Posts Tagged ‘negotiation’

As a freelancer, contractor or small business owner, you have a product or service you sell – right?  So how much will it cost me for you to provide the product or service?????  No, really – think about it – how much will it cost me?!?

I imagine if you did stop to think about the question, the answer is ‘well depends what you need, how big the job is, what you want?’.  Is this the case?!?    But, you must have provided this product or service several times (or more) over the past few years – so what is the average cost?  Or what about the minimum?  The maximum?

The reason I ask about this is that we all suffer from the Tire Kicker enquiries.   People who contact you, ask about your product or services, have no budget, no idea of what they want, and are there just to gather information for something which may never happen.   These people are all fine and good if they eventually turn into customers, but they can be a great drain on resource and can distract from other enquiries that really have a need you can meet.

Which is where quoting a ballpark figure comes in.   From the outset, don’t be scared to give a ballpark… “yes, typically for the creation of a website my customers pay on average around £2000”…. “well, depending on the scope of the project, data projects in the past have ranged between £5,000 and £30,000 – but let’s talk about your requirements and see what we can do….”

Giving a ballpark figure up front sets expectations.   People looking for a cheap and cheerful quick fix will quickly go elsewhere (saving you the effort of producing quotations way out of their price league), whereas those with a real need have an idea of the size of typical projects, and can start working on their own finances to see if the project is worth progressing.

One of my pet peeves (when I am a customer) is getting to a price.  If I am shopping for a service, it is so rare to see typical prices on web sites.  Even when you say your requirements, getting that ballpark figure is like pulling teeth – which is why being happy to provide the ballpark figure early works so well for all concerned.

At the end of January, I carried out my companies year end.   Using the small business accounting package (Freeagent), I was able to complete my year end accounts in less than an hour, and passed the figures to my accountant for sign off and submission.   Job done!   Then once everything was complete in my year end, I did some detailed year end analysis, looking for trends, costs which could be reduced, small profits which could be nurtured in the new financial year, and any other changes that I could make for the better.

Once my analysis was complete, I then did something which I have never done before – I fired 4 customers!

You see, by using the timesheet analysis in Freeagent and comparing the time spent on the customer against the revenue they had brought in, I worked out that these 4 customers were costing me money to support them.  The effort of support, answering emails, quoting for new work (work which was never taken up) and other day to day maintenance did not meet the invoices I raised against them.   Put it another way, each of these 4 customers was a drain on my company.

Worst than that though – not only were these 4 customers costing me money to support them, but they were actually taking up the most expensive commodity I had – time.  Every moment that I spent on their maintenance, was hours and days which I could not spend on new or more profitable customers.

So one at a time, I called up the principle contact for each of the customers, and as I say, I fired them.  In a nutshell, I said “Sorry to trouble you, but I have been going through our records and it appears we haven’t done any real business in the last year or so.  It also appears we are spending a lot of time providing free maintenance for you in the way of emails and other support, so I regret that we have reached the point we need to terminate our relationship”.  Yes, I know – fairly heartless right??

The effect of the conversations was as follows:

One customer got really upset.   They was some name calling, they hung up on me, and I have never heard from them again.

The next two customers said they understood, they could see my point.  They said that their finances did not allow for any new purchases, so there was nothing they could do.  They asked for a hand over meeting (which I provided free of charge), and they were happy to call it a day.

The final customer of the four was shocked.  He didn’t realise that his staff called on my company so much, and was very apologetic.   He asked for a figure to provide the support to them for a year, and promptly raised a purchase order.  They remain a customer – and I now get paid to answer their query emails, to raise quotes and attend meetings with them.

But the point is, by removing the non-profitable customers from my customer pool, my company has gained some 180 hours or so of extra time a year which can be directed to profitable customers and projects, with no impact on my balance sheet.   Now you can say that maybe I should have held on to them until a new customer came along to replace them, but then where would the 180 hours come from to allow me to deal with the new customers?

I am also in the process of firing a pet personal project – a project which I spend a little time on yet doesn’t generate any revenue or return.   It’s not easy because I have invested time, money and effort into this project, but it’s important not to get emotionally attached to customers or projects.  If they are not working.  Much better just to cut the ties and move onto something which is more fulfilling, responsive and ultimately profitable.

Don’t you think?

