It happens to us all.
You submit your proposal. You wait anxiously. Then you get the call from the client:
You’re too expensive.
The reality is this happens much less than people think, and if it does happen it is far from the end of the road. If anything, I believe you’re more at risk from underpricing than your are from over pricing (read my recent blog article on under-pricing).
What to do if Your Price is Deemed Too High?
Your first inclination might be to simply reduce your price. But think about, what message does that send?
If you can arbitrarily reduce your price it comes across as though you simply made it up in the first place!
It also smacks a little of desperation. And you don’t want to come across as desperate.
Your relationship with the client should always be peer-to-peer, and your engagements should always result in a win-win scenario. The good news is that, if you’re in a competitive situation and the client has told that you’re too expensive yet hasn’t awarded the contract, then it likely means they want you to do the work.
Your challenge is to get to a win-win fee
How to Achieve a Win-Win Fee
A win-win fee is simple to understand.
You need to get to a price that the client is willing to accept, whilst also ensuring that the project’s profitability is at a level that you are willing to accept.
The first place to start is to gain an understanding from the client as to what ‘too expensive’ means.
Do they mean the price is 5% higher than expected?
Is it 10%?
Until you can get a feel for the degree by which the expectation is out, you can’t determine what the best course of action is.
The second thing you need to do is to understand the client’s logic. The fact that the client wants to pay less for the project means one of following things:
- The client is budget constrained
- The client genuinely thinks you’re fee is too high
- The client may be in a position where he wants a discount to demonstrate his value internally – sometimes the case when dealing with central procurement teams or someone new to a senior management position
- The client’s expectations of what is required to deliver differs from yours
Once you have determined the degree by which you are outside of expectation and the client’s logic, you are in a position to negotiate.
What’s The Cost to You?
In order to negotiate – to reach an agreement – you need to understand your bargaining position.
Whilst you sought to understand how far outside of the client’s expectations you were, it’s difficult to use percentages as a guide for what action to take. The reason being is that 5% on a project worth a million dollars is quite different to 5% on a $5k project.
In the latter case it might be that you’re willing to compromise on your margin (profit) if the project leads on to something much bigger, for example. But with a million dollar project, that next project might be less likely or a long time away.
The challenge, too, of simply charging lower fees is that it’s very rare to be able to raise your fees at a later date, even if on a different project.
You have to set the right expectation of your value in your client’s mind!
So to determine your response you need to identify the cost.
To start with you need to know your Profit and your Profit Margin.
Profit = Fee – Cost to Deliver
Profit Margin (%) = 1 – Cost to Deliver / Fee x 100
If we use a simple example of a $50k project, with a $30k cost to deliver, this gives us a gross profit margin of 40% or $20k.
Profit = $50,000 – $30,000 = $20,000
Profit Margin = 1 – $30,000 / $50,000 x 100 = 40%
Now, if you establish with the client that your fee is 5% higher than anticipated, you can now work out what the cost is to you.
Fee x 5% = cost of the client’s expectation
So the cost to you in this example would be $2.5k ($50,000 x 5% = $2.5k).
Not a substantial amount by any means, but the value in this example is largely irrelevant. The importance is that we now know the value of the client’s target fee reduction. With this information we can start to evaluate appropriate options.
10 Ways to Handle Fee Objections if Your Fee is Deemed Too High
I’ve set out below 10 different ways you can respond to a clients pricing objection if your fee is deemed too high. The options fall into one of 3 types:
- Scope and Approach Validation
- Value Exchange
- Take a Hit!
SCOPE AND APPROACH VALIDATION
ONE: Reconfirm the scope and your approach
If your fee is too high the first thing to determine is whether your understanding of the scope is correct. Before you start giving things away, make sure both you and the client have the same understanding of the project and your proposed approach. It could simply be that the client did not understand how much effort would be required from your team, and once that is understood, the fee objection may go away.
TWO: Get the client to do more of the work
Your aim is to help the client move forward with the project in order to achieve their objective. We’ve already established that, as you’re in a pricing discussion, the signs are that the client wants to do work and is interested in doing it with you and your firm.
One way to reduce your cost is to reduce your effort. The easiest way to do that is to get the client to take on more of the work.
Take a look through your proposed project plan and see what tasks the client might take on instead of you and your team. Revise your fee accordingly, whilst maintaining your profit margin.
THREE: Reduce your cost to deliver
You are now entering much riskier territory, although if you have a sales team, it’s very likely they default to this option first.
How many times have you heard a sales person say that an opportunity is ‘Strategic’ and therefore should be won whatever the cost!
