Pricing is a very emotional issue. It is not just confidence in action. It is best if you can base your prices on solid data, or, failing that, reasonable, easily explained assumptions. That way, if a prospect challenges your prices, you can answer rationally, rather than view it as an attack on your competency or worth as a person.
See it for a moment from your prospective client’s point of view. Nobody likes to overpay. Everyone wants value, which rests on meeting clearly defined expectations. Everyone understands that a fine restaurant cannot sell its food at McDonald’s prices, and it’s equally true that nobody wants to pay a high price for food of McDonald’s quality. Yet both the fine restaurant and the fast-food restaurant can succeed at meeting the different expectations the customer brings to them. Both can offer good value.
It’s difficult to set a formula for how to charge. It depends on what you offer, who your competition is and the unique circumstances of you and your client at a particular moment. Obviously you want to know what others are charging, and you also want to be able to point out the unique attributes of what you offer, so that the customer will know enough to value it more.
My friend Rick Schilling, whom we met earlier, places banking professionals in temporary jobs. It is important for him to have a solid, quantitative justification both for the salaries he pays to those he places and for the prices he charges his clients. He believes that he does best for everyone when he lays all the data out on the table.
He tells a prospective client how much he expects to pay the contractor on a particular job, and how much he needs in addition to run his business and make a profit. He also makes sure they know that an important part of the value of his fee is quality control—double-checking references, for example, so that he can guarantee that anyone he sends out will be able to do the job specified.
Recently, an accounting firm called Rick searching for a financial professional with expertise in assessing the value of a business. One of the accounting firm’s clients wanted to sell his business, and asked the firm to submit an evaluation report. The firm did not have anyone who could do the job, or even learn to do so in a cost-effective way.
Moreover, the job was urgent. The firm needed someone who could do the job without close supervision, and get going immediately. Rick was able quickly to identify a banker in his database who had specialized in such valuations.
Rick told the accountants that he would bill $75 an hour for the banker’s time. Of this fee, $50 an hour would be paid to the banker and the rest would cover his service. He calculated his payment to the banker by determining that a full-time employee with that experience would make about $80,000 a year, plus health, vacation, retirement and other fringe benefits equivalent to about 30 percent more. This translates to roughly $50 an hour.
Rick had discussed the $50 rate with the banker, who had accepted it. Rick also disclosed what he would be charging. Sometimes, he says, potential contractors are willing to accept less than the fee he calculates, but he doesn’t allow them to do it.
He then got in touch with the accounting firm and quoted the price he would charge. The person with whom he spoke didn’t object to the price, so Rick went ahead and faxed the candidate’s resumé.
That’s when the negotiation hit a snag. The accountants called back and said that their budget only allowed expenditure of $38 an hour total, to be divided between the banker and Rick.
Rick felt that the accountants shouldn’t be negotiating at this point because he had told them the rate he would charge before he faxed the resumé. But he didn’t vent his displeasure. He merely informed the accountants that, for $38, they would only be able to engage someone of lower expertise and experience. He gave them the name of a large temporary staffing agency that specialized in providing help at that price point. Very politely, and in a helpful manner, Rick was telling the accountants that he was not accepting their fee, nor was he willing to haggle.
His cool demeanor was based on absolute certainty that the accountants couldn’t find the professional they needed at that price. Two days later, the accountants called back, and Rick suggested that they meet.
Rick was surprised that the accountants were willing to show the same openness about their fee structure that Rick had. Why they did so is somewhat of a mystery, because it surely didn’t bolster their case. Their pay scale began at $250 an hour for a partner’s time, $150 for an associate partner, and so on down the line. Because Rick’s banker was providing a highly specialized form of expertise, most of his time could probably be billed at the highest rate. Indeed, the firm had no partners who could do the job.
Rick also sensed that the accountant’s client was beginning to feel impatient. He felt no need to compromise, because his fees had a sound basis and the accountants were not able to do better elsewhere. The meeting ended with agreement by the accountants to pay Rick $75, the fee he had originally quoted.
Rick was also careful to ensure that the fee would be paid in a timely way. “Getting the business doesn’t mean you’ll get paid,” he said, adding that law, accounting and other professional firms have a generally poor reputation for paying on time.
He drew up a letter of agreement specifying that he could be paid weekly, within seven days of receipt of the invoice. The letter also specified a financial penalty, payable to Rick, if the firm decided to hire the professional full time. This letter of agreement was an enforceable legal contract.
Rick’s professional did his job well, and the accountants and their client were happy. This transaction led to more, less contentious, assignments from the firm.
By being calculating, and open about his calculations, Rick kept emotions out of the negotiation. And that’s how he got his price.
Excerpt from Spare Room Tycoon pages 129 to 133.
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