One of the hardest questions that a contractor, freelancer or a small business owner has to answer is how much to charge for your product or service.   Even if you manage to initially answer the question, it’s not something you can set and walk away from; pricing needs constant reviews to make sure you are making a profit, that you are generating business, and that the competition is not taking your sales.

There are all kinds of ways to work out the cost model for your product/service, depending on the uniqueness of your offering, and how you want to generate revenue.    Whilst not every option will work for every service, the following are the most common methods of working out the sales cost for business:

Cost by Return
The most common method is the cost by return – how much you need to sell a product for and by how many to cover the costs and make a profit.  For contractors or freelancers with a service, this is normally your yearly costs (salary, tax, etc) divided by the number of workable days (242 when you take out weekends, public holidays and 4 holiday weeks a year).   For manufactured or web based products this is more of a tricky calculation as you need to get a balance between number of units sold multiplied by a price, to see if this covers the material/creation costs to provide a profit.

Cost by Competition
Another simple way of pricing a product or service is to cost by competition; what others are charging for a similar product or service.  Again, for contractors or freelancers this is easy, as the typical day rates will be listed by agencies or job sites.  For small business, it can be a bit more tricky as it means speaking to competitors to see what features their version has and its price.   Also, it can be difficult to find a competitor with a true like for like service, but it can give you an indication of what ball park figure you need to charge.

Drop Your Pants
Not sure where the business term of “dropping your pants” comes from, but it basically means selling as cheap as you can in the hope of winning lots of business and therefore make profit through quantity of sales.  One disadvantage of this approach is that no matter how cheap you can sell for, there will always be somebody cheaper.  Plus, some customers will actually stay away from your products through a drop in perceived value.

Ad Generated Revenue
This is the principle of the internet and smart phone applications – provide it for free with lots of advertising, in the hope that you will get sufficient traffic which will lead to a relatively high number of advert clicks which in turn generates revenue to cover the costs.   Personally, I have never met anybody who has made money from this method (I would really love to hear from somebody who has), so I consider this a very, very high risk gamble.

Freemium
Freemium products are becoming more and more common.  Freemium is where your product comes in two forms; a free to use version (with or without the ad revenue generation as described above), and a premium version with more bells, whistles and functionality.  The idea is that people use your product for the free version, become hooked and some will eventually pay you for the premium content.   With this method, more thought needs to be given in the cost of the premium version as not only do you need to work with the cost/conversion numbers, but you also need to factor in the features you add (or hold back) to differentiate the two modes.  Some companies even make this more complex by providing different scales of premium content.   Whilst Freemium is highly used now for a lot of products and services, get the numbers wrong (and there are a lot of numbers to juggle) and your business will not last long.

Premium
At the other end of the pricing spectrum is the premium cost offering.  A lot of brands actually market themselves as a premium product or service, with one expensive price tag in return for an implied quality above and beyond the competition (look at brands such as Stella beer, Twinings Tea, BMW, etc).  If your message is strong enough, this can be a good tactic as it means you need fewer sales to make a profit, and will not get distracted by the customers who will spend less money.

Need First Curve
The Need First curve is ideal for companies with very exclusive or sought after products.  The idea here is that on launch, the price is high as people demand the service and MUST have it regardless of cost.  Then, once the must-haves have been dealt with, the price is generally lowered over time with the excuse of ‘cheaper production costs’.   Brands that have used this in the past include Apple (iPAD, iPhone, etc), Sony with the PS3, Microsoft with xbox etc.   If your product or service allows for this curve, then congratulations.

Tempt in Curve
As the name suggests, prices are set cheap for new customers by the way of promotions, discounts and trial offers, and then raise once they are hooked and know the quality of your product.  A large number of both product companies (i.e, printers which are cheap, but have high ink costs) and service companies (i.e, Sky television, free box for new customers) use this technique.

Ask the Customer
The method of costing that I like more than any other is asking the customer.  Its simple – find a target customer (or a handful), put a price structure together and ask them if they would pay.   Feedback from customers is the best way to find out if the price structure will work – if they tell you its too expensive, ask them what they would be willing to pay.

Try Different Mixes
But if in doubt, why not try all of the above, and mix it up.  If you have a web site with your price list and a ‘buy now’ button, have different web page versions to rotate and see which makes the best sales/profit margin.  If you are making real face-to-face sales, try some quotes as low ball, some as premium, some with an introduction offer, some with your calculated return price, and see which sells and makes money.

