearing our fee, immediately translates this into pure cash, not realizing that we have overhead, expenses, rent, sales and marketing costs, research and development, computer equipment, bills to pay, and all those other expenses to cover out of the check, and what is left is not such a princely sum as she thought. But remember, the client does not think in these terms, so the perception is that you're making "too much money" -- too much money being defined by most people as more than they make or think they can make (or more than they think someone in your profession should be paid).
The key is that when the client expresses shock or voices an immediate objection to the price quoted, it is an emotional response, not necessarily a refusal to pay or signal that they want to haggle. So there is no need at that point to stammer or apologize or say "Well, what do you want to pay?" as so many do. Instead, you answer politely, "Yes, it takes many hours of hard work plus years of experience to [do whatever it is you do]." Then let them make the next move. (You want them to respond. If you talk first, you lose the negotiation.)
How to Guarantee That Your Price Fits Within the Client's Budget
The easiest way to make sure your quotation or cost estimate is in line with what the client can afford is to ask in advance what they are willing to pay.
For example, suppose an existing client calls you in for a meeting. They say, "We want you to do so-and-so for us. What will it cost?" How do you respond?
Some service providers advocate asking the client their budget up front. When you know in advance what the client is looking to pay, you can tailor your proposal and quotation to fit that budget.
For instance, if a client wants you to landscape his property, you might ask if he has a budget for the job. Based on that response, you can do your preliminary sketch and proposal to create a design that the client will be pleased with and can afford.
As with many services, a landscaping job can vary enormously in price, depending on budget. The factors which raise or lower price include rarity of plants; density of plants; regrading of property; construction of walls, walks, or ponds; and so on.
It makes sense to get an idea of the budget and tailor the proposal accordingly. A client who says "My budget is $2,000" should get a nice basic design with some ground cover and small but tasteful bushes and plants. On the other hand, the client who says "My budget is $9,000" can have a lusher design with some exotic trees, a stone wall, perhaps even a pond with waterfall. It is a perfectly legitimate action and not at all unethical to ask a client, "What is your budget?"
When should you ask what the budget is, and when should you not? On small jobs, routine tasks, and other items that are fairly standard, you should probably just quote the price without asking the budget. When asked what your law firm charges for a simple will, you should respond, "$300," or whatever the charge is. The client understands the fees on smaller and more standard jobs don't have much if any room for negotiation and will either hire you or look elsewhere.
On large jobs, customized work, and projects that cannot be easily priced off the top of your head, it's your choice. You can ask the client, "What is your budget?" Or you can defer the issue of budget until after the quotation is submitted. On small to medium-sized jobs and standard jobs I tend to quote directly; on large, complex, and nonstandard jobs I tend to ask what the budget is.
Once in a while a client will object to your asking the budget question. "Why do you need to know that to quote a fee?" they may ask. I respond, "It is going to take a lot of time and effort on my part to work up the estimate and write the proposal. I don't want to waste your time or mine if the budget is not large enough for you to retain me, so could you give me a rough feel or range of budget? If it's too low, I'll tell you so immediately; if it's within the ballpark, I'll go back to my office and work up an estimate as you requested." That's extremely reasonable, and clients will not find it objectionable.
You will, however, have some clients who respond, "Gee, I really haven't bought this kind of thing before and have no idea of what it's worth. I really can't give you a budget; I want you to tell me what it costs. Then I'll decide." In such a case, you have to just go ahead and work up an estimate based upon the work involved.
Give the Client a Price Range Rather Than a Fixed, Locked-In Figure
If you are afraid the client will find your estimate too high, you can quote a range of fees. By doing so, you have a greater chance of presenting a number that is within the budget. You also indicate flexibility, whereas quoting a single fixed figure ($5,499) indicates lack of flexibility.
The range you quote can be narrow or quite broad. It's up to you. An example of quoting a narrow range would be, "We can program your computer to do so-and-so for between $4,000 and $4,500." Some clients may say yes to the range and allow the final quote to stand as a range. You charge the low end if the work is easier than expected and takes less time than anticipated; the high end if numerous changes, revisions, and extra work are required.
An alternative is to quote the fee as a choice of ranges from which the client can select. The client calls you in and says, "We want you to produce a thingamabob for us. What will it cost?" You are unsure as to whether their budget is big or small, but really want the job and are afraid a high quote will blow them away. You respond, "Well, we recently did something similar for several of our clients. Here's what it cost. Company A wanted us to produce a top-of-the-line, premium-quality thingamabob for them, with all the bells and whistles and complete service from start to finish. That type of job costs about $4,000 to $5,000.
