by Adam Juda on Saturday, June 27, 2015
In an ideal world, you'd quote a price and your customer would either accept or reject it. We don't live in an ideal world. Many clients will attempt to reduce your rates.
So what can you do?
There are three basic responses to a demand for a price reduction:
- You can reduce your prices.
- You can reject the demand.
- You can attempt to negotiate.
Agreeing to rate reductions is almost always a bad idea. Whether you match price reduction requests in whole or in part, you will be setting yourself up for a world of pain. Such acts will forever label you as a "commodity" in the eyes of your customer. Not only are you setting yourself up to make less money on this contract (and anchoring future work at this lower rate), but you're also reducing your negotiating and social power in all future dealings with this particular client. As a general rule, unless you absolutely must accept this specific contract, I would strongly recommend that you never use this tactic.
As a business owner, you are under no obligation to reach a deal with a potential client. In fact, I would argue that you are probably charging far too little unless a large segment of your customers believes that you are charging too much. Some clients ask all firms to reduce their rates out of habit. Even businesses that are fully willing to pay the quoted price ask for reductions in every business dealing, just on the off chance that some business owners will agree out of fear. By rejecting all requests for discounts, you will avoid giving up money from these types of clients. Of course, there is a downside. Clients for whom price is extremely important will be likely to walk away. This result might be acceptable (or even desirable) if you have enough work in the pipeline to pay your bills. As an added bonus, it will free up your schedule to meet with better playing clients.
If there is significant profit on the table, I'd suggest negotiation as the preferred response. Many equate negotiation with voluntarily reducing your potential for profit. This is not true for intermediate and expert negotiators. They know that any change in price should be met with a change in value provided. The most common advice is to match price reductions with reductions in project scope. Less common suggestions include the removal of guarantees, increasing the time for project completion or even changing the language of the project's licensing. Truly advanced pricers can combine negotiation with upsell techniques. Rather than offering to reduce the project price as part of a negotiation, they will attempt to raise the project price by bundling additional value into the project scope. As long as the customer agrees that the increase in value more than compensates for the increase in price, there is the possibility for an agreement that can satisfy both parties.
As a business owner, you always have options - even if you don't realize that they exist. If you need help understanding how to deal with your pricing, you can always contact me for a consultation or purchase a copy of my book on setting the price of your software.