Taking a hit on a first job with a new client

Hi Tom,

I’m in my first year running an IT business, and whilst i am still getting to grasps with correctly pricing jobs, i am considering taking a hit on profit margins for jobs with new clients that have the promise of future work. I am trying hard to work with property developers and thought it may be a good way to get a foot in the door with them by offering an attractive quote on a first job.

What are your thought on this?

Thank you for your Youtube videos, they’ve been a source of great help and advice.

Hammond

For customers where you expect to make recurring revenue through a support contract, it can be a very powerful bargaining chip to take a cut on profit margin for the initial installation. That is very common in my industry, which is networking for hotels, but we don’t do it for every job. We’re a large enough company that we have separate sales persons, and its their discretion when and how much of a discount to offer.

For your position of using a discount on a one-time job to curry favor for future one-time jobs, the situation is more difficult. I have heard before that if the potential customer asks for this, as in they imply but don’t outright promise that a discount now will get you more work in the future, to try to stay away from that customer - they are not business you want, unless you are desperate for the income. But if the customer doesn’t ask for a discount, and you are comfortable with them, I don’t see any issue in offering a discount. Just make sure its clear in your line-item invoice - put the discount after the subtotal but before the taxes.

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Thanks Bruce, that is very helpful insight. As a thought, and seeing as you are part of a large company, what sort of markup do you put on 1. equipment, and 2. outsourced labour?

Never discount labor. Hardware has a “street price” depending on what it is that is just a fact of life. Labor on the other hand is your knowledge and time, consider opportunity costs. Discounting for one and tying up resources for that client while missing a better revnue stream from another. You also do not want to get labeled as a low price company it will cost you in the long run.

I do offer discounts but only for paid up front contracts advanced purchase of support hours and if those prepaid hours are exceeded additional hours are billed at the contract rate. One other tip always refer to a support or project contract as an agreement contract can be a scary word to some. I usually command a higher rate because I specialize in Linux / Unix storage and backup systems.

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Starting point, and goal at the end of every project, is 20%. The higher ups generally are happy to see >15% final profit margin on each project, unless the sales person in advance set up a large discount or we made some bad mistakes in the design stage that we have to eat.

Also in a similar vein as what g-aitc said, we generally are offering the discount on the hardware, not our own labor (we call that “Project Management and Installation” for the line-item invoice) nor outsourced labor. I’ve never seen a discount larger than our hardware profit margin.

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@brwainer do you have a minimum? I found it eliminates problem clients and I’ll leave it at that.

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If you mean minimum profit margin, then I have no idea as I’m not in our sales department - I’m just an engineer. I’ve seen us take a loss on the hardware for some high-visibility clients, like particular hotels on the Vegas Strip, on Times Square, etc. But 100% of our customers become a recurring revenue - we are doing the install so they can start using our platform for which they pay monthly for.

EDIT: I just realized that contradicts what I said before about not having a discount larger than the hardware profit margin. We very rarely take a loss on the hardware, and when we do, the C-Suite is usually involved with the sale.

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I was talking more to the overall size of the project in terms of total value.

Oh, well we only service hotels, apartment complexes, nursing homes, etc - in other words we service businesses, not individuals or small offices. Our smallest customers would probably be a bed-and-breakfasts with half a dozen rooms, and we don’t have many of those. We aren’t the cheapest company in our industry, and we don’t normally compete on cost, so that on its own is a pretty good barrier to entry against problem clients and small jobs. The other aspect that makes us different from most of the people who would be on this forum, is that for any large hotel we are following the standards required by Marriott, IHG, Hyatt, etc. As long as we install the network per the standards documents, and provide proper support for the hotel staff and guests, everything is groovy.

I maybe a bit late to the party, but here’s my two cents. If the agreement for the work that you’re considering the discount on includes a solid future work guarantee (like a statement of intent to …) then a discount is likely appropriate like mentioned. But, (I learned the hard way) don’t sell yourself short, I did this with a client a few years back and have regretted it since because I let them persuade me to give a discount ($20-30k less because I told them I’m new to the market). It’s true that if a potential client is asking about some kind of discount then they likely aren’t a good fit for you - regardless of the situation.

It may sound a bit underhanded but if you can keep a prospective client from knowing you’re “new in the industry” then they’ll likely hire you on your merits alone, that’s the best kind of client.

Either way, don’t undervalue your services, prospects can smell that a mile away!

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Just because you are new to the industry doesn’t mean you should offer discounts. Now you must know what you are doing if you don’t don’t take on the project unless you find competent talent to fill the void.

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