"Company B chose a middle-range option. They still got a high-quality job, but without the bells and whistles, and we didn't do X, Y, and Z for them. This costs about $2,000 to $3,000.
"Company C was on a limited budget and wanted the plain vanilla thingamabob -- no options, no extras; a good job, but nothing fancy. We did this simple job for them and they were happy. That basic, no-frills job costs about $1,000 to $1,500.
"Mr. Client, which of these seems within your budget?"
My experience is that seven out of ten clients, when given this scenario, choose the middle range rather than the low end or high end. So if you want to get $2,000 to $3,000, quote that as your mid-range job.
The big advantage of this is that it eliminates price complaints because here, you are not telling the client what it costs. Instead, you are letting them tell you what they want it to cost.
The way most service providers quote fees -- a fixed, nonnegotiable price -- is like going to a restaurant, being handed a menu, and opening it to find there is only one item on it. You have no choice -- you either order it or eat nothing -- and if you don't like that dish, you'll probably leave.
Restaurants succeed because they offer their customers a menu of items and prices to choose from, so that the taste and budget requirements of the customer can always be satisfied. That's why you never hear a patron ask a waitress, "$19.95 for steak is more than I can afford; can you serve me one for $10?" If the customer has only $10, they can order the spaghetti and meat balls instead.
To avoid pricing conflicts that cause confrontations and arguments between you and your valued clients, run your service business like a restaurant. Offer a "menu" of different services and different price ranges and help your customers select based on need and budget. As I've said throughout this book, flexibility = success in the "Age of the Customer."
Negotiate by Adjusting Service Rather Than by Cutting Profit Margin or Base Rate
How can you be flexible about price without under-pricing yourself? Simple. You negotiate by adjusting the amount of service you provide rather than cutting your hourly rate, profit margin, or base fee.
For example, let's say you are a management consultant. The client asks for a cost proposal to do a certain type of consulting program. Your proposal breaks down the tasks and steps involved, shows the number of hours required for each, and gives the total number of hours; the fee is based on the number of hours multiplied by your hourly rate. Since the total was 100 hours and you charge $200 an hour, the project fee is $20,000.
The client balks. "That's way too much!" they object.
"I understand," you reply calmly. "$20,000 is not an insignificant sum. Yet we know the potential pay off of doing this work is a cost savings of many hundreds of thousands of dollars per year over a period of ten to fifteen years. Does it seem sensible to invest $20,000 to save $500,000 or more?"
The client doesn't buy it. "That may be the case, Bob, but I just don't have the money in the budget."
You reply, "Well, give me an idea of what your budget is for this project, and I can try and tailor the scope of work to fit that budget and still deliver the result you want."
The client thinks. "I don't know, I suppose we can afford $15,000."
You reply (either on the spot or after a more considered study of the problem back at your office), "Okay, here's the solution. On phase II we eliminate the two days of training the support staff; their managers can do that for them, and you will save $3,200. On phase IV we will eliminate the second audit survey; this was an extra safety check, and we live without it. That saves 9 hours of work and an additional $1,800. This gives us essentially the same job and result, with two steps eliminated, at your budget price of $15,000. How does that sound?"
Note what was done: you accommodated the client's budget constraint not by lowering your rate or profit margin (e.g., dropping your fee from $200-to-$100 an hour) or by simply agreeing to do the same work for whatever the client wants to spend.
What would have been wrong with those options? It's bad to lower your fee for two reasons. First, you'll be earning less. Second, there's no logical reason for it. Why should a $200 an hour consultant suddenly work for $100 an hour because someone says the price is too high? If you do that, the client will suspect that you really do not earn $200 an hour, as you claim.
As for the other option, it is also wrong to say simply, "Okay, what do you want to pay?" in response to a client who objects to price and then agree to the lower fee with no adjustment in scope or level of service. Why is this bad?
If you immediately jump to a lower price with no negotiation or adjustment, clients conclude that your original estimate was inflated and will therefore assume all first estimates you present also have a lot of "fat" in them. As a result, they will form the habit of objecting to your price and negotiating you down on every estimate whether the initial estimate is too high for their budget or not. It also makes them feel you are not forthright and honest in your pricing, and so reduces trust and credibility.
As we've just seen, the best way to give clients a lower price when they need it is to reduce the scope of service proportionally to the reduction in price. This makes the job affordable for the client, gives you the profit you want to earn, keeps your credibility high, makes the client appreciate your fairness and flexibility, and is a reasonable, sensible method the client can understand and accept.
Reducing Services by Eliminating Removable Options
A variation of the technique of reducing the scope of service to accommodate a restricted budget after submitting the original estimate is to submit the price bid or cost estimate in such a way that such reductions in service are built into it as "removable options," allowing the client to choose their level of price and service from the oral or written estimate you present.
