The Negotiation Equation
Behind every contract is something I call the Negotiation Equation.
Price=(Services+Deliverables) x Production Risk Multiple
Don’t worry, there won’t be a test. It’s just a way of illustrating how the risks of a job affect price. A ridiculous example helps illustrate.
Suppose your Client asks you to develop an icon for its new mobile app. Based on experience, you know that $2,000 is a ballpark price to design the icon under normal circumstances. Consider how would you price the work under these two scenarios:
- Scenario 1. You develop the icon from the comfort of your studio and deliver the icon by email.
- Scenario 2. You develop the icon while standing on a tight rope over a pool of sharks. And the sharks have lasers on their heads.
Same set of services and deliverables in each scenario. Should they be priced the same? Of course not. In Scenario 2, you are taking on substantially more risk. In the equation, the “Production Risk Multiple” is higher – maybe substantially so. If you judged the pool of sharks to increase the risk by a factor of 10, then the price for the icon would go from $2,000 to $20,000. Same deliverables with different risks means a different price.
Keep this in mind while negotiating. When you encounter objectionable language, consider responding not with a markup but with a conversation about price:
The indemnification provision you’ve requested substantially increases our risk and the work we must do to manage that risk. We can consider it, but it will dramatically affect our price. Can we discuss alternatives on the language or would you like us to send you updated pricing?
You are essentially challenging the Client to put its money where its mouth is: how important is that contract clause? Are they willing to pay for it?
Negotiating from the Best Position
In most projects, there is often a ballpark proposal or draft SOW circulated before the formal contract is negotiated. This initial proposal doesn’t have all the details sorted yet. It’s just a tool the Client uses to get a sense as to the scope and budget for the project. The key is to make clear that your fee assumes not only a certain scope of work, but also certain legal terms. That way, if the Client insists on terms markedly different than what you are comfortable with, you have a basis for adjusting your fee or having a discussion.
One approach is to set the baseline for discussions at your form of Service Agreement:
This scope and fee estimate assume that our final agreement will contain terms like those in Agency’s standard form of agreement. If you require terms different from those provided in our agreement, our fee will be increased accordingly.
You can also set your baseline by describing important key terms:
This estimate assumes that our final agreement will contain terms customary for deals of this size and type including: (i) mutual limitation of liability clauses; (ii) transfer of intellectual property conditioned on payment by Client for the applicable deliverable; (iii) a kill fee of 25% if Client terminates without Cause; and (iv) equal monthly billing in advance over the course of the project. If you require terms different from those outlined above, our fee will be increased accordingly.
The above terms are just examples. Use a similar approach to detail whatever is important to you on that project or with that client. If it is a new client with an unknown payment history, maybe you want to specify that the Client use pay monthly in advance rather than on completion. By specifying that term with your proposal, you’ve set the expectation and can get an early read as to whether your Client will accept.
What do you say when the client insists on its own Service Agreement or ignores your key terms summary? Respond like this:
Recall that our proposal assumed XXX. These are key terms that were reflected in our price. While I’m happy to discuss the terms you requested, please note that they will impact our fee by approximately $$ to $$.
These conversations are not easy. The first time you do it is the hardest. The next one is easier and they get easier from there. The strength in this approach is that your requests are based on a bargain and a notion of fairness:
More risk costs more money.
Less risk costs less money.
Like the Field Manual? We can build a version of this resource customized to your Agency's Service Agreement and SOW containing your target negotiating position (and fallbacks) on key terms. Want to learn more? Hit that contact form.