Pricing jetlag into the fee

1am in Ortigas City, the affluent precinct of Manila where I've been staying since I arrived in the Philippines exactly 72 hours ago.  I'm wide awake and out of Stilnox (aka Ambien).  I've only eaten lightly, used the hotel gym and self-medicating with red wine will only make the waking hours harder.  I'm 50% through the project.  Tomorrow I fly to Seoul to repeat what I've just delivered only this time via a (client-sourced) interpreter who claims, but only when chased, that she still hasn't received my slide presentation.  Interpreters are often hard to deal with and this augers poorly for the rest of the week.

I tell myself to suck it up.  Self-employment means that in the end every problem belongs only to you.  The only sane response is to price interpreter angst and the inevitability of jetlag into the fee.

Great Merlin Mann piece

Using the analogy of a sandwich shop, Merlin Mann teases out some lovely truths about the relationship between a smaller external supplier and a new client.  

1. The Sandwich Guy can’t do much for you until you’re hungry enough to really want a sandwich.
2. Once you’re hungry enough, you still have to pay money for the sandwich. This won’t not come up.

Couldn't have said it better myself.  In fact I didn't.

Pricing in

Recently a banker friend was evaluating the performances of the major players in the UK's upcoming election.  On the subject of Gordon Brown's bullying he declared that the reason why this news had so little effect on opinion polling was that the electorate had already 'priced in' this sort of information.

'Priced in' is a bankerish way of saying that news is unsurprising.  I like phrase as it implies that an intelligent assessment has been made of the offer in question with a degree of tolerance included in the face of an uncertain world.

Buried somewhere in my pricing must be the fact that I don't work continuously otherwise my business is unsustainable.  This is where the trouble begins for the dilettante who looks at that first week's fee and immediately multiplies it by fifty-two.

Barriers to Entry

Another day, another out-of-town stand-up gig for Mirth Control and thus another four plus hours in a car with a perfect stranger. And so another strange, roundabout conversation about the merits of the Edinburgh Free Fringe.

My interlocutor, another comic obviously, was trying to reconcile two contradictory positions: -

1. Much of the beauty and excitement of Edinburgh is that it is entirely an 'open access' event. Unlike other 'curated' arts festivals, if you pays your money you're in the Edfringe programme
   
2. The Free Fringe allows unsuitable acts on stage and both devalues the punters' experience and dilutes the audience numbers that rightfully should be paying to see 'proper acts'. It must be stopped

You can't have it both ways and you never could. Even before the likes of Alex Petty and Peter Buckley-Hill formalised the 'free' concept there were only ever two factors stopping an act, no matter how dreadful, from appearing at the Fringe: money and fear of public failure. As all comics have long since overcome the fear of humiliation money was the only barrier to performing at the Festival. Proper (read: committed) comics will drop £4,000-5,000 to 'do Edinburgh' and they feel that this figure weeded out all but the most deluded.

The real grievance against the Free Fringe is that it allows the dilettante stage time. A counterargument might be that the lowering of the financial barrier to entry enlivens the entire experience by opening it up to a new collection of poorer delusionists.

Hey, if you don't like it you can always walk out.

Five quid comedy

A couple of posts ago I aluded to the comedy staple of drawing attention to the (low) cost of a show as a way for a compeer (MC) to get a cheap laugh. Typically the exchange goes as follows: -

MC: So mate, you're here with your girlfriend?
Punter: That's right
MC: Been going out long?
Punter: About a year*
MC: Well, you're really keeping the romance alive if your idea of a Friday night out is a five quid comedy night in a dingy room above a pub

(cue: audience laugh)

Obviously the joke is damaging to the night's 'brand' as it forces everyone in the audience to ask just why they are where they are on a Friday night. This means that the comics have to work that much harder to remove the question from the collective mind.

The above exchange occurred verbatim at last Friday night's gig in Soho. But the acts proved to be worth much more than £5 and the audience went away happy.

