*** From the Archives ***
This article is from April 24, 2006, and is no longer current.
The Art of Business: Negotiating Fees
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How many times have you found yourself in this situation? You’re talking to a potential client about a project. She likes your ideas, you like her. It seems like a go. The conversation turns to compensation and comes to a screeching halt. Many creative professionals wither at this point because they’re not sure if they should set a set a price or ask “What’s your budget?”
Most negotiation experts agree: Nothing so determines the outcome of a negotiation as who makes the opening bid.
Bold Moves
In most cases, setting your price is to your advantage. A well-prepared, confident opening demand sends the message that you’ve done your homework and makes it clear you’re a professional who knows how to play the business game.
However, if you’re going to go first, you have to get it right. A ridiculously low offer may indicate a sense of urgency, and the prospect will smell either desperation or ineptitude. If your offer is too high, it sends a signal that you don’t understand market value or that you have an inflated sense of yourself. Either way, an ill-conceived offer can be perceived as insulting and can stop a negotiation in its tracks.
Another adverse effect of a poor opening offer is that it tends to invite an insulting response, which can polarize the transaction. To continue negotiating after this, you’ll have to retract your original offer. You’ll lose face and your prospect is likely to become less flexible as well.
In some circumstances, you might choose to let the prospect make the first offer. If you suspect the prospect has set a budget that’s higher than the fair market value, why not let her take the first stab at a dollar figure? You can also gain a lot of information by allowing the prospect to go first. Her bid will give you an idea of the company’s starting point, leaving you room to negotiate up without taking a large risk.
But in most cases, it’s a mistake to wait for the other guy to set a price. A competent opening proposal creates powerful psychological and strategic advantages. It puts you in the driver’s seat for the entire negotiation, and it provides a strategic advantage by allowing you to draw the first line marking the “reasonable ballpark.”
As High As Possible
In business school, one of the most commonly taught maxims is this: “The negotiated settlement is quite often approximately halfway between the first two reasonable offers.”
The key, then, is to set your reasonable offer as high as possible. Say you have a print project that includes a number of brochures and collateral sales materials. Because you’ve done your due diligence and proper estimating, you know that your reserve point (the point at which you will go no lower) is $10,000. Your prospect has a reserve point also, at which she’ll go no higher. Of course, unless you have inside information, you don’t know that reserve point.
Because you’re both experienced professionals, you know the fair market value for the job is somewhere between $13,000 and $18,000.
Your choices:
1. Start with your reserve price ($10,000) with the hopes that the low price will entice a quick yes. Bad move. You have no negotiating room should the prospect want to negotiate. More importantly, you’ve signaled that you don’t value you own time and expertise, or you don’t know the fair market value of your work. You may ultimately receive only $10,000, but it shouldn’t be because of a first offer.
2. Bid at the low end of the fair market value ($13,000). Still not a great move. Again, you afford yourself little negotiating room and you’re not instilling confidence in your counterpart. However, there may be times to be price-aggressive in a negotiation:
- You’re just starting out in the business and you feel you must compete on price.
- You desperately want this client for the long-term and consider this project a loss leader. (But be aware that you may be setting a low price structure for the entire relationship.)
- You know what reputable competitors have bid for the same job and you know you have to competitive.
3. Bid at the high end of the fair market value ($18,000). The downside: You’ll probably never get paid at the high end of fair market value as the negotiation will likely knock the price down a few thousand dollars.
4. Bid significantly higher than the fair market value ($25,000). Unless you’ve received clear signals that money is no object, this is a hard position because it leaves little room for your negotiating partner to maneuver. And because you’re way beyond fair market value, clients may think you have an inflated sense of self or disrespect for the client’s budget.
5. Bid slightly higher than the fair market value ($20,000). It’s modestly higher (11 percent) than the fair market value but not insultingly so. It shows confidence on your part but leaves room to negotiate a settlement within the parameters of the fair market value.
If you choose #5, you’ve set the opening demand above fair market value, so an insultingly low counter bid of $10,000 is unlikely. A client who’s good at negotiating will counter offer at $13,000 or perhaps $15,000.
If you figure that the negotiated settlement will most likely be the difference between your $20,000 offer and the client’s response of $13,00 to $15,00, you’ll end up with a compensation of somewhere between $16,500 and $17,500.
Now imagine if you had let the client start the negotiation with a bid of $11,000 and you went through the same process. Your counter offer would have been $16,000 or $18,000, and the final negotiated settlement (splitting the difference) would have been somewhere between $13,000 and $14,000.
By making the bold move of starting the negotiation, you came out ahead some $3,500 to $4,500. More importantly, you’ve created a win-win situation. You and your client both have reason to believe you negotiated well, you’ve remained within the boundaries of fair market value, and you maintained mutual respect.
Not every negotiation is as clear cut, but the dictum nearly always remains true: Don’t be afraid to start the bidding and do so from a position of strength. You can drop you price later if need be, but don’t sell yourself short from the start by giving the power of price to someone else.
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this was a good article; pricing is always a difficult issue.
i’d like to see something on working with vendors who screw up jobs and how to deal [whether they’re printers or programmers, since both are causing me massive grief now!].
A well-rounded article on a business area that is very difficult, both for practical and emotional reasons. As suggested in the article, this artist hates that part of the job! Very helpful!
With the same number of words one could have examined 5 typical clients and how to deal with them. Naturally there are dozens of other situations that are hard to cover in a short article, but 5 typical client situations would be more helpful.
