Agree Your Terms Before You Start
First of all, I have to give one piece of clear advice: You have to get your terms of business agreed with every client on every project before you start, and you have to stick to them.
This is particularly important when times are tough, economically. While clients not paying has been a rarity in our business experience (thankfully!), we’ve had 3 such cases in the last 6 months, which has caused significant consequences for an agency of our size.
One case in point shows the vital importance of getting clear agreements with your clients before commencing work.
So, like it or not, it’s critical to get clients informed and formally 100% engaged to following your agreed processes in every project before work commences.
See it as a kind of insurance. 99% of the time, you don’t need insurance, but you can be thankful you don’t need it. But on the rare occasion you do need it – and you do have it – you’re more than thankful!
3 Benefits of a Phased Payment Structure
It’s actually beneficial for your clients, as well as for you, for your payment schedules match your delivery schedules. For me, there are three main benefits, which are:
- Managing Risk
- Maximising Engagement
Let’s look at the impact your payment pattern can have on each of these various areas of your business.
Quite simply, it would suck to get paid right at the end of a project. You need an appropriate flow of cash through your business to be able to function. So scheduling multiple payments, in percentages, of your total quote, is a necessity for most businesses.
2. Managing Risk
As my unfortunate case study shows, if you don’t get compensated in stages, you risk maximum consequences.
If you took a 50% down-payment at the beginning of a project, the most you could lose (if the client pulled out right at the end) would be 50%.
The more tranches (slices) of work you break your projects into, the lower your risk. And if you can get paid in advance of doing the work on any of these pieces, your risk exposure could drop to zero!
3. Maximising Engagement
When you have something invested, you’re more likely to see a job through.
When your client has something invested, they’re more likely to see the job through.
The trick to scheduling payments is to create and to maintain an appropriate level of tension in the project, where everyone has something invested, everyone has something to work towards and something to gain at every point.
Going back to the extremes, if you don’t get paid until the end of a project, your client has little reason to respect your needs, and (as we found) may even choose to walk away, leaving you in the sticky.
If you don’t ask for compensation until you’ve already delivered, that gives the impression that you don’t perceive value in your work; and if you don’t see the value, clients won’t see the value. Perceived value is an important factor in the psychology of marketing, and buyers also really want it.
On the other hand, if you got paid full-whack up-front, before work even commenced, you’d have nothing to work towards! It would make more sense, with an eye on business cashflow and return for your time spent, to sign the next client and get another full whack than it would to complete the project for the client who’d already paid up. You’d suffer from lack of motivation, and the client would suffer from lack of attention, with little leverage to get your attention back.
So it’s firmly in your interests to stagger payments, to keep your attention on the project, and also to keep your client. It’s a well known fact in professional services that clients (or any stakeholder) with nothing invested don’t tend to engage with projects as well as those "with skin in the game".
Our Preferred Payment Schedule
I’ll set out our agency’s typical payment pattern, which you may want to use for your own business. Of course, every project is different, and we don’t always use this process, and I wouldn’t assume it would suit you either. You’ll want to tweak the tensions to find your own best practice.
- 30% on sign-up (secures studio time)
- 30% on sign-off of creative design
- 30% on sign-off of working site (preview)
- 10% balance due on go-live
This provides a good balance for our own team, and our clients, and these terms are set out clearly in all our proposals.
The initial down-payment of 30% helps to separate the serious clients from the "tyre-kickers" who want your skills, but don’t see the same value in them as you do. If someone isn’t prepared to put money down, maybe they don’t really want what you offer!
The initial payment secures time in our calendar for work to start. We’ll do as many design iterations as are needed to get a good result: sometimes it’s 1, more rarely it’s 5 different designs, but I always aim to nail it first time (it’s a much better use of time). When the client agrees that the design is broadly fit for purpose, we mark the milestone with a formal design sign-off. Attaching a 2nd payment to that milestone helps clearly mark and formalise the design sign-off step. At this point, we say the client owns the design asssets (they’re 60% paid-up after all), and we can proceed to production.
When we’ve built all the site templates (usually on our demo server), and the site is about ready to be transferred to the client’s server, we make a further 30% payable, bringing the client’s investment to 90% of the total. Only when the payment is made do we proceed with the launch procedure. At that point, the client owns all the graphics and original assets for the project.
The final 10% formally marks the completion of the project. At 10%, we can usually afford for the final completion to take a little more time. (We did have a single 1/3 payment upon completion, but we found that this introduced a bit too much risk. A client may keep making demands for minor changes, knowing that they still held 1/3 back.)
I hope these insights have contributed to your own business processes, or at least given food for thought. There are no fixed rules; you need to experiment and work out what works for you. Good luck!