On Saturday night I did an improv set as part of the amazing Midnight Matinee series at the Tristan Bates Theater.

The two gigs are no more than 200m apart and both were £5 entry.

Saturday night's compeer made the audience complicit in the night's proceedings. Here we were in the middle of Soho starting a show at midnight; just when everyone else is closing up shop. Your five pounds didn't just just get you the promise of entertainment, it got you one-night-only membership of a very exclusive club.

Pricing is only a signal in the marketplace until the punter takes his seat.

* This response can be anything from "This is our first date" to "Ten years" and the joke still 'works' (from the MC's perspective)

Cut-through

In the career of every successful comic there is a tipping point after which the inclusion of his name on a bill creates additional demand for the show. From a paying customer's perspective the logic jumps from: -

I'd like to see some comedy tonight. The local club is advertising some somewhat familiar names with some cool quotes from reviews from well-known papers and magazines to assuage my doubts*

To: -

Eddie Izzard is touring. Let's get tickets!

The vast majority of (very decent) acts will always operate under the first dynamic and much of the art of promoting is understanding this.

Comedy promoters must keep their 'aficionados' happy because these guys are the bread and butter. They need a good reason not to turn up to a night because they're so passionate about comedy. They're hanging out for the chance to say that they saw so-and-so do ten minutes in a tiny room about five years before she got that hit TV show.

The problem is that most promoters are also aficionados** and their passion for The Next Big thing can blind them to the actual cut-through amongst non-aficionados. Wishful thinking prevails and money gets lost.

Last night I compered an out-of-town gig where the promoter misread the dynamic. The headline act is an astonishingly good comic with a well-earned reputation on the touring and festival circuit. He'd been paid over the odds with the expectation he'd put more bums on seats than an average night. As the audience was the usual size and the breakeven point had shifted the promoter recouped little, if anything, from the additional investment.

The alternative would have been a one-off price hike, a dangerous thing to do in these straitened times. And a price hike strategy is an admission that the act's brand is stronger than the club's own brand.

An audience rarely gets its money back. This is why branding is a such a core dynamic in live comedy.

* There is a dark art to 'pulling' usable grabs for promotional purposes from even the least sympathetic reviews

** Every promoter is full of stories of the famous names they booked way back when. The classier acts who 'make it' are gracious enough to always acknowledge this

Who does a recession help?

I can't seem to pick up a newspaper at the moment that isn't predicting that businesses like mine (i.e. small consultancies) are either going to thrive in this financial environment or else that we'll go to the wall quicker than anyone else.

The arguments seem to run as follows...

Thriving: -

1. Clients are downsizing but still need to function so hiring an external for a few days rather than keeping on an employee makes financial sense
2. Companies that can grow in a recession (i.e. working from a small but expanding base) can pick up talented staff as their larger competitors are going through the trauma of shedding the very same people

Failing: -

1. As a rule we have neither the cash reserves or the credit lines to survive the inevitable cashflow crises triggered by late-paying clients, in turn triggered by the overall cost of funds
2. A larger / older competitor with a pre-existing brand who is able to (forced to) discount is possibly a better value proposition than a newer entrant to a market

My advice? Stay close to your clients, avoid competitive pitches at all costs and take nothing for granted.

Bespoke is the new new

As a consultant I work solely in the business-to-business sector. For this reason I have never delivered a 'new' programme.

Whereas individual consumers often love the idea of something 'new', companies usually hate it

Compare the adverts in a business magazine like The Economist with those in GQ. Businesses buy solidity and reputation ('the past'), whereas individual consumers want The Next Big Thing ('the future').*

For individuals 'new' means exciting, cutting-edge and state-of-the-art; and you'll pay more. Conversely to a company, 'new' can mean a gamble, uncharted waters or flying by the seat of your pants; so you want a discount.