In such a scenario, the primary estimate is the full job at the full price. Below that, you show different elements as options which can be removed from the total job, along with the cost reduction resulting from removal of that item.
For example, a construction estimate for adding a room to our home showed the removable options as follows:
TOTAL FOR ADDITION OF NEW ROOM: $25,000
SUBSTITUTE BRAND X FOR PELLA WINDOWS: Subtract $1,000
SUBSTITUTE CARPET FOR OAK FLOORING: Subtract $1,800
ELIMINATION OF SKY LIGHTS: Subtract $1,500
ELIMINATION OF TRACK SPOTLIGHTS: Subtract $700.
This way, if $25,000 is more than I had planned on spending, I see by subtracting the options that I can still get a room for only $20,000, if I am willing to go without the extras.
At this point you may object, "This sounds good, but my clients are going to want the $25,000 job, with all the extras, and want me to do it for the $20,000!" What about that?
It depends on so many factors: how much you need the work, how flexible you are willing to be, whether your prices are in line with what others are charging, and whether you rarely or frequently lose jobs based on price.
Let's examine some of those factors.
How the Need for Work Affects Your Price Negotiations
Ideally, you should approach every negotiation as if you do not need the work or care whether you get the job. This gives you the inner strength and confidence to be accommodating and cooperative but not frightened or weak-willed; you will work with the client, but not get pushed around or bow to unreasonable demands.
Unfortunately, while this advice sounds good in theory, it doesn't always work so well in real life. When we feel we need a job, we negotiate from a position of weakness rather than strength. And this makes us more vulnerable. As a result, we make price concessions that, although they win the job, make us feel we are being paid too little.
There are two types of need that weaken us: financial and psychological. Financial need is the need for money. In tough times, many of us aren't making as much as we used to. Others aren't making it at all. So when your plate is empty and you've hit a dry spell, and a big fat project is dangled in front of you, you want to get it. You need the money. And you're willing to bargain.
The other type of need is psychological. Some of us cannot stand "slow" or "down" times. We need to be busy: either because it makes us feel secure or because we need the approval of others -- and getting hired by clients is the ultimate form of approval. A minority of service providers even have a psychological need to be busy because they are workaholics: they're not happy unless they have more business than they can handle and are working from early morning to after dark.
The question is: Should you let either financial or psychological need affect your negotiating posture when it comes to fees? I cannot answer this for you. I can only present the two schools of thought and let you be the judge.
The first school of thought says, "Negotiate the job as if you don't need it, as if you don't care whether you get it or not. No matter how badly you want it, be willing to walk away. That's the only way you can negotiate from strength. Otherwise, the client will perceive you as weak and take advantage of you."
The second school of thought says, "While ideally the foregoing may be true, in reality you have to do what is best for you at the time. If you have a strong need to win a project, either for financial or ego reasons, there is nothing wrong with doing more or charging less to get it -- as long as you realize that that's what you are doing and are comfortable making such a concession.
"After all, in today's tough economic times, clients are spending less than ever before. So why risk losing the job? If the job normally goes for $2,000 and the client wants to pay $1,000, and you have nothing else on the docket, isn't it better to make $1,000 this week than zero? Take it!"
I vascillate between these two positions; however, what I think is not important. What is important is that (1) you can choose to follow either path and (2) if you choose to negotiate more when you are in need, you should realize there is nothing wrong with it. It is nothing to be ashamed of; everybody does it; and those who say they do not are either lucky or liars. Dr. Robert Gilbert says, "The ultimate skill is flexibility."
What to Do if You Occasionally Lose Jobs Because of Your High Fees
Nobody gets every job they bid on. If you do, you know that your fees are way too low and that many clients would probably pay more than you are now asking for.
If you are priced reasonably, in line with what others of your caliber and experience are charging, you will find that when existing clients ask you to bid on new work, your price will be acceptable to them as is, or with some minor adjustment, from 70 to 90 percent of the time.
That means 10 to 30 percent of the time, your price will be a little too high for that client for that particular job. Most of the time the reason is that the job does not warrant bringing in someone at your high level to handle it, but the client doesn't want to do it in-house or trust it to an inferior vendor. So they figure, "Why not ask Joe and see what the price is. Maybe we can sneak it into the budget somewhere." So the 10 to 30 percent of the time when the job never materializes, it's because asking you for a quotation was more of a "let's check and see if it's feasible" situation rather than a definite assignment.
