No Risk = (Almost) No Money
Monday, October 4, 2010 at 5:06PM 
Last week, in the Bad Girls' Guide to Business series, we talked about giving up "good girl" habits. We talked about owning your power, becoming comfortable with wanting to make a lot of money, when and how to use emotion to your advantage, and how to build trust with your prospects.
This week we're going to talk about MONEY.
And if we're going to talk about money, we first have to talk about risk.
"Good girls" don't like risk. We hate it. We want to feel safe, secure, and stable. Which means we have a problem (if we want to be business owners).
Avoiding all risk is impossible and undesirable.
There are things you can and should do to minimize risk, but there is nothing you can do to eliminate it completely. And the more you try to offload risk onto your buyers, the less revenue you stand to earn.
Here's what I mean.
Let's say Company X is interested in hiring a freelancer (let's call her "Alice") to write a sales page. Company X asks how much the project will cost. Alice has several options:
1. Charge by the hour: "It will be $100/hour, and I estimate the project will take about 5 hours. So it will probably be around $500. If it takes more or less time than that, I will charge you for hours worked."
2. Charge by the deliverable: "It will be 25 cents per word, and the sales letter will be 2,000 words. So it will be $500.
3. Charge by the result: "Each sale generated by this sales letter earns you $250 in profit. I will charge 10% of your profits from the sales letter during the first six months after you start using it. So, if the letter generates no sales, you pay me nothing. If it generates one sale per day, you earn $45,000 and pay me $4,500.
You can charge more if you assume more of the risk.
Note that the first option is riskiest for the buyer and least risky for Alice. The buyer doesn't know exactly how many hours Alice will spend, or how good the sales letter will be. There is no certainty as to price or quality. This is also the least risky option for Alice. She gets paid her hourly rate for every hour worked, period.
Option #2 is in the middle. Alice takes on the risk that she will end up spending more than 10 hours on the project. The buyer has certainty as to price, but still no guarantee as to quality. Company X still risks paying Alice $500 for a sales letter that generates no revenue.
The last option is risk-free for the buyer, but high-risk for Alice (because if the sales letter generates no sales, she doesn't get paid). At the same time, this option provides the highest potential return to Alice ($4500).
Buyers will pay a premium to minimize their risk exposure.
The reason Alice can charge a lot more for Option 3 than for Option 1 is because she drastically reduced the risk to the buyer. The buyer feels confident hiring Alice because his interests are now totally aligned with Alice's: they both have a strong incentive to generate a lot of revenue from the sales letter.
You may not be comfortable with an arrangement like this, but it makes sense to think about how you can reduce the risk your buyers assume by hiring you. Can you offer a guarantee? A low flat fee with a performance bonus?
The more risk you shift off of the buyer and onto yourself, the more you can charge - and the easier it will be to make the sale.
We're talking about calculated risk, not stupid risk.
This may be obvious, but it bears emphasizing: if you're going to shift risk off of the buyer and onto yourself, you have to do your research first. In the Alice example, she would want to know how the client's products have sold in the past. She would want to know how long the client has been in business. She would want references to ensure that the client will pay her. She will also need to prepare a contract and payment schedule. There's a lot of work involved with that.
But if you're serious about drastically increasing your revenue, it's worth asking yourself:
How much risk am I asking my buyer to assume? And how can I reduce it?
What do you think? Share your questions & thoughts in the comments!
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Previous Posts in "The Bad Girls' Guide to Business" Series:
Prologue - You Are Not A Work-At-Home Mom (Even If You Are) (Video)
Day 1 - Stop Being Such A Good Girl. Seriously.
Day 2 - Wanting to Make A Lot of Money Does Not Make You A Bitch.
Day 3 - Why Bad Girls Get More Buyers (Reason #1)
Day 4 - You Are Powerful. Deal With It.
Reader Comments (6)
Interesting! Never thought of it that way before but it really deserves consideration! In the past, the things that I have bought or bought into, have always placed the "danger" on the other person, not me. I guess it depends on how much you trust your own qualifications - this is NOT for the weak of heart OR THE STUPID OF HEAD!
What tools would you use to track/measure results in the case of the last option? Obviously there's some trust going on there, you have to trust that the client will honestly report sales to you and pay you appropriately. Are there ways you can recommend to handle this, or should we only use this type of risk-taking with clients we already have a trust factor with? You mention payment schedules and contracts. I'm curious how exactly that would work if there's an honor system in place.
Great post. Thanks for making me think this morning!
Mary Ann,
You are totally right - "it depends on how much you trust your own qualifications." And that's what the other person is often thinking when it comes to risk ("if this person really believed she could increase my sales 25%, why wouldn't she want to get paid on commission instead of a flat fee?")
Hi Lisa,
There definitely has to be some trust there, but I wouldn't recommend relying SOLELY on trust or the "honor system" (as a former lawyer, I have to say that!)
So there are a few things you can do:
1. Get the agreement in writing.
2. Build reporting requirements into the deal (i.e., client agrees to e-mail you once a week with the numbers)
3. Use your own tracking system (embed a piece of code into the sales & confirmation pages so you can independently track what's happening)
4. Include a provision for what happens if the client fails to hold up his/her end of the deal (i.e., pay you a flat fee of $4500 plus attorneys' fees if you have to take them to court).
It sounds complicated, but if you're planning to go this route you could have an attorney draw up a 2-page document you could use over & over.
In fact, I would recommend all of the above...PLUS trust. If you don't trust the person, forget about all of this and get paid up front. And if you REALLY don't trust the person, don't work with them at all.
Hope this helps...
Thanks again, this time for a new way to think about value and compensation.
I'm really glad you clarified the "results" option in the comments. I've had clients flake on paying me with the standard payment schemes, and after delivery I have no leverage to collect. Since I'm not part of the client's organziation and don't have access to their financials, it seems too easy for someone to lie about their results and/or forget to pay me.
But definitely an intriguing option. Leave it to a lawyer to bring contingency fees to other professions!
Kate,
You're very welcome. It is so important to think carefully about these kinds of issues, no matter what we end up deciding.
Are you having your clients sign a contract at the beginning of the job? Might be something to consider if you're having trouble getting them to make the final payment.