Where the perceptions of individuals and companies converge is at 'tailored'. Both groups are happy to pay over the odds for custom-made or bespoke. Even though by definition 'bespoke' is also 'new', for a corporate buyer there is the sense that as a supplier I will pay even more attention to your specific issues than usual. And that's worth paying for.

I don't charge a premium for bespoke/new programmes but this sort of rebadging means I don't have to offer a discount either.

* This is a generalisation I know. Still, consider the old business cliche No one ever got fired for buying IBM. Businesses rarely reward genuine risk-taking and even when they do, that risk is often passed onto smaller externals like me for the reasons I'm discussing here

Relief

As I mentioned in a recent post, I've just come off a very busy period with lots of travel.  I've been really looking forward to getting some time to myself to recharge, to think about the bigger picture and so on.

But...

I am at heart a freelancer.  This means I am continually plagued by the thought that the last job I did is the last one I'll ever do and the ever-darker forebodings of the financial press haven't helped my mood in the slightest.  So to say I was relieved when an email hit my BlackBerry last night confirming a large, interesting project that will run until mid-January is an understatement of the first order.

Being self-employed means continual, low-level anxiety about where the next job is coming from.  Even if it's entirely subliminal I suppose that buried somewhere in my fee structure is the cost of that anxiety.

Rent-seeking

I am sitting in an airport having just left a 'wrap-up' meeting at the conclusion of a very successful project.  The client was effusive and immediately looking for new areas where we can work together.  The problem is that the two projects where they next need external help don't match my skill set.  I have three choices: -

1. Take on a project and convince myself that I'll learn quickly enough to deliver what they need
2. Take on a project and find a 3rd-Party supplier who will deliver the work to the client but on my behalf
3. Explain that their needs fall outside of my competencies and decline the work
   

As tempting as the alternatives are I chose option 3.  My personal brand is too valuable for me to try and improvise my way through a major project (option 1.)

It is option 2. that I want to explore here.  If I really have my client's best interests at heart then I will either say nothing at all or I'll put him in touch with the right people and then get out of the way (which is what I did).

Still the temptation to manipulate proceedings so that everything goes through me is strong; if I bring buyers and sellers together then why shouldn't I get a piece of the action?  This is what agents do for a living right?  Essentially it's a version of what David Ricardo described as rent-seeking: -

The extraction of uncompensated value from others without making any contribution to productivity

I am not saying that this is a bad thing per se, it just doesn't fit my business model.  I am no good at turning up to meetings where I don't have a specific role, which is what agents essentially do.  Also, I want my value proposition to be based on what I know rather than who.  Finally, it would place my reputation for quality entirely in the hands of others.

Some would say that I'm possibly 'leaving money on the table' but at least I know my personal brand is protected and that is worth a lot more to me in the longer term.

At the Edinburgh Festival 4 (Long Tail analysis)

I was standing at the bar waiting for my drink when a local turned and asked,

"You up for the Fringe?"

"Yes."

"Wanna know what's wrong with the f***ing Fringe?  Too many of the f***ing acts are f***ing sh*t.  You cannae work out what's good and what's not."

(He was, after all, an Edinburgh local)

He had a point.  As I've mentioned in previous posts there are over 2000 shows and the Fringe positively prides itself on the total lack of quality control.  The very best of theatre and comedy is right alongside shows so awful that they beggar belief.

The obvious comparison is between the Edinburgh Fringe and the World Wide Web.  Let's look at the Fringe through the prism of Chris Anderson's 'long tail' model.  We have near enough to an infinite variety of products available and since audiences are happy tramping around the city to obscure venues at all hours, a surprisingly efficient mode of delivery.  The problem, as my drunken Scottish mate identified, is how do you know what's good and what's not?  Price is no guide as some terrific acts are performing in the free venues whilst terrible ones are charging £12 ($24 USD).

This is where the Long Tail analogy falls down I think: much of what's on offer out on the far left of Anderson's tail isn't merely outdated or obscure, it's just bad.  The Fringe is that tail in living colour.

