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Marcus on loss leaders

Published on: October 15, 2007 by Paul Boag

Even after going on at length about making sure that contracts are in place, tasks are recorded in detail, requirements consultations are paid for and project management effort is not underestimated 8211 all to avoid under-charging 8211 sometimes there are occasions when you should take a hit and do a project as a loss leader.

The two main benefits being:

  1. future profits through repeat work
  2. marketing the company (which is harder to measure)

So, when would this be?

A multi-national comes knocking

Generally speaking, I would really try to avoid cutting costs if a huge name brand asks you to pitch for work. Firstly, I doubt budget would be much of an issue for them and secondly, you don8217t want to label yourself as 8216cheap8217.

However, you may be pitching against a lot of other agencies and you know the allocated budget (which happens to be lower than you would like to charge). In this case you may want to lower your quote to around the budget mark simply to give yourself a chance of winning a big name client.

Promises of future riches

I would avoid any client that says 8216do this job on the cheap for me and there8217ll be loads more in the future8217. However, if you reach the same conclusion yourself then you might want to consider it. Repeat work is far more profitable and reliable than having to win new clients all the time.

Basically, as with all these examples, you need to try and limit how much you are discounting and be very aware of what you8217re giving away so a) you can weigh up the risks and b) be able to measure whether the risk was worth it in the end.

You8217ve got a new toy

If you have a new application or piece of software with nothing but a dummy site associated with it, then offering a discount to a client to implement it is almost certainly worth it.

There is nothing more powerful as a sales tool than a real case study demonstrating a product or service so, until you get a real example, it is in your interests try and make one happen.

It is also fair on the client to reduce price in this instance because it is likely that a certain amount of bug fixing will happen during the project thereby often dragging the project out longer than expected.

Comments

Comments are for the discussion of this post. If you have other questions / comments then post them to the forum or send me an email

  • Post by Andrew on October 16, 2007 1:35 PM

    I agree with your 'rules' Marcus but making decisions on such projects is rarely black and white.

    While I'm all for making profit, I think to be able to develop your skills, either as a business or on an individual level, there will often be an element of 'loss leading' (perhaps we should call this R&D). The trick will be to know when to call time on something new or experimental and fall back on a tried and tested option that won't suck out the profit from a project. And of course, everyone would like to think that taking on a project with a particular client will lead to more work or at least a referrals.

    For me running a small web business 18 months old, almost every project could be seen as a loss leader- whether in a bid to enhance my portfolio or provide added business benefit to the client.

    There's an argument that clients are paying for a service and not for their web designer to educate themselves. But there has to be an R&D element and I feel this is how running such projects should be seen - just keep an eye on the clock.

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