An obvious way to reduce your cost is to go back to your estimate and review:
- The level of resources you’ve assigned to the project
- The amount of time you have estimated for each resource
What you’re examining here is how you’re going to deliver the project and who is going to do it. I don’t like this option so much as it’s where mistakes are most often made.
People get excited about the prospect of making the sale, so they become over optimistic as to what can be achieved by the team. They start to assign tasks to lower skilled resources in order to bring the cost of delivery down, whilst maintaining the profit margin, and still being able to offer the client a reduced fee.
This all looks good at the time of sale, but can become a disaster once in delivery.
It is, however, always prudent to review your approach. For example, are you giving a greater level of quality (which requires additional time) than required. Can you deliver the same result with a bit less effort?
You need to get into the weeds here, and be creative. Maybe you can shave some cost by delivering aspects of the project remotely, thereby reducing your on-site time.
Or if you are required to be on client site but can’t make all of your on-site time effective, agree with the client that you may spend some of your on site time working on other client projects. Most clients will agree to this, although it does of course depend on the nature of your consulting. You should also ensure you cover off any concerns around data privacy and security.
To reiterate, your aim here is to reduce your delivery cost, whilst maintaining the profit margin, and being able to offer the client a reduced fee. For this to work you have to be absolutely honest with yourself in your review.
The three options above all concern reviewing effort, but in many cases there are no opportunities to reduce the effort. In these cases look to see how you can exchange the value of the cost of the client’s desired reduction for something of equal value to your business.
FOUR: Ask for a testimonial
Testimonials create trust and authority in your prospects. If you haven’t already got a testimonial from the client, then trade a reduced fee for one. And ideally get a video testimonial. You can always transcribe it afterwards.
You should also be very specific about when you want it. If the project is long, say 12 months, then you probably don’t want to wait until the end! Is there some other milestone that happens much earlier in the project that it would make sense to get a testimonial for?
Never rely on a client to write a testimonial for you! Whilst marketing your business is at the top of your agenda, it’s not likely to be high up on your client’s priorities. I’ve always found that if I write a testimonial initially for the client, they can then edit or even entirely rewrite themselves.
Regardless, it’s your responsibility to ensure the client doesn’t have to start with a blank sheet of paper. There would be nothing more embarrassing than being given a testimonial that you can’t use!
Also, make sure the client has authority to give you a testimonial. I’ve worked with a number of large corporates who have internal communications policies that prevent the provision of testimonials.
FIVE: Get payment up-front
Chasing payment is time consuming, and most every business battles with cashflow from time to time. To provide the reduced fee your client is seeking – or at least to meet them some way towards it – ask for payment up-front. If it’s a large project, break the payment down into monthly milestones and bill at the beginning of each month.
Always keep in mind the cost of the client’s expectation and the value exchange.
SIX: Reduce or increase payment terms
The larger the client, the more likely it is that they have long payment terms. Some of the global businesses I consult with have 90-day payment terms. You can leverage the request for a reduced fee to seek a reduced payment term.
On the flip-side, the client maybe seeking a reduced fee in recognition of their current budget cycle. Maybe your fee could remain the same if your billing falls into the next budget cycle, in which case you might agree to increase your payment terms. This is a high risk option though.
SEVEN: Offer a discount on the next project
This is a more tricky one as it may not be possible, ethical or even legal to do so depending upon the opportunity at hand. However, you may be able to continue with the fee proposed under the proviso that you provide a discount on the next project.
To pull this one off you’ll likely be selling to an existing client as this one requires high trust from the client. The value of the discount you provide might need to be greater than that requested for this to reflect sufficient value to the client as you’re still asking for sign-off on your original unreduced fees.
EIGHT: Offer a Deferment
This is in many ways the opposite to number seven. You can offer to reduce the immediate fee, but under the proviso that you can include it on your next project. This can be useful if the client is currently budget constrained. The next project could fall into the next budget period, thereby making more funds available.
I’d only recommend using this approach in a situation where there is high trust as this is a high-risk strategy. Many things can go wrong, the most obvious being that the next project doesn’t happen! That’s why this strategy is only really appropriate for a project that is a piece of an overall larger project or programme of work.
You must get the commitment in writing too, as another risk is that the person who agrees it with you leaves the organisation. You could then find your agreement worthless!
On the same vein, it can be difficult to get any form of legally biding contract to commit to this strategy.
TAKE A HIT!
You are now at the point where you’ve exhausted your win-win scenarios. Your options here are more limited, and whichever option is chosen it will cost you money.