In this environment the various Fringe reviewers wield immense influence as the only vaguely efficient guide of what to see and what to avoid.  I think the more important role is in warning people away from the bad rather than towards the good.  An hour in the company of a delusional idiot who thinks he's the next Eddie Izzard is an hour you're never getting back.

Last night we were standing room only again, which means over 30 in the audience.  And we got reviewed!

Itemised quotes

The economic downturn has shown up on my doorstep in the form of requests for greater detail in pitch documents.  In the last week two different clients (one old, one new) have referred project proposals to Purchasing who have then demanded very specific financial breakdowns.  I had to remind myself that purchasing departments usually have a precise mindset that deals more easily with large quantities of tangible low-ticket items (say, widgets) instead of small quantities of intangible high-ticket items (consultancy).

Because Purchasing Officers / Managers are intentionally removed from the project itself I sometimes find it hard to avoid seeming evasive when I can't break down my figures past a certain point.  "I cost what I cost" is obviously an unacceptable response.  

It is vital to work out whether the person you're dealing with is coming from an administrative or negotiating standpoint.  With an administrator it's simply making the numbers add up, but today I made an incorrect assumption and ended up in a negotiation over day rate before I knew it.

I await the outcome.

Opportunity cost

Currently I'm pitching on a huge project; a train-the-trainer roadshow made more complicated by being pan-European and with the usual disconnect between the centralised marketing function in Paris and the regional sales teams.

I can already guess that the project will swallow every available moment of my life between now and deadline with multi-country teleconferences, endless rewriting of PowerPoint slide decks and one-line emails about the need to install an updated version of Adobe Acrobat.  Because I won't let myself to do bad work I will do all of this regardless of the financial deal I strike this week.

Whilst I want the job and I'm prepared to handle the hassle that will come with it I'm also aware of the opportunity cost of getting the pricing wrong.  It's going to be hard enough dealing with all the frustrations brought about by the client's internal politics without having to turn down more lucrative work because I'm overcommitted.  If that happens I'll really struggle for motivation.  This is what undercharging feels like and it's when I do my worst work so I need to factor a sense of opportunity cost into my pricing.

The jobs that have hurt my reputation the most have always been the cheapest.

Beware of 'mates rates'

Let's say I need a new website.  A friend has a web designer friend who has just gone freelance and he gets in touch.  We grab a coffee to chat about what I need and what he offers.  The conversation moves onto the obvious common ground of the vicissitudes of self-employment; there is bonding, even a sense that we're kindred souls.  Inevitably, in the name of our new friendship, he offers to do the work for me at 'mates rates'.

Superficially it makes sense: he's new to self-employment and not all that busy right now.  Thinking aloud he says that there seems to be a synergy between us.  He muses that maybe we could even look to collaborate on projects in the future.

I haven't said a word.  I shouldn't have even agreed to meet for coffee.

Even though he doesn't know it, the deal on the table is that he'll sell me some surplus time in order to buy access to my client list.

What do I get?  Because we're 'mates' I don't get to shop around and compare suppliers because that would imply disloyalty.  I don't get to change specs as my needs change because any move on my part to expand the project will be discouraged: he gets no additional return on the deal for any extra work I need done.

Worst of all I lose the right to insist that deadlines are met.  I know that if a 'real' client comes along I'll immediately drop down the priority list.  I'm left in the perverse position of hoping he's not that good a designer because I don't want him to be busy!

By agreeing to a bargain I give up all the advantages of being 'the client'.  I don't get to expect the level service that I give as a supplier.  The absolute best I can expect of the deal is a decent website done at cost plus a favor owed.  The worst is very, very ugly.

So I don't accept 'mates rates'.  Not from lawyers, accountants, web designers, graphic designers, writers, printers, anyone.

I don't accept them and I certainly don't offer them.

