Risky Business

5.1.3

When calculating a price to quote a prospective client, there are a great number of factors to take into consideration; many of which aren’t immediately apparent. Often the idea of adding a cushion to the cost is seen as lazy calculation at best and underhanded and greedy at worst. This notion of charging extra with supposedly no justification for doing so is seen as bad business.

But here’s the thing.

When you go to the supermarket to buy a loaf of bread, do you suppose that you’re paying only for that loaf of bread? Or could it be that you’re also paying a small percentage of the employees’ wages; a small percentage of the utility costs to operate the facility; a small percentage of the loaves of bread stolen each year; and a small percentage of the projected loss incurred by the supermarket when, say, 10% of its bread inventory exceeds the pull-date and is therefore unsellable?

The issue of risk is a huge factor in determining the final price of nearly everything.

Consider also the automobile manufacturers. What keeps Toyota from going out of business when it becomes necessary—due to some design or mechanical flaw—to recall several million vehicles? Toyota stays afloat because teams of shrewd individuals sat down and conducted risk analysis, figuring exactly what can go wrong and has gone wrong in the past, and how much it can set the company back. This safeguard number is then factored into the price of their automobiles.

The voice of protest resounds: “Wait just a minute! I’m no thief! Why should I have to pay extra for a loaf of bread because of thieves and employees who can’t manage inventory?”

The answer is simple: businesses can’t think in terms of individuals only if they’re going to stay in business. The truth is, you probably aren’t the reason prices are the way they are. But others are, and those others could cost a business big-time if those behind the risk analysis don’t consider every penny lost and compensate accordingly.

Unfortunately, because the world is the way it is, businesses cannot expect the best possible outcome. Instead, they must analyze every risk and determine how much it will cost them.

This is not something that applies only to big corporations like Walmart or Toyota; it applies also to individuals.

Being self-employed is risky. It’s much more risky than being employed by a boss. Being self-employed means, among other things, never being certain how frequent your work will be. And while client A’s project may go off without a hitch, client B’s project could run into a serious snag.

So what is the individual to do? He or she must be safe, looking carefully at the big picture of the ups and downs of business (which means future-thinking rather than per-job only) and price accordingly. I’m not talking about price-gouging. I’m talking about accounting for unforeseeable outcomes and being realistic. And really, this could and likely would be an applicable principle on a per-job basis as well.

Say you’re hired to prep a wall and install a large, hanging cabinet. You price out the cost of travel to get to and from the job site, the cost of materials needed to complete the task, the value of subcontracting another person to assist you; but when you get there, you see that there’s been some water damage to the wall that seeped in and rotted the studs. Now you have to tear out the old drywall, replace the studs and install new drywall in addition to the work originally discussed. This added extra material costs and a great deal more time to your labor and that of the other individual you hired. You might break even on this project, but more likely, you’ll suffer some loss—unless you accounted for this sort of thing in your initial quote. If you didn’t this time, you’d be smart to do so next time.

Individuals and large corporations do not stay in business by failing to account for the certainty of unforeseen loss. Bad things happen. That’s the way of the world. And as I’ve said in the past, businesses aren’t meant to break even, they’re meant to profit; otherwise, they die.

When you do price with a reasonable cushion, you will certainly get comments about how high your prices are; these voices of concern are sometimes accompanied by the loss of a work opportunity. But then again, it’s always possible that even without the cushion the same potential client would have scoffed at your quote. That’s because each person views the value of goods and services a little (sometimes a lot) differently. That has to be expected. The important thing is that the person determining and quoting the price stands by the quote and doesn’t second-guess even if the price is laughed to scorn.

Being sure of your price and standing by it shows integrity. That means no negotiating. You know your expenses, you’ve accounted for the potential risks and you’ve quoted accordingly—not yielding if the prospective client wants to negotiate.

At the end of the day, it’s not always easy to arrive at the right price for a project. Be sure to take as much time as you need to think things through. I hope these considerations are helpful in getting you there.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s