The conclusion is this: if you occasionally lose jobs because of your pricing, but you win the majority of jobs you quote on, your prices are in the right range, and your fee negotiation techniques are working. So don't worry about trying to improve the win ratio by lowering fees or being more flexible than you already are. You can if you wish, but it isn't necessary. Your pricing is already right on target.
Have a Negotiating Hierarchy
Although "haggling" over fees has become a fact of life for service providers, there is no need to haggle with everybody. You should be flexible and accommodating only with those whose business you want to get and keep. On the other hand, for those whose business you don't need and are willing to do without, you can be less flexible and more insistent on sticking to your guns -- although this too should be done in a polite, friendly, and helpful way rather than rudely or confrontationally.
Which clients do you accommodate and which are you tougher with? The choice is yours. I have established a "client hierarchy" for my business which I use to determine how flexible I will be with any particular person. This hierarchy, in order, is:
Existing clients, good
Potential clients, good
Existing clients, marginal
Potential clients, marginal
Good existing clients. My existing accounts -- the good ones, anyway -- are my number one business priority. I define a good account as one that is profitable, pays good rates, gives me a lot of assignments of the type I enjoy doing, pays bills on time, and is pleasant to work with. These are my most precious business assets, and I will do everything in my power to keep them happy. Interestingly, although I will be the most accommodating with these clients, they are the ones seeking the fewest concessions.
Good potential clients. Good prospects are second in importance. When I am negotiating fees with a prospect who has all the characteristics of a good client (except they are not yet my client), I will be creative in trying to package my services and fees to fit their needs. If I do, they will become a good client, and you can't have too many of those.
I always place the needs of my good clients before good prospects; serving existing accounts is even more important than selling. And you want your clients to know you feel that way.
Marginal existing clients. Third on the hierarchy is marginal accounts. Because they are clients, I will treat them well. But if the account is not enjoyable or profitable, I cannot make too many price concessions, otherwise we would reach a point where the work is simply not worth doing.
Marginal potential clients. At the bottom of the hierarchy are marginal prospects. If someone is not a client, and is not a person or company I particularly want to do business with, I am fairly firm and unyielding in my fees and terms.
Since you cannot please all of the people all of the time, I recommend you establish your own client hierarchy. With it, you'll quickly be able to determine whom you negotiate fees with and who you do not, so at least you can please some of the people most of the time.
What to DO if You Consistently Lose Jobs Because Your Fees Are Too High
If you consistently lose jobs from existing clients and the reason is price, it is an indication that your fees are not realistic, are not in line with what others in your profession are charging, or at the very least are on the upper end of what is considered "reasonable."
You might object, "But I've been charging these fees, and getting them, for years." Yes, but we're not in the 1980s any more. The economic climate has changed. The client, not the service provider, is in control. The marketplace is more competitive.
In many industries and professions, fee increases have not kept pace with inflation. In others, fees have remained flat or actually declined in recent years. One well-known direct mail writer summed it up best in a letter he sent me which said, "There are twice as many vendors competing for half as many jobs as there were six years ago, and fees today are half of what they were then."
Your profession may not have suffered so greatly, but it is unreasonable to assume that you can charge today what you charged in the past and continue to win and keep clients. You have to be aware of what clients are paying in today's market, what your competition is charging, and whether your fees are high, low, or medium.
I recommend that you or someone you know call up your major competitors and either ask for their sales literature and rate sheets or ask them to quote a fee on a typical job. You should be aware at all times of what your competitors are doing to win and keep clients and how much they are charging. If you are shy about doing this research, ask or hire someone to do it for you.
How to Price in Competitive Bid Situations
Most of us serving clients on an ongoing basis charge a fair price for value delivered. We don't overcharge or rip off clients. But we don't undercharge, either. With a good client who is a "regular," you figure they like your service, are comfortable with you, and will pay your fee as long as it's not unreasonable or outrageous.
We assume with our ongoing clients that when they ask us for a price it's because they want to know what the job will cost before we start, not to compare our price with bids from other vendors. We don't think of ourselves as "competing" for the job; we assume the job is ours as long as the price is not out of whack.
But more and more, clients are seeking second and third bids from your competitors on jobs that once would have been sole bids by the preferred vendor -- you. Why? Not necessarily because they are eager to switch. They aren't. Most clients prefer to work with a "known quantity" and seek other sources only when given reason to. The reason for the multiple bids is to make a comparison check between your price and those of your competitors, to ensure that you have not gotten "too comfortable" -- that is, to make sure your prices are still competitive.
Even if your prices are fair and competitive, this can be a problem. The reason? Your competitors are hungry for new clients and very, very eager to take the client away from you or at least get a "foot in the door" by doing a job for the client. And you would prefer for that not to happen. After all, once the client sees what your competitor can do, they might like it. And suddenly, you have half the business instead of all of it, and a second vendor has muscled in on you.