My background and one of my interests is psychology.  I have always been fascinated by what makes people tick, why they do things they do, and what makes people different from each other.  But the aspect of psychology which I have always found the most interesting is body language.   When we communicate face to face (rather than over email or phone), over 80% of what we say is through the gestures we make as we talk or listen.

Understanding body language can be a real boost for your business.   If you are trying to convince somebody to purchase your product or use your service, they may be nodding and agreeing with you through their words, but if their body says no, well this is a big clue that you need to rewind and try a different tact.

Body language can be a complex business.   Most people are aware that generally crossing of arms is a defensive action, but there is so much more to it than that.   A good place to start to learn body language is through a book called The Definitive Book of Body Language: How to Read Others.  This book guides you through the basics, right up to the more complex signals that can be used both in a business (“I don’t believe you” gestures) and personal (“I find you attractive, make a move”) context.

As a brief introduction to some of the clues in body language:

• A suggestion made when the hand is palm down is more than a suggestion, it’s a command.  Whereas palms up or out is a defensive suggestion gesture.
• Hands held near or over the mouth when somebody is listening is a signal of not acceptance or disbelief
• Support of the head in the hand when listening is a signal of boredom – its time to change the tempo of the meeting or presentation
• Playing with the ears (pulling, scratching or rubbing) means you are making a connection – tell them more
• When somebody lies, there are various clues including looking away at the start of speaking, lots of swallowing, and high pitched at the end of a sentence
• Leaning way back in a chair can be a sign of boredom or disinterest, whereas a lean forward can be more interested
• Hands rubbing face (forehead, nose, eyebrows) is actually more of a defensive gesture than the arms crossed
• A women’s handbag is an extension of herself like a 5^th limb – when she puts it close to you, this can signify acceptance.
• The biting of the lower lip by the teeth is an indication that the other person has lots of useful information to share, but they feel that they should not tell you

For more on reading peoples body language, take a read of The Definitive Book of Body Language: How to Read Others

Sometimes I kick myself for things I do.   But more often than not, I kick myself for things I don’t do.  Take this weekend – I received a letter from my joint GAS and electricity supplier and it said that the prices were going up again.  I had had enough – so I called them up to complain about the massively inflated costs of powering my home.   “Why is it so expensive?”, I asked, “why don’t you have a cheaper plan?” I continued.   Without a moments pause the operator said “We do” and changed me to the new plan.

It’s the exact same gas and electricity coming into my home (and home office), from the exact same supplier, with me paying the bills the exact same way – but its 25% cheaper.  And what did I have to do to get this?

Jack Canfield (author of the Success Principles) says that “Nobody will give you what you need, because nobody but you knows what you need”.    His solution – Ask.   Or as he puts it “ask, ask, ask, then ask again.  And when you are done asking, ask some more”.

If I had asked earlier, months ago when I was first unhappy with the cost of my fuel, I would have saved 25% over the last few months, including the winter fuel.  All I had to do was ask.

So what do you need to ask of your customers, your partners, your co-workers or the world to get what you need for your freelance business?  And what is stopping you from asking?

I strongly believe that the recession is not over, and that the pain we all suffered is about to come back during the summer and take a big old bite out of small businesses again.  If I am right, all businesses, contractors and freelancers are once again going to have to tighten our belts, and use new ways to find new customers as work starts to dry up.

But finding new work, selling products and landing new contracts has two different stories that must be told.   Yes, there is the convincing ‘why you should buy’ argument where you sell your skills, your services and your products.  But I also believe there is another part of the sales process, the reason why ‘you can’t’.   Let me explain….

I have recently been on holiday, and coming back from a nice relaxing week of scuba diving, I checked into the airport for the return flight home, and because my scuba equipment was still a little damp, my baggage was over the weight allowance.  It was actually 5 pounds over.   This small 5 pounds cost me over 80 euros on this particular Thomas Cook flight.  Wow, that’s a lot.

But as I sat there arguing the cost of this extra baggage weight with the Thomas Cook rep, in the next counter over, a family of 6 checked in.  Every single member of the family was obese – I mean really morbidly obese.   So there was I, your average Joe trying to get my extra 5 pounds in without the extra cost, and here was a single family happily checking in a few extra hundred pounds of body fat at no extra cost.   Where was the fairness in that?

