You have to give to get. This is a great principle to follow when preparing a proposal for a client or negotiating a deal. But there should be limits on how much is given free-of-charge. The interesting point is how and why this is so.
Service providers such as IT developers and consultants are selling intangible services. Often they have to give quite a lot free-of-charge before being paid back or winning a legally binding contract.
Prospective clients understandably want to know the details of deliverables, milestones, specifications and costs. To flesh these out some work is always done free-of-charge at the proposal or early deal negotiation stage. It is good for business and builds trust.
But there should be limits. Giving too much erodes profit and can put the very existence of the deal at risk. Why is this so?
The deeper a service provider goes into finalisation of the development of the details – with no set legal and financial terms imposed – the more likely it is that the deal or profit may disappear.
Working for free can mislead a client into thinking the service provider is “helping out and trying to win business” rather than being “a business in business”. It changes the psychology of the relationship, often translating into a poor negotiation position for the service provider when it finally comes time to insist on financial terms and a binding legal contract.
When there is excessive free work it is not uncommon for a client to drag the service provider into what we’ll call a relationship vortex.
In the vortex the client finds itself able to request and receive more and more risk reduction work, and to have conversations about this and that, and thereby delay making a decision on taking a risk, paying money, and entering into a binding legal commitment.
This is mutually destructive. When money and legal deals are ultimately put on the table, the risk is the client may treat them as just more things to talk about. And so, on and on it goes.
Act like a business and you are more likely to be treated like a business.