A couple of weeks ago, I had a conversation with a PR Dream Team member whose client has asked her to join them full-time.
That is quite the compliment—and an honor she’s not taking lightly.
However, she just started her own communications business so the timing is wrong. She’d at least like to see if she can get her own business off the ground first.
Having read Performance-based Pricing in a Billable Hours Industry, she wanted to get my thoughts on pricing alternatives before she just shut the whole thing down.
We talked about four options:
- Joining the client full-time
- Staying on her own, but negotiating equity in favor for a lower retainer
- Staying on her, but join the client’s advisory board in exchange for equity
- Negotiate a percentage of sales that her firm drives for the client
Pricing Alternatives When Joining the Client Full-time
The easiest option, in this case, is to join the client full-time.
It’s what the client wants and it’d be the cleanest way to negotiate a deal.
But.
There is no way, not in one hundred million years, that I would ever go back to work for someone.
So when my friend said she’d like to explore other pricing alternatives, I yelled, “Good for you!”
The good news is, the client really wants her as part of her internal team so she has all of the leverage right now.
Which is why it’d be fairly easy for her to work through one of the three below scenarios.
However, if she did decide to join the client full-time, I recommended that she ask for equity in the business as part of her salary package.
The general rule of thumb is your salary is one-tenth of what you think you can generate in revenue for the organization.
If you have experience—and results—to show you can generate $1MM in revenue, your salary should be $100,000.
On top of that, you can ask for equity, which could either be real or phantom stock.
The only challenge with the latter is you don’t get anything out of the deal unless the business sells.
If it’s real stocks—and you’re considered a partner in the business who is earning equity through doing the work—you’d get a distribution, if the company is profitable.
Consider it a bonus. but the company does have to be profitable.
I also recommend this for any senior-level communicator who is joining a new organization.
Your compensation package absolutely should include more than your base salary and benefits.
Pricing Alternatives When Negotiating Equity
If, however, my friend definitely wants to stay on her own, and build her own business, she can negotiate equity in the business in exchange for a lower retainer.
I never recommend this in year one.
That first year, you’re still getting to know one another and you’ll learn things about the client, their team, and the business that you don’t know when your’e starting out.
In some cases, you’ll discover they embellished or omitted information during the on-boarding process.
In others, you might discover they’re being investigated and could be indicted (not that I speak from experience or anything).
The point is, have at least a year with the client before you start offering discounts or lowering your retainer.
You also have to have a good year of experience with them to prove you can drive sales on their behalf.
Once you’ve done that, you’re back in the position of leverage.
Let’s say, for instance, that your client is a $17MM business and their growth goals are to get to $30MM in the next three years.
Their profit margin is 32 percent, which means they’re making $5.4MM in their $17MM business.
If they were to sell today, and you had one percent in equity, you would make $54,400.
That’s certainly not enough to cover an entire year’s worth of work for a $17MM business, but you can subtract that amount from your retainer.
Meaning, if your work will cost $250,000, your retainer then would be $195,600, plus one percent equity.
This negotiation would carry over every year.
With one percent equity, your retainer would decrease each year, as they added more to their revenue, assuming they kept their profit margin at 32 percent or higher.
When they got to $30MM, their profit would be $9.6MM. That makes your “cut” $96,000 so your retainer reduces that year to $154,000.
The only challenge to this is if your equity is phantom, which means you don’t get your “cut” unless there is a sale.
At that point, it becomes a business decision.
Can you do the work for $154,000 if it sounds like the business will sell during the current calendar year?
If the answer is yes, it will be far more lucrative for you to do it this way than to stay solely on retainer.
(You’ll see why below.)
Pricing Alternatives When Joining the Client’s Board
A few years ago, we had a client whose marketing department we were running for them.
All of their marketing and communications was run through us, and my team was his team.
In year three, the CEO came to me and asked me to consider joining his advisory board—he needed a communications expert on there to balance out the engineers, lawyers, and accountants.
The catch was we had to resign their business because our doing that work would be a conflict of interest.
So, while we were giving up about $60,000 in annual revenue, I believed in what they were doing—and I knew there was a sale coming because the CEO is a serial entrepreneur.
I negotiated phantom stock and took my seat on the board.
This is a really great option for my friend whose client asked her to join them full-time.
Rather than being in the trenches and doing the work, she can step out of the day-to-day, help them hire someone to lead communications internally, and sit in an advisory role.
She would give up the annual income in exchange for stock.
Continuing with the example used above—the client wants to get to $30MM in the next three years with a minimum of 32 percent profit margins.
If she negotiates one percent when she joins their board, and they sell at a multiple of four, she’s suddenly going to make $380,000.
You can see it’s a pretty lucrative deal in the end.
While you give up the annual revenue, the reward on the back end is far greater than any type of annual retainer…and for far less work.
It would take her almost eight years to make that money in retainer fees. In this scenario, it took only three years and she’ll get it as one lump sum.
Pricing Alternatives When Taking a Percentage of Sales
The last option is to negotiate a percentage of sales that you create on behalf of your client.
You can negotiate gross or net sales, but never, ever do it on profit.
I learned that one the hard way. We had negotiated 25 percent of everything we generated for a client, but he talked me into doing it based on profit.
He explained that he still had to pay his team and the business expenses and it didn’t make sense for him to pay us if he ended up in the red because of it.
That made sense to me so I agreed to it.
What he left off…well, let’s just say he’s not the most ethical or honest person on earth.
That first year, we generated $6MM in new revenue for them. I also knew, from having talked to his CFO, their profit margin was 41 percent.
We were to get 25 percent of $2.46MM (or $615,000).
But the guy went out and bought a Ferrari and listed it as his company car on the business.
He also moved some money into other things so it ended up looking like there was no profit…and we got $0.
And, because I hadn’t been clear in the contract that it had to be before he did anything like that, we had no leg to stand on.
Clearly that was a terrible business relationship and I learned a very valuable lesson.
(He also drove said Ferrari to our office and dropped off a piece of art he’d bought for our lobby, to say thank you. Needless to say, that went right into the trash.)
Negotiate your percentage of revenue on sales, not profit.
They’ll still remove cost of goods sold, which is fine.
But never, ever make your payment reliant on whether or not the client reinvests their profit into the business.
Other Pricing Alternatives?
I’ve probably given you a lot to think about—and I know a lot (or all) of this sounds risky.
But, if you’re willing to take some risk, and your business can survive without the consistent income, I recommend you try one of these pricing alternatives.
It ends up being extremely lucrative in the long-run…and you’ll be mad you didn’t try it sooner and with more clients.
Now the floor is yours. Have you ever tried pricing alternatives in your service business?
