Some time ago, I wrote about how retainers were saving my business.
Turns out, I was wrong.
Always be Diagnosing (A.B.D.)
Simply: Diagnosis has the highest profit margins; maintenance, the lowest.
Profit margins tend to be directly correlated with the a service’s perceived value. For me, that value decreases the further I get away from diagnosis.
Not coincidentally, this tends to decrease over the time my clients and I spend working together. Just when our relationship is solidifying, my leverage is slipping (maybe that’s why clients are so happy to continue working together…)
Retainers—the deal that comes along long after the diagnosis—tend to be the least valuable, and easiest to replace, service offering.
Clients know this, and that’s why it provides the worst profit margins. The cost of replacement is lowest, and that gets clients leverage. This is the definition of a commodity.
Since maintenance retainers are simply a commodity, they often require responsiveness as a selling point.
Responsiveness has this unintended byproduct in that it pegs the agency as the servant (which is another bad position to be in when you’re asking to be well paid).
All these negative aspects help demonstrate why maintenance retainers are invoiced by the hour (usually well under $200/hr.), but diagnosing expensive problems gets priced in blocks of $10,000s.
Again, clients can find maintenance offerings almost anywhere, but an expensive problem, by definition, is one that’s not easily solved.
The harder a problem is to diagnose, the more lucrative it is. With maintenance, you’ve already given the client the answer, so there’s less value to be extracted.
How to increase maintenance profit margins
If you’re against the commodity wall, there are not a lot of options:
a) Play the game. Use cheaper, more customer service-based employees for client work. Basically, lower your prices & hire your competitors before your clients do.
b) Get out. Reinvent/position your web development firm as an expert marketing firm for x vertical. Over time, churn out any clients that don’t see you as this expert.
Profits are a good thing
For maintenance to be a viable business model, you need scale. You need to hire lower-cost employees and you need to advertise. One off retainers, on the other hand, will rarely be profitable.
These ongoing services devalue—or often, completely eliminate—the consultant’s best weapon: Their expert diagnosis.
Without that tool, profit margins will suffer. You probably think you’re doing your clients a favor by not charging them for your expertise, but in fact, you’re actually hurting them.
Higher profit margins mean the better client relationships because: a) you’re happier and, b) you can use your profits to hire employees to service the client.
If you try to do everything yourself (because you can’t afford not to), that’s when you start losing your cool and sending angry emails to clients.
Remember: There’s no shame in getting paid well. Sure, nobody likes writing big checks, but in the long run, your clients would probably prefer it.
Plus, it’s their choice to hire you. Let them make an honest decision without giving away everything for free.
The next time you think about shortening your own work load by simply sending a retainer invoice, think twice. You may be sabotaging both your business, as well as your client’s.