Copyright 2005 AttractioneeringWhen I first started my business, a colleague suggested to
me that I bill my clients based on the results I created
for them. It was an appealing idea at the time - after all,
who wouldn't take me up on that offer, and so long as I
performed, I'd get paid. Sounds too good to be true? It
probably is. Here's an article that discusses charging
models and why being paid on results, popular as this is
becoming, may not be your best option.
I'm currently reading Alan Weiss's book - "Million Dollar
Consulting", in which he has a section dedicated to payment
models. (Highly recommended book, by the way, although I
don't agree with everything he says).
This is my interpretation of what he says: The ways to get
paid are on a spectrum from 100% up front, paid before
beginning work at the extreme left hand side to contingency
fees based on performance at the extreme right hand side
i.e. you only get paid on results and over a timeframe
beyond the end of the project. In between are situations
like 50% deposit, then scheduled payments all due before
completion of the project, and 100% payable on completion
etc.
He points out that your cashflow situation deteriorates as
you move from left to right. In the worst case scenario,
you may not see any return on your investment in the
project until many months after it has been completed. If
you incurred expenses or hired subcontractors, then not
only would you not have any personal income, but you'd be
out of pocket as well. Most small businesses don't have the
cash reserves to fund someone else's project, and if they
have to borrow, then obviously their profit margins are
eroded by interest payments. In the case of a
"one-man-band" this might be OK, if you have other income
to live on in the meantime and do not incur any costs other
than your time. However, in the UK, the major reason
small businesses go under is cashflow problems, so for most
of us, positive cashflow is a necessity.
What I would add (and I don't think Alan explicitly stated
this) is that the level of risk increases as you move from
left to right. For example, if there is any kind of
disagreement during or after the project, and you haven't
been paid, or have only received partial payment, then you
risk losing some or all of your fee.
If you work on a performance/results basis then you also
risk:
1. the client dragging their heels and not creating a
situation where you can get started
2. disagreements or ambiguity over what constitutes results
or performance
3. the client being unethical or downright dishonest and
not providing full disclosure of results
4. the client not using your work in the way it was
intended thus diminishing the probability of success
5. the client not being fully committed to the project or
not valuing what you do because they're not committed to
paying anything yet
6. creating an image of yourself or your company as being
"desperate" for work
On the flip side of this is the risk to the client.
Clearly, paying nothing until tangible results are
delivered is the client's lowest risk (and probably most
desirable) position, and paying the full fee up front is
their highest risk position. If the client perceives a high
degree of risk in employing you for their project, then
they may take their business elsewhere or just abandon the
project. Therefore many marketers advocate reducing the
client's risk in order to win business by working on
contingency fees i.e. paid on results. In this scenario,
the consultant or independent professional should negotiate
so that the rewards outweigh the risks - so that they will
be paid in excess of their standard fee by the cumulative
payments based on results.
Therefore the maxim for the consultant/professionals is to
negotiate as much upfront fee as possible, in order to
minimise the risk and prevent cashflow problems. But you
need to be able to do this in a way that also reduces or
eliminates the client's perceived risk (or else you make
yourself vulnerable to another risk - that of not winning
the business). Other ways of reducing the client's
perceived risk include having a good reputation, building
credibility and being known as the expert, plus adding
satisfaction or money back guarantees.
You should only engage in results-based fees if:
* the reward outweighs the risks and hit to your cashflow
* contingency based fees are normal in your industry
* you have spare capacity and something is better than
nothing
* you need the project to help build your credibility and
reputation
* you have agreed metrics upon which your performance can
be measured and the client is legally obligated to provide
the corresponding information
Other than that, try to stay over to the left-hand side of
the spectrum as much as possible if you want positive
cashflow and to stay in business for some time to come!
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Jane Hendry helps professionals, consultants and coaches to
create marketing systems that easily and consistently
attract their ideal clients. To get your f*ree Attraction
Marketing Starter Kit please visit
http://www.attractioneers.com
