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Retainers

"I'm doing fantastic, thanks to you"

My eyebrows furled downward in puzzlement. "Thanks to me?", I asked. "The last lead I gave you turned into a nightmare where I bet you worked a hundred or more hours for almost nothing".

My breakfast companion smiled wryly. "True, but actually that turned out fine. I'll be getting enough other business from them to make up for that mess. But that's not what I'm thanking you for."

I took another mouthful of eggs and raised my eyebrows quizzically.

"It's the retainers. You told me to do that first thing, but I just didn't get it. Now I understand, and I'm doing it, and I have to thank you. You were so right."

Ahh, yes. When he had first started his business, we had shared another breakfast, and I had given him a whole brain dump of advice, including the suggestion to bill clients a small yearly retainer. The purpose of the retainer is to establish a business relationship, to cover all minor phone calls and emails that are otherwise annoying for both you and your customer to account for, and to provide a justification for a discounted billing rate. I've used that model for years for just those reasons, but many consultants resist the concept, insisting that their customers won't like it. In fact, customers do like it, because it is to their advantage: they get a lower hourly rate and you don't nickel and dime them with small invoices for little services. They also feel, quite rightly, that they "have your attention". But, as I said, some consultants just don't see that.

My companion went on. "I've got ten clients on retainer now, and that's just in the past three months. The clients love it, it's so much easier for me, and I know I'm going to love it even more when I have a hundred of them."

Right. After a few years, it becomes dependable monthly income that lets you coast through the inevitable dry periods.

"And just as you said, for most of them, it really isn't much of a discount, so I'm not losing any money."

That's the part some consultants just don't grasp. I suggest setting the retainer amount approximately equal to a third of what you'd ordinarily expect to bill in a year. So, if your typical client uses twenty hours of service, set the retainer to be equal to six or seven hours, and discount their hourly rate approximately 33%. If they use less than what you expect, you have effectively raised their rate, and if they use about the same amount they will pay about the same, but if they use much more hours, it will cost them less. That's an ideal billing model that is much more difficult and confusing to implement any other way. Consider this as an example:

In my business, I expect an average client to use me ten hours per year. My ordinary rate is $150.00 per hour, but for clients who pay a $560.00 per year retainer, I drop that to $85.00. Let's see how that works out:

Hours used per yearCostRetainerEffective rate per hour
5$425.00$560.00$197.00
10$850.00$560.00$141.00
20$1,700.00$560.00$113.00
40$3,400.00$560.00$99.00

See how nicely that scales? You need to set your retainer to scale reasonably for your customer mix, but this works out very nicely for mine. The big customers get a discount, the minor folks pay almost full rate (but do get the advantage of small issues included in the retainer also). Everybody is happy.

I did not mention (but will cover in another article) that I actually sell these as prepaid blocks of ten hours. If a customer doesn't want to do that, my rate is $95.00 an hour with the same retainer, which is a little higher. I also have other plans for the few very high volume clients I have and special plans for resellers and other consultants.

We finished our breakfast and split the check as we always do. My companion said he had some leads for me for mail server customers (see Kerio Mail Server) and some general Unix support clients he'd pass to me by email. I thanked him for that, and we went on to face the day.



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