The problem I then had is that the check-in girl had limited training.  She had been trained that extra baggage had a charge, but had not been trained to answer why body fat did not carry an additional charge.  I actually suggested to her that it would be cheaper if I ate my wetsuit, whilst the transport weight would be the same.  She wasn’t trained to answer my questions and didn’t have the common sense to respond to my logic.

And that’s the problem we are all going to have to face.  As money gets tighter, there will be people who raise the questions – why cant it be cheaper, why cant they have a discount, why cant they have the same offer as somebody got last year, and why cant you do it for nothing.   Unlike the check-in girl and the Thomas Cook baggage policy, if we want to continue to get customers and sales, we will all need good answers.

As IT contractors or freelancers, one of the unhappy facts that we soon get used to is that we will always have one or two customers where they are never happy with the products or services we supply. That may sound a little unfair to customers, but as a rule of thumb, regardless of whether you provide IT services, write software, develop web sites, documentation or consultancy, everybody wants it to do more, something different, work in a different way, interface with something else, and with no impact to the timescales or cost.

Now with the exception of ordering a meal at a restaurant (where you may order a side dish, hold the veg or ask for a different sauce), I can’t think of anything else where customers expect that level of customisation and change during the development process.

You don’t see Joe Blogs walking into his local Ford dealership and saying, “yes, the 4×4 looks great, but can you make it a little taller, add two more wheels and allow it to be hooked up to my 28 inch plasma television”. Or how about Mrs Smith going to her local supermarket and saying “I want a packet of cornflakes, but I want them to be in a wooden box and to have the instructions in Russian”. So why do people expect so much from Computer Systems or expect to buy a standard system and then tweak it so much?

The reason customers expect this level of customisation or change is..… well, to be honest, I don’t know. But, the solution to this situation is clear contracts, clear specifications and most importantly, the customers/users signature on the paperwork. Now, this won’t get you over the really challenging person who insists the product be exact to meet all their needs, but at least it gives you a fighting chance. For software developers, a clear specification of what the software or service will do is a must. For writers and web designers, you really do need to have in writing, a number of reiterations that are allowed before changes become chargeable.

For my own peace of mind, everything I do gets a specification (which of course I charge to produce) which I insist is signed before any work starts. And I always include a standard item of text which I include in bold to make sure it is read at the end of the introduction which I offer for you to copy and paste into your own contracts/specs. This text has saved me from arguments and free changes a number of times….

It should be noted that the details provided in this specification, including any example screen displays, data held and methods of processing are a guide to the development of the solution. It should be noted that some screen layouts may vary from those shown in this specification due to coding restrictions, and some functionality may change very slightly during development. Where this occurs, every effort will be made to detail the changes back to the interested parties before the software is delivered.

This specification provides a guide to the functionality to be developed. It should not be assumed that if functionality is not listed in this specification, that it will be included in the final delivery.

At the start of the year, I made a radical change to the way that I quoted for business.   Now I have to say that I don’t produce mountains of quotations for products and services, but for those that I had been producing, I had never really been happy with the format of my quotes.

 The old format for a quotation consisted of a quotation cover letter (what the quote is for), the quotation breakdown (figures, what’s in, what’s out, etc), and then the Terms and Conditions which at that time took over 4 pages of A4 (I could have printed this with a small font and fitted this on 1 page of T&Cs, but I hate small print).

Just before Christmas, I was required to send out 3 or 4 quotes in the same week.  I was happily putting them in envelopes and reviewing the quotes and a thought struck me.  Here was I, saying give me your business, and by the way, here is a whole load of legal nonsense to scare you away and give you reasons why you should not accept the quote.  

I am now using a new format of quote, which I am a lot happier with.  The letter and quote are the same, but the Terms and Conditions are replaced with a single page of a service Guarantee and an abridged version of my T&Cs.  As you will see, I still link to the full unabridged version for those that are really that interested.

