So What's All This Gonna Cost?

May 6, 1998
by Pat McClellan

The down and dirty secrets of pricing.

A while back, someone posted a question on Direct-L, asking for some tips on putting together a production budget. Sooner or later, all of us have to put our necks on the line and commit to a budget. This can be very scary, since you may find yourself working for nothing if you underbudget the job. Of course, the flip side is that if you plan your budget well and include a nice margin, the rewards will outpace your old hourly rate. That's the reward for managing the risks.

What Price?

Back when I worked fulltime for a major corporation, I had the opportunity to interview the company's top sales rep. This guy was making $6 million in profits for the company every year. Since there's quite a lot of pricing discretion that sales reps can exercise, I asked him what his philosophy on pricing is. "Simple," he says, "I charge them as much as they will pay." And really, that's a great rule to live by... as long as you can figure out what they'll pay!

I've found that you're just as likely to lose a job by underbidding it as if you overbid it. I know that sound weird, but think about it. Let's say you need some work done to your car which you expect will cost $900. You get one estimate for $928 and a second estimate for only $425 for the same work. What does the estimate make you assume about the quality of the work you'll get? If you know nothing else about the mechanics, which one would you have more confidence in?

The key here is NOT that you should be more expensive. The key is that you should meet the customer's expectation. Let's go back to our example. If you had expected the work on your car to cost only $500, that expectation changes how you would view those estimates. Now, instead of assuming that the $928 mechanic is better, you might think he's trying to rip you off.

So now we come to the fine art of mind-reading. How do you know how much the client expects to spend? Again, the answer is way too obvious: you ask. OK, maybe you do it in a carefully planned way, but ultimately, you have to ask. It's a delicate dance with the client. They may not want to tell you -- perhaps they are not confident that they know how much it should cost. Perhaps they figure that if they tell you, then they won't get a good deal. Or you may have the misfortune of dealing with a client who is dogmatic about the concept of WIN-LOSE... every dollar you win is a dollar they lose. Finally, you may have a client who has brought you in so early in the process that they haven't even thought about a budget.

There's no way that I can teach you "the method" of getting numbers out of your client. Every client is different, every project is different, and every one of you reading this is different. Perhaps these generalizations will be helpful.

After listening to your client and discussing their needs and concepts for the program, explain that "a program like this" can be produced in a number of ways for a range of budgets. Toss out a WIDE range of prices to illustrate: "I've seen websites which meet your objectives for as little as $10,000, and others for up to $35,000 or more." Just like buying a car, you can choose an economy car, which will get you there, or a luxury car which not only gets you there, but does it in a style that leaves an impression with the user. "So..." you sum up slyly, "where's your comfort point on the continuum of price vs style?"

Don't leave that meeting without knowing what they expect to spend or you're wasting your time putting together a budget proposal. Once you've got the target number, it's up to you to figure out how to produce the project to meet the budget.

Michael Finlayson posted these tips on budgeting your program on Direct-L:

I have a spreadsheet in Excel with an entry for every line item of every production I've ever done. Audio, Video, Multimedia items from mic rental to photo developing, raw video stock to animator's fees, blank CD-R's to catering, etc. If I do a new project with new componants, they get added to the blank sheet before I start the bid. Then they're in the blank the next time I have to write a bid. Sometimes an item like "video tape" later becomes 1", Beta SP, 3/4", SVHS, and VHS items as is necessary. This spreadsheet started pretty small. It's now about nine pages.

I have a column for each item's name, units it comes in (hours, days, rolls, disks, bulbs, flat fee), and a column for quantity of units I expect to use or need. That requires the best guess you can come up with, usually based unfortunately on being wrong in the past. There is no teacher like experience, and no one can really tell you how long it's going to take you or your employees to get something done.

After units, I have a column for Rate per unit. Then I have a column that multiplies quantity times rate giving me a total for that line item. Then I sum that column.

That's the number, which is usually much larger than you expected. If you want, you can add an item for mark-up (overhead like office rent, insurance, heat, phone) which is often around 30%, or you can just raise your rate on each line item to account for that stuff.

I have two more columns that let me enter expenditures to date on each line item, and a final column that gives me budgeted amount minus expenditures to date. (Hint: you don't want this to end up a negative number!)

The bottom line: it all amounts to figuring out how long its going to take you to create each componant. My spreadsheet really serves as a reminder of every single thing I need, or have needed in the past. It also helps me monitor my progress through the project, so that if I have underbid one componant I can see if there's somewhere else I've overbid and can still make the bottom line come out without sacrificing quality or going back to the client to admit my mistake and beg for more money.

Whether you decide to provide your client with a copy of the budget is up to you. On one hand, you're kind of pulling your pants down, showing your hand, etc. On the other, it can come in handy later when you have a disagreement about the scope of work. When he says "I thought you were going to do the covers for the CD, too" You can clearly point out that you can provide the artwork from the raw materials, but there are no graphic design or printing fees in the budget.

One last suggestion: When I got out of school, I worked as a carpenter. We used to figure out what a job would cost and then add 50%. We used to joke about it, but more often than not the end result was about right. Then we thought about doubling the estimate. Gotta make a profit you know -- to buy those spiffy new computers you've been dreaming about.

Thanks, Michael, for those great tips. You can download a sample of Michael's Excel spreadsheet Mac or Windows.

Spreadsheet Disclaimer: If a formula is missing, and drops a month of camera rental or three weeks of the grips' fees, don't call Michael! This is an untested demo. Feel free to use it as a starting point, but check your work!

Summary

With spreadsheet in hand and a newfound confidence, go out there and get those jobs. Always give good value for the contracts you win, and you'll find that the client becomes more of a partner on the next job.

Michael Finlayson owns Time Slices, which is an award-winning Multiple Media Production Company. The business is about 1/3 Video Production, 1/3 Audio Production (both recording and original music services), and 1/3 Interactive Multimedia Production (including Director Programming and QuickTime VR photography and processing.) After 17 years in the record and occasionally, the video business in NYC, Michael moved to the Isle Of Palms, near Charleston, SC in '92 and added CD-ROM to the mix. A web site, www.TimeSlices.com, is in gestation.

Patrick McClellan is Director Online's co-founder. Pat is Vice President, Managing Director for Jack Morton Worldwide, a global experiential marketing company. He is responsible for the San Francisco office, which helps major technology clients to develop marketing communications programs to reach enterprise and consumer audiences.