This means that if you know or feel fairly certain you are in a "competitive bid" situation -- that is, the client is getting estimates from more than one vendor -- you should probably price a bit more competitively on this project than when you know you are the sole bidder.
How much less? As a rule, make your price in a competitive bid situation 5 to 15 percent lower than the amount you would bid if you were the sole bidder and there was no competition. This increases the probability that your bid will in the same range as the others, yet keep it high enough so it's not obvious to the client that you are low-balling.
In such a situation, where you are the preferred vendor and where the client is seeking competitive bids as a "reality check" to ensure your prices are in line, you need not be the low bid to win. In fact, the client wants to hire you and is looking for justification to continue doing so. All they need is to be reassured that your prices are reasonable, not that they are the lowest. A 5 to 15 percent reduction in cost will usually accomplish this.
How to Offer the Client a Low Price and Still Retain Their Respect
Why are you offering a lower price to the client, and why are you so willing to negotiate? Because you want the job, yes, but also because you want to serve the client and help them find a way to afford and benefit from the services you offer. Fee negotiation is a service function as well as a sales function. It's not done because you're a wimp or are scared of the client. It's done because you want to be the client's partner and help him achieve his goals (while you achieve yours as well).
Too many service providers feel lousy about haggling over fees, and this feeling comes through to the client. If you think it's undignified or a sign of weakness to negotiate fees, you will perform the task in an undignified and weak manner, and that is how you will come across to the client.
On the other hand, if you view fee negotiation as part of the process, as a positive rather than a negative, you will perform the task in a professional and helpful manner. You'll feel proud, and your dignity and self-esteem will be high. This too will come across to the client, enabling you openly to discuss fees in a manner that lets you retain your dignity -- and makes the client see you as dignified and professional.
To continue this train of thought, what we are doing when we negotiate fees is help the client -- specifically, we help him or her benefit from our service by finding a way to make our service affordable.
The desire to help clients is a key attitude of all successful service providers. By conducting fee negotiations in the framework of helping clients rather than begging for work, you do it in a way that makes clients grateful for your flexibility in money matters, yet does not make you seem desperate or unsuccessful in their eyes.
There's a difference between telling the client "I need the work; please give me the job; I'll do it for any price" and saying "Let's see if we can work out an arrangement that enables your company to use my services at a price that meets your budget." The former is indicative of someone who is desperate and needs the work; the latter is indicative of a successful professional who is supportive of his clients and cooperative with them.
Making it Up On Volume
"Being flexible to help meet the client's needs" is one justification for negotiating prices. Another is the volume argument, which goes something like this:
"My fee for recording a radio commercial is $400. I cannot lower that fee for a one-shot assignment. But, Mr. Client, you mentioned you need six commercials. If you give me all six to do at one time, I can give you a volume discount and do the entire job within your budget of $2,000."
This makes sense for you and the client. From the client's point of view, many of the things he buys are cheaper if bought in volume, so why not your services? A volume discount is something he is used to getting, so when you present it as the rationale for lowering your fee to meet his budget, it makes perfect sense and does not seem arbitrary.
From the service provider's point of view, doing the six commercials all in one shot will probably take less time and cost less than doing six separate commercials at six different times for six different clients. The six spots can be done in sequence faster than the individual commercials; it means one trip to the studio and one day's rental of studio time instead of six; the similarities in spots probably mean the series can be done in less time. So you are making more profit on the series than when doing one-shot commercials, and it's perfectly reasonable to pass part of the cost savings along to your client in the form of a volume discount.
Making "Conditional" Low-Price Offers
Another way to lower your price without seeming to come out the loser is to request concessions, conditions, or special terms from the client in exchange for agreeing to reduce your fee. In essence, you say to the client, "Okay, I will perform the service within your budget, but in return, I want X, Y, and Z." What are some of the concessions, conditions, and terms that are possible?
Getting cash up front. "We will reduce the fee 20 percent to meet your budget, but at this low price, we cannot bill you and would need payment up front."
Offering improved terms. "We will reduce the fee 20 percent to meet your budget, but at this low price, we would want to be paid in full net 15 days, not the usual 30 or 60."
Limiting service. "We will reduce the fee 20 percent to meet your budget, but at that low price, revisions and changes are not included, and if desired, would be billed at a rate of $75 an hour additional."
Sharing workload. "We can do the job for $500 instead of our regular fee of $750, provided you handle the booth set-up, hire the personnel, and coordinate the service requirements and hospitality suite directly with the conference sponsor. If we can handle the rest without being involved in those details, we can give you the $250 fee reduction you said you needed to go ahead with the job."