Trial pricing

A gambit that occasionally appears when I'm negotiating with a new client is the proposal for a 'trial' price.  The idea being that I discount my fee for an initial (trial) project in return for the prospect of more work in the future.  Of course there is no implication that any future project will revert to my normal fee structure.

So what's actually being said to me is this...

1. We don't have enough faith in what you do to pay you properly now, so if you fail we need to limit our financial exposure
2. But if you do happen to succeed then we propose rewarding our own bad faith with a continued discount
   

And the client usually believes that he's doing me a favour!

The assumption underpinning the proposal is that I'm not in enough demand to dictate terms and that it would be better for me to sell my time to them at a discount than sit at home earning nothing.  In short, the client is behaving like a company but treating me like an individual.

If I'm going through a less-than-busy period it's tempting to agree to the deal but the pitfalls are obvious; the best case scenario is that I have to turn down higher-paying work with other clients because I'm committed here.  The worst case scenario is that word gets out and I'm forced down to this new price across the board.

I can't say 'never accept a trial pricing offer' because there are times when they make sense; for example when the client's offer of (a lot) more work equates to a genuine 'discount for bulk' or when your cash-flow is so dire that anything's better than nothing.

But I can say this: it is no one's interest but your own to keep your prices high.  If you don't protect your fee structure no one else will.

Charge at the point of pain

My services are expensive.  For many clients my day-rate is at the absolute upper limit of what they would ever pay any supplier under any circumstances.  When I mention my fee there's often a sharp intake of breath around the table, nervous glances even.  I'm fine with that.  I'm fine with being a line item on a departmental budget requiring an asterisk against it and an explanatory note at the bottom of the page.

But the reason I'm fine has nothing to do with the actual money.  To do my job properly I usually need a pretty big headcount of client personnel in the room; sales representatives if I'm running training and marketing executives if it's a strategic planning workshop.  In either case, my fee is dwarfed by the cost-to-company of putting that many people in the room with me.  

It wasn't always this way: when I started out my day-rate was dwarfed by the room hire.

If I'm perceived as inexpensive then my ability to deliver my product (training, consultancy) diminishes; participants turn up late, step out to take calls and conduct other business during 'my time'.  Entire sessions can be compromised in this way, projects founder and I'm left with a justifiably poorer reputation.  Conversely, when I charge more I get the engagement I need to get the job done.  Once word gets out as to what I'm costing the company everyone magically does what they're asked to.  In the room on time, phones off and focused.  

Pricing can be an effective tool, sometimes the only tool, for creating internal commitment to my project.  My fee should force my contact to go to his boss' boss to get budget sign-off.  Suddenly my guy has to vouch for my quality and I stop being the only person to with a genuine stake in the success or failure of the project.  So now I really have to be worth what I'm charging.  I'm forced to bring my 'A Game' every time because other people are affected by the result.

Pricing

Over the next few installments I want to examine the issue of pricing, especially the question of why it is so hard for many people to ask for money on their own behalf.

When negotiating fees I take a counterintuitive approach: mentally downplay the link between the price I'm charging and what will eventually end up in my bank account.

Because my clients are huge companies, not individual customers, I am never negotiating with anyone with a direct (personal) financial stake in the decision.  My 'opposite number' will get the same paycheck regardless of the outcome of our negotiations.

Of course my client will always be operating within a finite budget but that's a different thing.  Most managers deal with budgets vastly larger than their own salary and so, barring (isolated) instances of outright graft, they treat those budgets as abstractions.  Because big organisations aren't good at rewarding individuals or departments for underspending, budgets are just big numbers there to be spent, or even overspent, by the end of the accounting period. 

What I need to avoid at all costs is the client making the link between his big number and my personal bank account.  The moment he thinks "His fee is about 15% of my annual salary!" then I'm in trouble.

A key tenet of successful fee negotiation is to treat the money as an abstraction, because that's how the client views it.