Insight

‘We could really do with £50k…..’

Friday, February 22, 2013

“One of my clients, a small design agency of 5 people, was asked to quote on a piece of work. They’d not worked for this client before. They took the time to carefully cost the project, based on their normal charge out rates, and the time and level of commitment required - 2 days work in itself. The price came to £100k.

At this point the agency experienced what I would describe as a ‘slight degree of nervousness.’ It seemed like a big number to them; a lot of money. It was. In fact as a project it would be one of the biggest projects they had undertaken. But, they took a deep breath and sent the proposal off.

The client came back the next day with the following news: ‘We’ve only got £50k in the budget!’ The agency rang me. Their first reaction was, ‘there’s £50k we could have.’ Mine was a little different - we could not accept a £100k project for £50k. They were initially hesitant to accept my advice to turn away £50k. I reminded them that we had carefully worked out a financial plan for the business based on sound principles and we should stick to it.

They contacted the client via email, thanked them but said that they could not do the work for the budget, concluding that it would be lovely if they could stay in touch. No counter-offer. The end.

Actually not, as it turned out. Things did go quiet for a couple of days. But then the client picked up the phone and said they’d found some budget for the project and could make £95k if that was acceptable to the agency. Which, of course it was.”

What gave the agency the confidence to know what they were doing was right?

1. ‘The size of the number, it felt big!’ A perfectly valid thought. But not a fact. The important point was that there were sound business principles behind the calculation of the price. It had been worked out. It was a genuine figure. There was no smoke and mirrors, no figure added on as fat (see 5.). They knew they’d done their numbers properly and this gave them a mindset of certainty and confidence in what they’d suggested.

2. ‘They have a financial plan that underpins the business’. Sitting beneath the studio is a financial plan. This involves delivering income to cover overheads and make a profit. They know they need to bill at £X per hour to be profitable at the end of the year. If they have that plan and someone says ‘I won’t pay that’ and they take what they offer, they’ll never achieve their plan. The more times they do this the further away they get from achieving their plan. They may actually lose money. I have experienced of serial acceptors of these offers, eventually folding as businesses. In fact it happened to one of the best creatives, a household name with books on shelves. No one wants to go the same way.

3. ‘Imagine the atmosphere in the studio if they’d taken this job for £50k!’ How are they going to feel? How will the team feel? That they’re working ‘£100k hard’ for a £50k reward. They can’t pull their effort back to £50k because the client’s expecting a £100k job. So they’d be stuck working their backsides off on a job that takes them further away from where they want to be. The effect on team moral is going to be bad, and they want to enjoy what they do, not suffer for it.

4. ‘They’re consistent’. They have a plan and they keep to it. They could add on some fat to the bill to negotiate but they choose not to. This instills a sense of self-worth that is important to them as an agency. It allows them to stay in rapport with their clients by being clear about where they stand.

5. ‘They don’t add margin only to cut it later.’ What if they add some money on top, say 20% and then let that slide in the negotiation? How does the client know that they’re supposed to stop there? If they give 20% what’s to stop the client chipping further?

6. ‘They’re confident in their ability.’ They know their ability and they stand by it. They know that what the client is paying for is better than they could get elsewhere. They’ve created a niche of expertise for themselves. This is another foundation stone for their confidence.

7. They understood the myth of ‘We’ll just do this one.’ It’s always a tempting thought. Could £50k now be better than nothing? What about up-selling the client in the future? These things get questioned, but what stops them is the knowledge of what could happen. A better opportunity could come through which they can’t accept because they’re doing the £50k job. They know getting the client to pay more next time will be an uphill battle that in all likelihood they won’t win.

Of course if you try this the next time you are asked to cut the price you may send the email and never hear from the client again. It might be the best thing that never happened to you.

Based on an interview of Gary Baxter by John Scarrott, (membership director of the Design Business Association) who teased out the story……

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How much to charge? Setting the right rate

Wednesday, January 23, 2013

If you're planning to start your own design business, deciding how much to charge is one of the most important things to get right, from Day One. But how do you go about setting charge-out rates? Let's look at how a hypothetical start-up might tackle this crucial calculation...

Highly rated designers Harry, John and Lucy have always wanted to go into business together, and now they've decided the time is right. They've found a studio; they've picked up a second hand pool table; they have a few potential clients lined up; and they've chosen a name – Hypothetical. Which only leaves one more thing to decide: how much to charge for their services.

Over coffee (and Echinacea tea, in Lucy's case), they brainstorm it. How will they know that the figure they come up with is right? And will it be negotiable?

Eventually, as darkness falls over Hoxton Square, they come up with three questions, which they think will give them a starting-point for calculating how much they need
to charge:

What will our annual overheads be?
What salary are we going to pay ourselves?
How much profit do we want to make?

Next, Harry impresses his new partners by whipping out his iPad and showing them his projection of how many hours each of them will be able to charge, based on their planned roles in Hypothetical:

 HarryJohnLucy
Total time (52 weeks x 37.5 hours) 1,950 1,950 1,950
Deduct: Holidays (including bank hols.) (248) (248) (248)
Sickness contingency (38) (38) (38)
Administration (338) (150) (150)
Business development (250) (100) (100)
Client time 1,076 1,414 1,414

So now they are starting to get somewhere: with 3,904 hours available (1,414 x 2 + 1076), Harry, John and Lucy are ready to work out their charge rates... or
nearly ready.

But in the nick of time, Lucy remembers something. Reality. In real life, she points out, things go wrong. Projects take longer than expected. People faff around pointlessly. Inefficiencies occur, particularly on pitches.

Harry and John think back over their own recent experience – and concede that Lucy has a point. The partners decide to allow 20% of their time as a contingency, leaving them with 3,123 hours (80% of 3,904).

What next? John's turn to sound business-like. He suggests they should aim to pay themselves £50,000 each, to start with. And he reckons that their annual overheads – all the running costs of the business, from heating to chocolate HobNobs – will come to another £50,000.

So here is John's costs-model, which he controversially presents in a hand-written script font:

Overheads 50,000
Salaries (£50k each + NIC) 165,000
  215,000

Lucy – whose thought processes have been sharpened up by the Echinacea tea – points out that Hypothetical should also aim to make a profit. And she's heard that 25% is a good target to aim for; which, she announces, comes to £53,750 (25% of 215,000).

So now the financial budget is complete, with a fee income target of £268,750 (£215,000 + £53,750). And with 3123 hours available, this gives an hourly
charge-rate of:

£86.05

Which, Harry tells the others, breaks down like this:

Overheads £16.01
Salaries £52.83
Profit £17.21

So there it is, a meticulously calculated charge-out rate, which will put Harry, John and Lucy's new business on a firm financial footing. And if they do have to negotiate with their client, they will know that any discount of more than 20% will result in Hypothetical making a loss.

Next on the agenda? Harry isn't happy with John's chocolate HobNobs. He has a different proposal for Hypothetical's biscuit purchasing policy...

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