Captain’s log, stardate 20170405
Sent by Jonathan Stark on April 5th, 2017
Reader Michael Doyle wrote in to ask:
What price should you quote for a project that would MAKE your client $100,000 per year? I’ve sold websites successfully over 20 years and I ask them what an average job is that they do. If BigCo Inc says they sell a kitchen renovation for $15k then I say If I can deliver you 5 leads a week then thats a successful outcome then the $10k website sounds cheap.
Thanks for your question, Michael!
I will address this in two sections:
Regarding what to charge…
In a previous email, I said:
What price should you quote for a project that would save your client $100,000 per year? In general, quoting $10,000 (i.e., 10% of projected first year savings) would make the deal a no-brainer.
In Michael’s case, I’d still set the price at $10k (i.e., 10% of perceived value) if the $100,000 is incremental profit (vs revenue - more on that in the next section).
Again, I’m talking in general terms here but 10% of net improvement is a good guideline. There are times when you want to charge more or less depending on the specifics.
Let’s say BigCo knows that they close an average of 20% of leads. If Michael’s work delivers 5 more per week, they’ll be virtually certain to land one additional $15k job every week.
So, here’s some math:
1 new job per week x $15,000 x 52 weeks per year = $780,000 of additional annual revenue
So Michael can charge $78,000 (i.e., 10% of $780,000) for the project, right?
Not so fast.
It’s important to remember that the $15k BigCo charges for a job isn’t pure profit.
It’s probably not even mostly profit.
If BigCo’s profit margin on a $15k job is $1k, their incremental profit from Michael’s project would be $52,000 per year, not $780,000.
In other words, if Michael charged the client $78,000 they’d lose $26,000 on the project in the first year.