This single abridged page now looks as follows:

THE TOUCHSTONE SYSTEMS GUARANTEE

Touchstone Systems provides the following guarantee on all its products and services:

• We Guarantee that any deliveries will be on time and within budget as agreed by both parties or we will make up the difference
• All products and services will be of the highest industry standard. If you disagree, we will correct the situation at our own cost.
• If you still feel that the service/product does not meet the agreed specification, we would not expect you to make final payment
• When meetings, appointments or deliveries are scheduled and agreed, if we don’t meet the agreed times, you don’t pay
• We will provide regular status reports (each day for short projects, weekly for longer) on progress of the work by email or where you prefer, by phone.
• If we provide a product and after all of this you still don’t like it, return it within a month and you don’t have to pay

ABRIDGED TERMS AND CONDITIONS

A full copy of the Touchstone Systems Terms and Conditions are available from the Touchstone Systems Web site at www.touchstone-systems.co.uk/Terms/ However, if either party reaches the stage where we need to look at the small print, something has gone very wrong and we will work with you to put it right. The Terms and Conditions simply state that:

• We will keep a record of work we do, hours we keep and our activities. We will provide these on request or at agreed regular intervals
• If you are not happy with somebody we supply to do the work, we will replace them, no questions asked. But if you are still not happy and want to terminate the relationship, please provide us with 4 weeks of notice to wrap up the project
• When we supply project work, products or information as part of a delivery, we will retain the rights and ownership until you pay for the goods or services
• We agree to keep all information, including details of the work, and any client information seen fully confidential. We also fully comply with the Data Protection Act
• Before work starts, you have the right if required to interview the personnel we assign on the project and select which staff to use. However once work is started, they are deemed to be approved to work on the project, subject to swap out as already stated
• We agree to be fully insured for the project, as you would expect, including public and product liability
• We provide an invoice at the end of the project on 21 days payment terms plus expenses as agreed. We would expect payment to be made in these terms, otherwise late payment charges may be applied
• With the exception of death or personal injury through our negligence, our services and products are limited to 20% of the contracted value.

I thought I would share what has happened a couple of weeks ago . Before I start, please bear in mind that I found myself in a lucky position of knowing how much the customer wanted me, and I accept no responsibility for this if you try it yourself.

So I have been in a contract for 5.5 months of a 6 month contract, and the customer had already taken me aside and made noises about renewing the contract – all good stuff. I waited, and on Monday, the call came in from the agency, “they want to renew for another 3 months, with possibly 3 months after that”, great says I, “However they have tight budgets, and day rates are dropping, so we need to discuss money” says the agent.

What followed was a 20 minute chat about rates, and how both the customer and agency wanted me to drop my rates by around 9%. Well, as much as I like working for the customer and the work, there is no way that is going to happen. So without really thinking about it, I said, and these are pretty much my actual words…

“Well, it surprises me that you are talking about a rate reduction. Over the past 6 months, I feel I have proved myself and actually done more for the customer than they asked or really paid for, so I was going to ask you for a day rate increase. As I am doing more work than was expected, how about we look at a day rate of xxxxx”. Xxxx was my date rate plus 30%.

In my view (and oh god, agencies are going to comment below about this), an agents job is not only to find the right contractor for a position, but to find the right rate for the customer. I didn’t in fact want 30% more, but I picked a high number so that they could beat me down and look good to the customer.

Directly after the phone call, I went in to see the customer, and said that the agency would be calling, and that we had had a strange conversation about rates, and whilst I understood from the agent that budgets were tight, I felt I had a lot to offer, and was prepared to be flexible, but if they really wanted to retain me, we would need to look at a rate increase. I pointed out that yes, they could get somebody cheaper, but the job involved more than was originally suggested, and for the lower rate, they would be hard pushed to find anybody with the right skills (this may or may not be the case – I have no idea).

Over the next 24-48 there was a series of phone calls between the agent and myself, and the agent and the customer. The customer went up a little, but not too much. The agent told me the increase, and I quickly said “No. Sorry, I understand the gesture but I said xxxx and they said yyyyy. Whilst I understand budget pressures, the only person who is loosing in this are myself for getting a lower day rate than I need, and the customer for paying more.”

Anyway, after all the phone calls were nearing an end, I caved with “Cut the difference. I want xxxx, they offer yyyy, if you can add £10 a day onto their offer, I will accept” – the agency said yes – so the agency cut its commission by £10 a day.

The customer came in to chat to me, they are happy – it means for slightly more money, they get to keep me and saves the effort of finding someone new, training them up, and taking the risk of signing up a dud. The agency told me that they are happy – they don’t loose face to the customer, and have ‘beaten me down’ from my original request, and of course I am happy, as not only am I not having my day rate cut but in fact its gone up. In the end, its gone up a few pence under 10%.

As I say, this may sound slightly underhand, but what I am trying to get across is the power of asking, and the power of negotiation. If you don’t ask, you don’t get.