SME owners understand the challenges of cash flow better than most, which is why many are looking at flexible ways to charge clients for their product or services. One business owner suggests how such an approach can be a win-win.
Up-front payments can be difficult for many businesses to achieve. However, rather than turn down a sale, there are strategies you can implement to make payments easier for your clients while still profitable for your own business.
With 20 years of experience, Robert Tiller, CEO of Tiller Design, has found that phased billing provides better client satisfaction than charging one big lump sum for a project.
“It's small bites as you're going along; we look for the stop points as much as the go points,” he says.
By splitting the billing into separate parts, clients pay smaller amounts throughout the length of the contract, making the payments more manageable and hence less open to delay or default.
From this, Robert’s billing strategy splits into two different sub-methods: the first is to simply provide a quote and negotiate the price to a point where both parties are happy, and the second is what he calls the “shared risk model”.
“We're going to take some money to live, and the rest in equity, for example,” explains Robert.
However, he warns that the shared risk model is not flawless, as it only works if the client is willing to agree to the deal, and if you truly believe in the longer-term viability of their business.
“Every person who walks in the room has a different has a different appetite for shared risk. Different budgets, different capacity. If it's a brilliant idea and you're really into it and they've got no money, we'll still try and figure out how to make it work,” says Robert.
If you do plan to take an equity stake as payment, Robert recommends a minimum of 20 per cent as the magic figure to ensure optimal value for both parties.
“No matter who you are or why you're climbing in, if you take less than that, you're starting to dilute your ability to have impact within that business. If you're taking 20 per cent at the beginning, you're going to end up with 5 per cent at the end,” he explains.
The shared risk model is not for every business, and should not be jumped at right away. For Robert, the model is not even mentioned until Tiller Design has worked with the other business for at least a year.
“[Its] really even a harder sell then selling the concept of designing something, because you look someone in the eye and go, 'Great idea, give us 20 per cent'. No one should take that up immediately, obviously,” he says.
Hear more insights from Robert about prototyping and taking ideas to market on the My Business Podcast now!