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We’ve been in business almost 12 years and have struggled with something for some time.
How do you effectively present pricing to clients?
Do they only need to know the overall cost?
Should you break everything down as much as possible?
What if they ask questions about what you’re charging?
How much information is too much to show your client?
I’ve recently been working on a very large renovation project for a homeowner’s association. It’s an addition with extensive renovations for a 4000 sf building that the residents of a subdivision use. The project has been in design for 15 months and we’ve been working on design, layout and logistics. During the course of the design process we’ve been presenting the client lump sum cost estimates for portions of the work. I’ve shown them an overall cost and then broken it down by project; the addition is going to cost X, the interior renovations are going to cost Y and the exterior updates are going to cost Z. As part of the process it was required that I share all the trade contractor costs separate from our company’s costs. This was so the association could see the trade contractor’s costs and pick which company to use. This forced us to disclose exactly how much we were charging the association for their construction project.
The lump sum cost estimates I’ve been showing them added up to $625,000. This was a little over their budget but instead of cutting work out of the job to hit the budget they decided to push forward accepting the fact that the project was going to be $625k.
About a month ago we finished the very long and complicated process of securing all the trade contractor pricing and assembling everything into a spreadsheet that could be easily understood. The total project was $621,000. We were under my projections! Yippee, right?
Wrong!
The presentation was made to a less-than-enthusiastic group. Even though the total cost was less than my projections, they were not happy. They felt we were charging too much and should start drastically cutting costs from our line items.
They requested we provide tons of information showing where all this money was going and how we would justify the need for it. In short, it’s been a disaster.
I’m frustrated because everything was fine with the overall costs and in the end the total project came in at $621k. That was 5 thousand dollars less than I told them it would be. It really didn’t matter to them! They were contesting the amount of money they were giving just to us.
I’ve spent the last 5 weeks firmly defending my costs and working with them to justify the numbers. It’s been very difficult and stressful. Part of me is beginning to believe they will never get it no matter how hard I try.
This story is an example of what can happen when you decide to disclose all of your company’s costs (go open-book) to potential clients.
Most people have no concept of what it takes to run a small business, make a salary and turn a profit. They think everything should be cheap and your salary as the business owner is ‘profit.’ Remember this if you decide to conduct your business open-book.
Some business models are more easily adapted to the open-book model. Auto repair shops are one example. Most everyone has become accustomed to seeing the labor and parts separate. They may think the labor is expensive but most everyone has come to accept that.
Other clients will have a really hard time justifying a project if you give them a lump sum cost for the work. They won’t understand why it costs so much. For these people you may need to break things down a little. Giving them the costs broken down could help them better understand where the money is going and sign on the dotted line.
You may choose to present most of your pricing as a lump sum and break it down only when forced. This is our approach and it works very well for us. I have broken down bids in the past with success. It just depends on the client and what they’re expecting.
You may feel more comfortable presenting pricing open-book because everything is right there for the client to see and you can easily justify all the numbers. I know many companies that do their pricing this way and it works out great.
In the end it doesn’t matter if you break it down or not. The cost is the cost. You’ve spent the time to prepare a fair proposal and present it to them. If they can’t have the common sense to hire you, walk away! Don’t start cutting money from the proposal. It will make you look deceitful (you in fact were charging too much) or you’re going to lose your butt because you did it too cheap.
Don’t let them tell you how much you should charge. You know what’s best for you and your business.
No matter how dirt cheap you are there will always be people out there who think you’re charging too much. You can win a battle with the stupid.