The Art of Business: Negotiating Fees
How many times have you found yourself in this situation? You’re talking to a potential client about a project. She likes your ideas, you like her. It seems like a go. The conversation turns to compensation and comes to a screeching halt. Many creative professionals wither at this point because they’re not sure if they should set a set a price or ask “What’s your budget?”
Most negotiation experts agree: Nothing so determines the outcome of a negotiation as who makes the opening bid.
Bold Moves
In most cases, setting your price is to your advantage. A well-prepared, confident opening demand sends the message that you’ve done your homework and makes it clear you’re a professional who knows how to play the business game.
However, if you’re going to go first, you have to get it right. A ridiculously low offer may indicate a sense of urgency, and the prospect will smell either desperation or ineptitude. If your offer is too high, it sends a signal that you don’t understand market value or that you have an inflated sense of yourself. Either way, an ill-conceived offer can be perceived as insulting and can stop a negotiation in its tracks.
Another adverse effect of a poor opening offer is that it tends to invite an insulting response, which can polarize the transaction. To continue negotiating after this, you’ll have to retract your original offer. You’ll lose face and your prospect is likely to become less flexible as well.
In some circumstances, you might choose to let the prospect make the first offer. If you suspect the prospect has set a budget that’s higher than the fair market value, why not let her take the first stab at a dollar figure? You can also gain a lot of information by allowing the prospect to go first. Her bid will give you an idea of the company’s starting point, leaving you room to negotiate up without taking a large risk.
But in most cases, it’s a mistake to wait for the other guy to set a price. A competent opening proposal creates powerful psychological and strategic advantages. It puts you in the driver’s seat for the entire negotiation, and it provides a strategic advantage by allowing you to draw the first line marking the “reasonable ballpark.”
As High As Possible
In business school, one of the most commonly taught maxims is this: “The negotiated settlement is quite often approximately halfway between the first two reasonable offers.”
The key, then, is to set your reasonable offer as high as possible. Say you have a print project that includes a number of brochures and collateral sales materials. Because you’ve done your due diligence and proper estimating, you know that your reserve point (the point at which you will go no lower) is $10,000. Your prospect has a reserve point also, at which she’ll go no higher. Of course, unless you have inside information, you don’t know that reserve point.
Because you’re both experienced professionals, you know the fair market value for the job is somewhere between $13,000 and $18,000.
Your choices:
1. Start with your reserve price ($10,000) with the hopes that the low price will entice a quick yes. Bad move. You have no negotiating room should the prospect want to negotiate. More importantly, you’ve signaled that you don’t value you own time and expertise, or you don’t know the fair market value of your work. You may ultimately receive only $10,000, but it shouldn’t be because of a first offer.
2. Bid at the low end of the fair market value ($13,000). Still not a great move. Again, you afford yourself little negotiating room and you’re not instilling confidence in your counterpart. However, there may be times to be price-aggressive in a negotiation:
- You’re just starting out in the business and you feel you must compete on price.
- You desperately want this client for the long-term and consider this project a loss leader. (But be aware that you may be setting a low price structure for the entire relationship.)
- You know what reputable competitors have bid for the same job and you know you have to competitive.
3. Bid at the high end of the fair market value ($18,000). The downside: You’ll probably never get paid at the high end of fair market value as the negotiation will likely knock the price down a few thousand dollars.
4. Bid significantly higher than the fair market value ($25,000). Unless you’ve received clear signals that money is no object, this is a hard position because it leaves little room for your negotiating partner to maneuver. And because you’re way beyond fair market value, clients may think you have an inflated sense of self or disrespect for the client’s budget.
5. Bid slightly higher than the fair market value ($20,000). It’s modestly higher (11 percent) than the fair market value but not insultingly so. It shows confidence on your part but leaves room to negotiate a settlement within the parameters of the fair market value.
If you choose #5, you’ve set the opening demand above fair market value, so an insultingly low counter bid of $10,000 is unlikely. A client who’s good at negotiating will counter offer at $13,000 or perhaps $15,000.
If you figure that the negotiated settlement will most likely be the difference between your $20,000 offer and the client’s response of $13,00 to $15,00, you’ll end up with a compensation of somewhere between $16,500 and $17,500.
Now imagine if you had let the client start the negotiation with a bid of $11,000 and you went through the same process. Your counter offer would have been $16,000 or $18,000, and the final negotiated settlement (splitting the difference) would have been somewhere between $13,000 and $14,000.
By making the bold move of starting the negotiation, you came out ahead some $3,500 to $4,500. More importantly, you’ve created a win-win situation. You and your client both have reason to believe you negotiated well, you’ve remained within the boundaries of fair market value, and you maintained mutual respect.
Not every negotiation is as clear cut, but the dictum nearly always remains true: Don’t be afraid to start the bidding and do so from a position of strength. You can drop you price later if need be, but don’t sell yourself short from the start by giving the power of price to someone else.
This article was last modified on December 14, 2022
This article was first published on April 24, 2006
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