Easing time frame and other work requirements. "I will do the job for the reduced package price of $2,875 provided there is no rush and I can take as long as I want to do the work and I can do it from the office via phone or fax, with no on-site meetings or conferences."
Having client provide "extras." "My normal fee for a speech is $2,000. But I'll tell you what. Do you have videotape capabilities? If you can professionally videotape my talk and give me a master of the tape, I will waive the fee and speak for just a copy of the tape and the $250 honorarium you offer your speakers."
How a Vendors' Network or Bureau Makes You Immune to Price-Based Objections
Many service providers are "lone wolves." They do not network or associate with peers; view others in their trade as dangerous competitors; and avoid contact with those competitors for fear that these firms will steal business from them.
But a better strategy is to form alliances with your competitors in which you sell their services to your clients, through your company, and at a profit to both you and the other service provider.
Let me give you an example. For years, I have been writing technical documents for different clients nationwide. I have a company, The Center for Technical Communication (CTC), that provides writing-related services including technical writing, writing seminars, editing, and so on.
In the past, whenever a job came up that I could not handle -- because I was too busy, the client didn't have the budget, or it was something I didn't do -- I would just say, "No can do."
Then I thought, "If I can't do these jobs, why not offer the work to my competitors through my company?" I spoke to my competitors, got their rates and resumes, put them in a file.
Now, when a client calls with a job I cannot personally handle, I say, "I can't do it for that price, but we have a large number of associate writers who work for us at a variety of rates." I look in my resume file and match the client with a writer who charges what they can afford to pay for the job. My commission is 20 percent, which is taken out of the writer's fee; the client pays what they would pay if hiring the writer direct, so there is no penalty to the client for using CTC.
This is a win-win situation for all parties. Clients benefit because they get a solution to their problem for a price that is within their budget.
I benefit financially because, instead of wasting leads that come to me from my marketing efforts and other sources, I can now convert those inquiries to a sale. For instance, on a $5,000 writing project, I earn a commission of $1,000.
More important, however, I receive an additional benefit: I now get to say "yes" to clients and prospects instead of "no," and I never have to turn away a client because my fee is too high: if clients cannot afford to pay my hourly rate, I will get them a writer they can afford.
As a result, fees are never a point of disagreement, confrontation, or contention. If I quote my rate and the client says, "Too high!" I simply say, "Fine. Tell me what your budget is, and one of our CTC associates can do the job for you!"
The writers also benefit. I am not ripping them off taking a 20 percent commission, because CTC eliminates the need for the writer to market and sell himself or herself. There are no sales visits to make, no direct mail to send out, no showing the portfolio, and no follow-up. When we bring the writer a job, it's a done deal. So we save him or her an enormous amount of expense and time, well in excess of the 20 percent commission.
This has been so successful in CTC's technical writing business that I have also established such a network for the speaking and seminar side of the business. Our CTC Speakers Bureau allows me to provide any client with a speaker or seminar leader to fit their budget. If the client cannot afford to pay me $3,000 for a day of training, I ask, "What is your budget?" and then find them a speaker in our files who knows the topic and whose rates are in line with what the client wants to pay.
Can this strategy work for you? Build a network of people who perform your service or related services. When you cannot personally perform the job because your fees are simply too high, or for any other reason, instead of sending the client away empty-handed, match them with an individual or firm that can perform the service at their price. You do it through your company, and you take your commission as a percentage of the vendor's fee.
Afraid these vendors will go behind your back and try to steal your client? It does happen. Your best bet is to make the vendor sign an agreement saying they agree not to work for any client of yours, or at least any client you hire them to work for, for a period of one or two years. You may want to ask your attorney to help you draft this document.
Referrals -- Fee or Free?
If you refer work to other vendors, do you do it out of kindness or for some financial reward? The answer is: You can do it either way.
Referring a client you cannot help to someone who can help them is an example of putting the client first and rendering superior client service. After all, we exist to help our clients find solutions to their problems.
If we turn them down and then don't provide an alternative solution, we are not being very helpful. The client walks away with his problem still unsolved. And he does not feel that we have helped him or been cooperative.
By telling the client "I can't do this assignment, but here is the name and number of someone who can," you are helping the client find a fast solution to the problem. And although someone else and not you will get the work, you will have made a favorable impression that paves the way for future business.
So overall, making referrals when you can't take on the job is good practice. It benefits you and the client. The question is: Should you do it for fee or free?
At the most basic level of referral, there is no compensation at all. You simply refer clients to someone you feel can help them, with no expectation of renumeration or reward of any kind. This is still good for you for the reasons discussed: you never lose by doing good for your clients.
