Cash flow issues can stop a budding business in its tracks. Use these four tips to design a retainer fee agreement that not only keeps clients happy, but also keeps the lights on.
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Every business needs to make money, but not every founder knows how — or when — to collect it. Cash flow problems are one of the top startup killers. Still, many business owners get so focused on delivering a great service or product that they neglect to check whether they have enough money to accomplish their big goals.
The Alliance of American Football recently learned this lesson the hard way: When signs of financial trouble hit the AAF, Chairman Tom Dundon came to the financial rescue. In early April, however, Dundon decided to take his money and go home. CBS Sports reported that the league had no choice but to shutter operations. Sources disagree over whether the league could have finished the season without Dundon, but most agree the business couldn’t survive long without more cash from somewhere.
Related: 5 Ways to Keep Cash Flow Pumping
The fad of acquiring users now and making money later is over. Companies need to turn profits quickly if they want to survive. To keep the lights on without angering clients or investors, service-based startups should consider the advantages of retainer agreements.
Why retainers work for growing companies.
Dependable, recurrent income provides security that no investor commitment can match. Investors can always decide to withdraw their support, as Dundon did with the AAF, but a company with paying customers always has a fighting chance.
In the agency world (where I operate), most partnerships last longer than one project. Businesses learn to trust one another, find a common language and discover the best way to work together. Retainer agreements make it easier to develop those long relationships, but sadly, the word “retainer” has a few negative connotations.
Clients don’t want to pay flat fees for work of uncertain value. Businesses, on the other hand, don’t want to collect a set rate and find themselves trapped into serving a client who insists on pushing the boundaries of acceptable volume. Good retainer agreements set realistic expectations for both sides — and they don’t just discount existing service prices.
Discounts in retainers devalue the work the business performs. Companies should not express gratitude for steady pay in the form of a rebate. Reduced rates open the door for clients to take a magnifying glass to the agreement and make uninformed judgments about what is or isn’t a good use of time.
Imagine asking a runner to complete a marathon, then judging that runner based on how many steps he or she took. Not only is that measurement needlessly precise, but it also completely misses the point of the exercise. Retainers should provide more of what clients want, not encourage them to go digging for reasons to complain.
Rather than frustrate clients by turning an hourly rate into a flat fee, use these four tips to design retainer agreements that please both parties:
1. Follow a paid discovery process.
Paid discovery processes help companies conduct enough research to provide accurate assessments of client needs and opportunities. Even the mighty HubSpot, which could easily afford to provide free assessments, advocates for paid discovery periods to build trust.
Offer a discovery option, but don’t treat it as a free consultation. Instead, use this opportunity to assess the client’s needs and opportunities (without the added pressure of agreeing to a larger contract). Once clients complete the discovery process, they should be free to take their information and hire whichever vendor they want. Use this introductory period to show them which vendor is right for the job.
2. Set boundaries on deliverables.
Establish specific deliverables — not hours — to complete within the duration outlined by the retainer. Agencies typically default to a certain output, like a target number of blog posts. Clients don’t need to know how long those deliverables take to make; they just need to get a good value from the retainer agreement.
Uber hopes its new Uber Vouchers product will help it expand further into the B2B market. Like a retainer, these vouchers encourage businesses to see the value of their purchases as the rides given, not the dollar amount paid. It doesn’t matter how much the ride costs if the voucher covers the trip.
Clients love to test boundaries, though, so set specific limits to keep both sides sane. Some agencies use a throttling agreement for this purpose. In addition to full customer support, retainers may include work on any task that takes less than 30 minutes to complete. More complex tasks, though, would require per-project fees.
3. Empower employees to say “no.”
Limits in retainers don’t work if employees don’t have the power to enforce them. Startup owners have a moral imperative to turn down client requests that are unreasonable, and their employees deserve the same freedom.
Patagonia recently announced that it would no longer provide products to corporations that fail to uphold high standards of environmental stewardship. Turning down paying clients is never easy, but setting boundaries for undesirable or difficult contracts makes life better for both employees and the company’s best clients.
Learn to turn people down gently. Don’t just say “no” without explanation. In fact, avoid the word altogether. Talk to clients about the needs behind their requests; then, explain why the requested solution may not be viable and suggest alternatives.
4. Proactively prove value.
If Google’s best hardware developers aren’t safe from the chopping block, no third-party services are, either. When clients audit their books, many see retainer agreements as easy ways to cut costs. Secure the partnership by proactively communicating with clients about the value they receive. Form relationships with a few people to ensure the company always has an advocate in the room.
Retainer services have a bad reputation for being reactive. Clients call and ask for something within the parameters of the contract, the startup provides the help and clients wonder why they don’t just pay for services a la carte. Fix that perception by treating the retainer as a subscription. Reach out to clients with regular updates on metrics, progress and new ideas to stay in their good graces.
Retainers open the door to constant improvements — but only when clients understand the value they receive. Startups hoping to switch to upfront payment structures should adopt a mindset less focused on selling services and more focused on working with clients toward long-term goals.