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.
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.
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.
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.
@brwainer do you have a minimum? I found it eliminates problem clients and I’ll leave it at that.
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.
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!
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.
Second to both kingsolmn and g-aitc.
Unless that future work is guaranteed in writing, don’t count on it. In my 20 years doing software consulting, I never saw such promises pan out once. All you’re doing is setting an expectation of how little you will work for in the future.
I can’t speak to hardware markups, but we aimed for 30% margins on all our engagements. If you do decide to discount, make sure you budget your time against the original estimate, as the discount was a sales decision, not a reduction in scope.
If you do decide to offer a discount, present them with a quote for the full amount and clearly indicate that your offering them XX% discount in the interest of proving yourself and developing a long-term relationship with them. Make sure that is expressly called out and discussed. If they talk about future discounts, you can negotiate them in return for a longer-term monthly commitment, which means you get paid X dollars regardless of whether they actually have work for you.
You made very solid points in your post those new to the biz would be wise to take them as sage advice. My take on the subject is the same as you stated in the last paragraph. Consulting and support rates are x and for after hours weekend holidays a premium surcharge per man hour. Discounts are given for advance payments on a monthly or annual bass of hours. The charges should be substantial and should reflect the the type of client and condition of their infrastructure.
Another point, define how you apply time charges start and stop, travel time for on site, rates for on site, remote support. A clear statement of policy is your best friend in avoiding disputes and problematic clients .
If you sell hardware there is that “street price” one has to deal with but you should not expect to base your total margin from the job on the HW alone. Charge for your time call it rack-en-stack, setup etc. but charge for the service.
This is a great post. I will add to be careful on the first one because of the word of mouth to others on pricing. My first customer (again I am new as well) was an MSP client of less than 5 users. During that I priced them to pretty much cover my backend management tools like my rmm, etc. That being said I am still able to run a profit because they luckily listen to my suggestions and let me standardize items in their environment. Which makes the management all worth it for the price on my end. But problem is now I am having to adjust pricing to make room for growth with the referrals. Just be careful on this and what I did for the pricing I place a discount on the invoice* which covers the questions I may get. I will agree with the post above if it is not in writing on future jobs its not worth it in my opinion to lose money and or don’t get caught in the market that you undervalue yourself.
I read, or someone told me one time. “Never give discounts for free”.
Always take something away in exchange.
I also read that…
If you are doing a favor, do it for free. If you’re charging for something, charge full price.
If you charge less as a favor, they’ll forget you’re doing a favor and later will demand support or you to have some kind of responsibility as if you were doing the normal profit.