The $65,000 Question

Let’s start with a question. As a seller of contractual services, do you make more money if you charge a new client $65,000 or $70,000? The answer is not obvious, but it may be the smaller amount. Why?

What if you told the client you would do the work for $65,000? But, your company had some cost overruns that may or may not have been the client’s fault taking the cost to $70,000. If you told the client, we had some overruns, but told you it would be $65,000, so that is what we will invoice, you will create goodwill and trust. Your firm may get hired for future work as a result. If you billed the $70,000, you may not get hired again.

But, what if you told the client it would be $70,000 and you were more efficient. By invoicing the lesser amount, you will have done something unusual and it will be noticed. This may also lead you to being hired for future work.

The key that gets lost on managers who push for billing every cent in the system is most services are relationship based. If trust is established, the opportunity to have a mutually beneficial relationship exists. You make more money serving the client long term. When trust is broken, all bets are off.

This is a hard lesson organizations like Wells Fargo are learning today. And, if you doubt the veracity of this observation, the most acclaimed accounting firm used to be Arthur Andersen. They no longer exist as they breached the trust of a significant client and they could never recover.

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24 thoughts on “The $65,000 Question

  1. Word of mouth is THE MOST powerful advertising tool there is. I will eat a loss if it means that customer is happy, will come back again, and will recommend me to his friends. Simple, yes? Sometimes you have to spend a few bucks to establish a reputation as an honest businessperson.

  2. I totally agree! That is a mistake many make. Charge less and let them know and you will get another order which brings more money than the amount you would have added. Otherwise you won’t ever be contacted again.

    • Thanks Erika. In my business career, I have had many discussions with internal leaders as to why I was not billing every charge in the system. If you do find the need to charge more due to client error or request, then that begs a conversation before the billing process comes due. Thanks for your thoughts, Keith

      • True. Clients have finite budgets and don’t like bad surprises. Yet, if you have legitimate cost overruns due to the client, speak with them in advance and agree on what’s fair. But, the contractor better be ready to ease of the accelerator in those conversations.

      • Agreed. The system will bill everything, losing sight of the “art” of invoicing. In big companies, people are told to charge all of their time, even when they are inefficient. Then the companies push to bill what’s in the system. This is especially true when people are judged on how many hours they bill to the system.

  3. Note to Readers: If you follow the comments between Erika and me, this increasingly prevalent concept of auto-billing is discussed. Instead of an account manager preparing the invoice services, companies are sending them out centrally. The dilemma occurs when the bills exceed the amount agreed upon in a quote or work order. This is a key reason, a person needs to be the final interface on the invoice. I have sent multiple thousands of invoices in my career and always invited questions from clients. Many times, I would dialogue over additional fees where the client played a role in the increase.

    But, at the heart of the automated billing is the belief the company will make more money billing everything in the system. The problem is people are forced to enter all their time, rather than their budgeted time. So, inefficiency is rewarded. And, once it is in the system it is counted as revenue on an accrual basis, even if not billed yet. So, the automated system takes the “art” out of the billing process and, as noted above, does not necessarily lead to more profit.

  4. Dear Keith,

    Clients do not like surprises. As a former insurance sales agent, I frequently had the discussion of why they were being charged more or why they suffered a rate increase. As a trusted agent, I was able to come to an understanding with the client. I appreciated the clients contacting me instead of just taking their business elsewhere when they could have without even bothering to contact me.The company that I worked for has had a client retention rate of at least 92%.

    A company living up to their brand of being a business with integrity is crucial.

    Wells Fargo has tarnished their brand as well as the banking industry in general.

    One company that has come perilously close to harming their brand is Walt Disney parks, an American family friendly icon.

    In Orlando, a couple of years ago, Walt Disney replaced their entire IT department with foreign workers with HB1 visas in order to save monies. The American workers with tenures averaging over 20 years had to train their replacements. This was a major clue that this American icon had executives too focused on cost cutting measures. The executives were about to do this same maneuver with NY and California until this story became a major NY Times story. Then Walt Disney stopped this replacement of their tenured workers with HB1 visa workers.

    Remember the recent horror story where a family was vacationing at The Grand Floridian, a premier resort at Walt Disney, when their son was killed by an alligator. The little boy was on the edge of the water and not swimming. The reason that the family did not sue the company is because of what the family’s attorneys uncovered early on. There were fire fighters employed by Walt Disney who had been reprimanded for feeding the alligators in this area. Despite the executives being fully aware of this, they did not remove the alligators at the Grand Floridian lake..Walt Disney and the family came to a financial understanding without the family having to formally file a suit….My analysis is that management was too focused on cost cutting measures to where they forgot the importance of protecting their brand.

    Time will tell if they have learned their lesson, Gronda

      • They have indeed. Bank of America has been fined even more by the Consumer Financial Protection Bureau. If you have any former military in your in family, USAA is known for customer service. There has been flight to credit unions as well, as some feel they can escape the cross selling. The community banks have better customer service, but I would make sure they are in it to stay and not dressing up for a sale to a big bank. What I have found with the bigger banks, you have to play a key role in the navigation of your customer service.

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