Of course, you want to make referrals to vendors who (1) you know are qualified and will do a good job and (2) won't try to steal future business from you or promote themselves to your client.
At the next level, you refer clients only to vendors you know personally. The expectation, often unstated, is that in return for the referral business you give them, they will make every effort to give you an equal amount of referrals. If someone does not reciprocate, you simply stop referring business to them and start referring it to someone else. And by the way, I see nothing wrong in telling the person, "I am referring so and so to you. They are a good client, so please take care of them. And by the way, all I ask in return is that when you get a job you cannot handle and need to refer out, you think of me first."
The highest level is where direct financial compensation is involved, where you have a network of service providers or suppliers you refer work to in exchange for a percentage. You can either refer the work to them and have them send you a commission check after they are paid by the client, or you can arrange for them to do the work through your company, as discussed in the previous section and the example involving CTC.
Referrals usually build goodwill all around, and even if you are not immediately rewarded, the rewards eventually do come. For example, there was one writer to whom I referred several lucrative projects over the years and who never sent me a thank you note or referred any business back to me. I told my wife, "This disproves the theory that being kind pays off; being kind gets you nothing."
A year later, the writer retired. He referred two of his three clients to me (the third was one in a field I do not handle), and both became clients of mine. So I was wrong -- goodwill does pay off.
Offer Services That People Will Buy In Order to Avoid Paying More For Other Services
There is one way to get your price, even if it is high, and even if the client is short on funds: offer services that save the client money or eliminate the need for them to buy an alternate, more costly service.
The best example is the home remodeling business during the recession. In a recession, people want to hold on to their money and not spend it. And home remodeling is one of the most expensive things you can buy. Yet during the recession of the early 1990s, the home improvement business was booming -- at least in our neighborhood, where you saw more dormer additions, second story additions, porch conversions, and add-on family rooms than ever.
Why was this so? Although people didn't want to spend money, they were increasing their families, and they simply had to have more space. In a good economy, they would have simply traded up to a bigger house. But this is an even bigger investment than remodeling, and more of a financial commitment: it requires a large down payment that can consume the bulk of an average family's savings and also involves a long commitment to a large monthly mortgage payment.
For the family that had to have more space but could not afford or was afraid to commit to buying a bigger house, remodeling was the only alternative. A new addition might cost $10,000 to $50,000 or more, but it eliminated the expense of moving, closing, points, and a bigger mortgage.
I don't know what business you are in, so I don't know if this strategy can work for you. But here's how to analyze it. Look around at your market. Are clients reluctant to purchase your primary service because it's too expensive? This will hurt you as well as your competitors. You can gain the edge by coming up with an alternative service that enables clients to get some of the benefits they want, while spending less.
True, this service might sell for less, so profit margin is reduced. But because buying this service saves the client the cost of buying the more expensive service, they will buy. Hence, you will have plenty of business, while your competitors stand there gaping and scratching their heads.
Note: The alternative service you create need not be an alternative only to what you are currently offering. The only requirement is that it be an alternative to any costly service that the consumer wants to avoid buying and can avoid buying by hiring you instead for less money.
By using this strategy, you will eliminate most of the price resistance on the part of the client, so that fees become less of an issue and the negotiating process described in the rest of this chapter is eliminated or at least reduced to a minimum. That will make you happy, right?
What to Do When Clients Feel They are Paying Too Much
What happens when the client agrees to your price, but later expresses to you that she feels you really "squeezed her" and took advantage of their neediness? Or what happens if the client gives in and agrees to your price, but reluctantly and sullenly, rather than happily and enthusiastically?
Another problem is when the client agrees to your high price seemingly without hesitation or concern, but as you begin to perform the service, comments that they don't seem to be getting extraordinary service or results, considering the high fee you are charging.
These things are bad. The goal is not just to force the client's hand and win the negotiation and get your price; the goal is to have clients who are comfortable with what they are paying and feel they are getting their money's worth.
Here are some techniques for making clients feel they are not getting ripped off and are receiving a good value when they agree to pay the higher price you asked for.
Present the Price in the Lowest Possible Unit Terms
For example, for a training seminar, quote the price as "$100 per student for 25 attendees," not "$2,500 per day." The former is a bargain; the latter may cause resentment among some clients who feel that no one should be making $2,500 for a day's work.
Recap or Summarize All the Services Being Performed for the Fee
Instead of saying, "My fee to write the capabilities brochure is $3,200," say, "The fee for creating the corporate capabilities brochure is $3,200, which includes the following: research, review of all client materials, interviews with engineers and scientists, on-site visits to client facility, teleconferences, outline of brochure, first draft, rewrites, and all revisions until client is satisfied with manuscript. Text to be submitted as hard copy with an IBM-compatible floppy disk included at no extra charge. Writer will also review layouts and make design recommendations at no additional cost."
