Captain’s log, stardate 20170405
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Reader question re How to set “no-brainer” prices
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:
- What To Charge
- Revenue vs Profit
Onward!
1. What To Charge
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.
2. Revenue vs Profit
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.
Takeaways
- When your work reduces annual costs by $100,000, then $10,000 is a no-brainer
- When your work increases annual profits by $100,000, then $10,000 is a no-brainer
- When your work increases annual revenue by $100,000, then $10,000 is a probably not no-brainer
Yours,
—J