NINE: Give a discount
The end of the line – almost! You’ve exhausted all avenues and the only option is to reduce your price, and thereby to reduce your margin. So should you? Is this the right thing to do?
Firstly, consider what other ways there might be to reduce the project cost. Are there other line item costs that you can leverage to reduce the overall project fees?
For example, I always apply an administration fee to expenses. I do this because it takes time and effort to process expenses and invoice accordingly. You could offer to waive this cost (remember, it’s 5% on expenses, not the whole project cost!).
You could also consider simplifying your approach by agreeing a fixed expenses budget with the client. This could be utilised in a couple of ways:
- If you’ve included expenses in your costs, separate them to bring the project cost itself down. Then create a separate expenses budget
- Apply a fixed expenses budget, but offer to refund (or essentially not bill) any amount not spent. This might be a hard sell – it depends on the budget and if the client already knows you well enough to trust you at your word
You could go further and offer to cover all travel and expense costs. This one is obviously very dependent on the project at hand – it’s location, the likely travel costs, etc. The costs need to be enough to encourage the client to take action and make a decision, but at the same time it will eat into your profit margin so be sure you’ve calculated how much it will cost you and what you’ll be offering the client.
Eventually, you’ll be left with simply reducing the cost of the project.
Only you can determine if it’s the right thing to do, but before you do, here are some things to take into consideration:
- What does your current pipeline look like? Or in layman’s terms, do you need the revenue? Sometimes needs must, and the right thing to do for the longevity of your business is to take on the project even at a reduced profit margin. I would caution that, if you’re in a general downward spiral in your business, the right thing to do might be to let some staff go rather than take everyone down in a sinking ship!
- Will the project tie up valuable resources? Might you miss out on other more profitable opportunities? This is often referred to as Opportunity Cost. It is even more of a problem for the smaller consulting businesses and solopreneur because it can be very demoralising as your realise the consequences of your decision. Again, you need to have an understanding of your pipeline to determine whether the risk is worth taking
- Will it impact profitability on other projects with the client? Are you working on other projects with the client? There’s a chance that they might simply assume you can do all of your projects at a reduced cost. This is why you must make it very clear to the client that you have worked incredibly hard to provide the discount. You did it out of respect and loyalty, and your aim now is to demonstrate value such that you’ll never be expected to discount again
TEN: Just say no!
The absolute final option is to turn the client down.
The price is the price.
You’re not playing hardball, you’re simply being honest. It is not in you or your client’s interests for you to do the project at a reduced fee.
This strategy has two obvious results:
- The client says, “Ok, thanks for taking the time to submit your proposal, perhaps they’ll be an opportunity to work together again in the future”. You might think, ‘Fat chance’, but you never know! Maybe the consultant they choose messes up and they come back to you at a later date. Following up on a lost project is a great way to win more work. Never burn your bridges
- The client reluctantly says, “Yes”. If that does happen, you must now work hard to ensure the client sees and feels that they’ve made the right decision. You must deliver lots of tangible value. Make the client look good in front of their peers and staff. Make it clear that they’re smart by choosing your firm and pushing their budget. The value you deliver should be at least 10x your cost
So there you have it, 10 ways to address pricing objections if your fee is deemed too high.
As you’ve seen, only one of them is to provide a discount.
My final piece of advice to you on this topic is this:
Hold your nerve!
The consequences of not holding your nerve can be significant, and could even bankrupt a firm.
I was talking with a client in a large firm last week. He was telling me how one of his team members was delivering a project and it was proving tight on time. When asked what he’d scoped the project at, his team member said a fee of £87k. When he asked how much it was sold to the client for, the answer was £62k!
Clearly the sales guy in this scenario lost his nerve. He got excited about the win. He developed a fear of missing out. And he sold a project that might end up providing little or no profit.
You might say that any profit is a good thing, but if your business is to grow, you need to invest in marketing, in sales, and in your delivery team. You need to fund this growth.
Your clients benefit from this investment too – which they funded – as your team and your capabilities grow to meet the client’s growing needs.
Selling consultancy is not a game. Your firm has valuable expertise that you want to deliver to help your clients. You should set a fair and profitable price. If you feel you can’t defend your price, then I would question if it is fair. If you don’t think it is, then you’re unlikely to be able to convince anyone else.
What do I mean by fair? I mean win-win.
You deliver the work. The client benefits (win) and you get paid profitably for your time (win).
Remember these 3 rules:
- Don’t simply discount through fear of missing out
- If you’re against a deadline, negotiate faster!
Can you think of other ways that you could respond to a request for to reduce your price?
Do you agree with the suggestions made above? Let me know in the comments below.