In the late 90’s, I was managing a premium brand for Jacuzzi and we had a giant web project up for bid. It was a complicated project: development and management of standardized websites for dealers in 63 countries.
I had a brilliant young woman submit a proposal for the job, and I knew I wanted to hire her. But her proposal was out of my budget range.
I was fully prepared to give up some of the services in the proposal – to minimize the bells and whistles – in exchange for the peace of mind I would receive in working with a highly-motivated professional.
She wanted the job.
I wanted her work.
When I presented my budget limitations, her automatic reply was:
I can give you a 25% discount. I’d really like to work with you.
In a split second, it changed the way I felt about her. I wondered – if she would give up so easily on her hourly rate – whether or not she really had other clients, and why she was clamoring for work.
I wondered if I’d misjudged her value.
But I believed in her, and I knew her business was relatively new. And so I told her, flat out, what I knew to be true about negotiating services, and what I tell every new business owner who attends my webinars:
Never discount your hourly rate.
The devil is in the discount.
Once you begin to barter on your time and expertise, you’ll never recover.
I asked her to re-write the proposal. Not with a discount, but with creative ways to save time, and to eliminate elements that were nice-to-have, but not critical. I asked her to find a way that she could be paid for every hour at her prevailing rate, and I could protect my marketing budget.
She was more than surprised. But she re-wrote the proposal. And we worked together for many years, on many projects for many companies, always with me paying her full hourly rate, and both of us feeling good about the outcome.
Why didn’t I just take the discount and run? Lots of reasons.
1. Discounting hourly rates leads to resentment.
I knew that once the project began, I’d be spending loads of hours with this web developer. And she was a pro. What would happen on hour 150, when she was working late and earning only 75% of her standard rate? What would happen when another client came along who agreed to pay 100%? Would she jump ship? Would she resent the commitment she’d made to our company? Would her enthusiasm wane? Most certainly. If you bill hours based on your experience and expertise, discounting them won’t lead to more work or more money. It will lead you to resent your clients.
2. Negotiations for people never work.
Getting a discount on a sweater as the Spring season rolls around feels great. Inventory remains, and your favorite retailer needs to move it. That’s entirely different than asking for (or giving) a discount on a human being’s time and effort. There are only so many working hours in a week. Professionals don’t have “extra inventory.” As soon as you give – or request – a discount on hours, you’ve cheapened the value of your day, or someone else’s.
3. Discounting makes clients doubt you.
Imagine if your doctor said, “I’m running a special on yearly physical exams. If you sign up before Friday, I’ll give you a 25% discount.” Would you worry about the quality of care? Your clients will surely wonder about the quality of your service if you give it away cheaply.
4. Discounting hourly rates never ends.
Once you establish that you’ll discount your time, you’ll feel compelled to lower your price as a tool to get new work. It will become part of your negotiating routine. And what’s worse, you’ll come to believe that your own value is in question. Recovery is nearly impossible.
5. Hourly rates should be based on market value.
One of the things I hear most often from small business owners is, “I can’t charge that much. I’m new.” Here’s the thing: unless you’re unqualified or pretending, being new has nothing to do with your rates. You should set your hourly rates – in relation to the rest of the market – based on what you’ll provide to the client. That way you’ll feel wholly confident that when a client asks for a discount, she couldn’t get that discount elsewhere. You’ll stop worrying about being undercut by the competition if your rate is truly based on what the market will bear for the same level of service and expertise.
6. Your hourly rate determines your cash flow.
I have a saying for the creative I work with: “This is not the Red Cross. We work for profit, and we’re not ashamed.” We bill every hour that we work for our clients. And that’s because we’re businesspeople, and we have a responsibility to the businesses we’ve established. Branding isn’t a hobby for me. And your business isn’t a hobby for you, either. If you’ve set your hourly rate properly, it covers your expenses and allows your business to move forward. And even more than profit, we need cash flow to make a business work. Discounted hours lead to cash flow issues and poor business performance, and nobody benefits from that. Not even your clients.
So how do you get around providing discounts? How do you say “No, Thanks. This is my rate, and I’m sticking to it?”
If the client can’t afford your proposal, don’t work at a cheaper rate. Work a fewer number of hours. If you’re building a house and you want an intricate travertine tile floor and the contractor tells you it will be $5,000 to install, you don’t ask the contractor for a reduced hourly rate to meet your budget. You choose a type of tile that allows for a cheaper install. The same should be true of your “labor” relationship with clients. Don’t reduce your hourly rates. If you feel compelled to provide a less expensive option, do so by showing up for fewer hours.
Know the difference between “You’re too expensive,” and “I can’t afford you.” Just because someone can’t – or won’t – pay your prevailing rate, doesn’t mean you’re too expensive. Sometimes clients are not the right fit for us, plain and simple.
Be willing to walk away. If you want to run a profitable business, you have to be willing to work to sell every hour at a maximum rate. That means walking away from discounted work. It is better to struggle a bit in the beginning as you search for work, than to continuously struggle financially because you can’t hold your value with clients.
Practice the conversation. When someone asks you for a discount – especially a friend or family member – it can be uncomfortable. Learn to say this:
I wish I could give you a discount. I’d love to work with you. But I only have so many hours in a week, and my business and my expenses hinge on the income I get from those hours. If I discount my hours, I can’t pay my bills and I can’t move forward in my business.
That web developer? She and I became friends. And she told me more than once that the discussion we had about her discounted rates set the tone for her business going forward. And she thanked me.
So charge what you’re worth. In the end, your clients will actually thank you for it. And so will your wallet.
Julia “Juju” Hook has been a brand strategist for more than 25 years. Her online program, Unforgettable U, provides entrepreneurs and small business owners an affordable option for developing killer brand strategies. Click here for a free download of her proprietary system for building an authentic brand that connects, converts, and changes the world: The Anatomy of a Brand, and to access her blog which provides Strategic Juju to entrepreneurs, start-ups and small business owners each week. Juju shares insights about how we brand our businesses to connect with our ideal clients, and about how we brand ourselves to connect with our full potential.