The former seems like a lot of money for a small thing; the latter like a lot of service and work for a modest fee.
Compare the Price to the Result
Copywriter Mike Pavlish charges high fees to write direct mail packages and ads for his clients. In his promotional mailings, he addresses the possible objection to his high fees before it is even voiced by pointing out, "My fee is a drop in the bucket compared to the tremendous increases in sales and profits my copy will generate for you." If your service makes or saves the client a large amount of money, point out that your fee, although seemingly hefty, is miniscule when measured as a percentage of the money the client will make or save using your service.
Compare the Cost Differential to the Result or the Importance of the Job
Sometimes the objection is not the fee itself but your fee in comparison to what a competitor is charging. This is even easier to handle, because you don't have to justify your fee; you just have to show that the difference between your fee and theirs is really insignificant compared to the extra quality you offer, your greater experience, your track record, or the results you achieve.
For instance, you are charging $5,000 to do a project. The client says, "Someone else will do it for $4,200." You say, "I understand. $800 is not insignificant, and no one wants to spend $800 if they don't have to. But even if our system is only a little better than the other, we will save you $3,000 in materials the first month of operation. Tell me, would you spend $800 one time to save $3,000 per month every month?"
Compare the Fee for Your Portion of the Job to the Fee for the Entire Job
Sometimes we forget that our service is not the entire job but just a small portion of a larger job.
Let's say you are a landscaper and a wealthy client wants you to do the landscaping for a new $800,000 home they are building. They choke on your quote of $15,000. "That's a lot of money for bushes!" the husband says stiffly. You reply, "I understand. $15,000 is not an insignificant sum. But, Mr. Client, the landscaping sets the tone for the entire house and determines, to a large degree, whether the outer appearance impresses friends and relatives and how the whole exterior of the property looks. Tell me: Do you want to skimp on the landscaping when it comes to making your $800,000 home look the best it can be?"
Emphasize the Quality and Value
The client may not appreciate the work, labor, skill, materials, quality, or value of what you do. So tell them. If your landscape design uses rare and valuable Ooka-ooka trees that only you can get and will be the envy of the neighborhood, say so. If you are saving the client time and expense on future upgrades of their manual because you store the page layout on computer disk permanently at no extra charge to the client, remind them. If you give a free wash and wax with detailing of every car interior and your competitors do not do this, or if you clean out every crevice with a perfumed cotton swab, say so.
Many clients do not realize the value of what they are getting. So tell them. When they realize the value, the work and skill that goes into it, they'll feel they are getting their money's worth, and won't have any regrets about the price.
Throw in a Few Freebies
If the client still isn't convinced they are getting their money's worth, throw in a few freebies. For example, a client wanted to hire me to give a seminar; his boss would not sign off on the approval. When we asked why, after hemming and hawing, he finally said, "I know your proposal says you include handouts and course materials, but for this kind of money, I'd think you could throw in a copy of your book for each of our trainees as well." I replied, "If I could give each trainee a copy of the book at no extra cost, would you be able to go ahead?" He said yes. I shipped the books, closing a $4,500 seminar for an extra $100 in out-of-pocket costs for the 20 free books.
Learn to Say "No" In a Way That Leaves the Client's Dignity and the Relationship Intact
Occasionally, despite your best negotiating efforts, you and the client will not be able to come to terms on a particular project. You cannot do the work at the low price they are willing to pay. And so you must turn down the assignment.
This can be unpleasant and awkward. Or it can be pleasant, dignified, and professional. It's not the situation that determines it; it's how you handle the situation. It's entirely up to you.
Learn to say no and turn down client requests gently and gracefully. For example, "Michelle, I am really sorry. I would like to take on this project for you, but no matter how we adjust the scope of work or the numbers, I can't even get close to your budget figure. If there's any way you can do some of the work in-house, we can handle a portion of it for that fee. Or, is there any way to get money from other budgets? As much as we'd like to do the whole job right now for the fee you have offered, we can't -- much to my regret."
When you cushion the blow this way, the client can more easily absorb it and react in an equally agreeable, friendly manner. But when you turn them down in an abrupt, terse manner, they feel uneasy and a bit offended. Saying no to a client is never beneficial to the relationship, so if you have to do it, do it tactfully. And always make a few last-minute suggestions or offer some additional alternatives when you're giving your turn-down. This shows that you genuinely want the deal to work out and that your door is always open as far as this matter is concerned.
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