While these negotiating tactics are worth knowing, it all rests on knowing the ‘fair market price’ – which presumes a project is very well defined.
Most design projects have a wide range of options that can vary the price enormously. Photography, for instance, can be cheap stock for $25 a shot; premium library stock for a few hundred a shot; or commissioned, at a cost of several thousand a shot with models, locations etc.
Also, everyone seems to know someone who can get cheap printing. Don’t fall into this trap. It usually runs through a broker and may be a printer in another city (or country). I do a lot of annual reports and other tight-deadline work, so insist on using printers with large presses, in-house prepress and binding and a lot of capacity so I can really squeeze the printing time when there’s the (almost inevitable!) delay in getting the accounts signed off.
A design professional needs to guide a client or prospective client through the possible options before even defining the spec. There’s no point in quoting commissioned photography if their budget only runs to royalty-free stock. Conversely, you’d look like an amateur if you proposed stock shots to a client who’s expecting (or whose job requires) a shoot.
I find detail is helpful in negotiating the fee. When the client can see every cost: photography, models, props, location scouting, retouching, illustration, copywriting, typography, proofreading, test prints etc etc, the total seems less arbitrary. It shows them the complexities of the job (they often think you just go back to the studio and “do it”). It also means that any negotiating can be about specifics. If they need to trim costs, you can work through the budget knowing where you can economise (two models, not three; studio, not location; lighter/cheaper stock; lose the multiple varnishes and metallic inks). Of course, your own fee should only move if the amount of work is reduced – DON’T change your rate without a good reason. If you let them haggle you down, they’ll do it forever. They must offer something in return: a bigger (guaranteed) job; discount on their products (provided you want them) etc.
Also be wary of letting them try and cut corners Ð “my niece has done a bit of modelling”, “a friend of mine has a house that could work as the location”, “We can write the copy”. By all means consider them, but only after checking they can deliver – and making the client understand that if they are going to compromise the finished piece, you’ll say so.
In my experience, especially now that so much business is conducted via e-mail, there is very little negotiation, only quoting. And there’s rarely a second chance. The client asks for a price, and then decides, usually in favor of the lowest bidder, and follow-up messages are ignored. I’d like to see more articles on how designers can cope with this difficult situation.
One other thing that might be mentioned is that if you bid high, the client expectations will also be high if accepted – they may expect miracles.
I have been a self-employed graphic/web designer for 17 years. My biggest challenge now comes when bidding Flash web sites. So far I have been awarded 5 out of 5 Flash sites, but I fear I am bidding too low. I have no way to know what other clients paid for their Flash sites. It would really be nice to have some examples to show prospective clients on the web and be able to quote what these sites actually cost those clients. I also am not sure why such info is so protected. in either case (high or low) it would force me to compete on a level playing field – then the decision is left to other areas besides just budget. When it comes to a web site (especially a Flash site) I simply do not understand how anyone can bid a fixed fee unless it is outrageously high?
Without a doubt, my weakest area for 17 years has been the ability to estimate a job accurately up front – I am always under by 100-300% because the bulk of every job I have ever done ends up 90% unforseen client revisions. Now I bid everything as a minimum up front fee with the understanding that an hourly rate kicks in after the minimum has been exceeded – if the client leaves everything up to me, I always stay within the minimum – otherwise the sky is the limit.
Primarily, we’ve assumed that the client is also a professional and aware of fair market value. Many of my clients are start-ups, individuals or partners that are not educated in print OR web design processes. They also don’t have $18,000 for marketing their company for a year, let alone a single project.
I haven’t yet had anyone collapse in shock at my prices, but that only makes me question whether I’m charging enough seeing as I too am a start-up entrepreneur (although I have 20 years in the biz) and don’t want to price myself too high for their budgets. At the same time, I’m not exactly seeing a profit yet.
There is a resource at the Society for Graphic Designers of Canada web site (https://www.gdc.net) – they survey designers in Canada every two years or so to track billing rates, compensation levels and average job estimates. It’s a good reference if your client balks your estimate.
I’ve seen some designers that post “package pricing” on their web sites, and state what that includes per number of revisions, etc. Is that a successful model given the previous comment on “online quoting” dilemmas?
We are also up against those “give-away-the-farm” types at online bidding sites. I’ve seen offers posted that “we’ll do your web site for $299 – including the hosting”. Or “logos designed for $99!!” Ooh. Sign me up for that one.
But clients will jump on those if they are price-driven. Sure, they get what they pay for. But in the meantime, legitimate designers are forced back out on the street to go door-knocking… another favourite pastime of creatives!
I probably should qualify my previous response. “Yes”, I agree totally with everything that was said, but “No”, in the sense that any of it pertains to any client “I” have ever done work for the past 17 years in THIS industry. I have done projects for over 100 corporate clients (ALL repeat clients) – most monthly billings per client in the $1000 to $20,000 range. I have never had a client well versed enough to define the parameters of ANY project up front accurately enough for me to even consider submitting a meaningful bid until after the work is complete. Face it, if they could spec out a job properly, they could probably complete it in-house! The reason they look for a fixed-bid is because they are usually clueless as to what a job will entail. If I were to submit a fixed-bid, I would just have to assume that I am being hired to train the client at my expense. The only people I know that can do custom work and throw out a true fixed-bid up front (and make a profit) is Orange County Choppers. There is so much markup on what they build they cannot lose, plus the client has very little input – you get what they give you and like it.
Thanks to all of you for your comments. Eric Adams and I have been following this space closely.