Is lowballing acceptable if your client can't afford to pay?
There's an interesting project. You love the company. Your really want to do this. But you know you'll lose money.
The thing is, the client is obviously close to broke. You know this won't lead to more work, or if it does, it'll lead to more badly paying work.
Now, a lot of people might think, why would this be unethical? Silly to work for free maybe, perhaps even a bit amateurish, but unethical?
That is, until they see your back balance. If your client doesn't pay your rent, who will? Will you beg off your friends and families? Will you become, for a time, a burden to the state? Will you be forced to declare bankruptcy when you could have said no to your client and taken better paid work?
And of course, what about your competitors? Doesn't undercutting them put them out of business too? Aren't you helping to create a vicious cycle by undervaluing your own work?
Does anyone else see a moral dilemma in charging too little?
Clarification added July 3, 2010:
Thank you, some very good answers here. It's been worth reading the opinions, experiences and knowledge of others.
I do apologize for all the grammatical mistakes in my question. I think my left brain went on strike. Time for a vacation.
Regards,
Vasco
Answers (21)
James B.
Engineer at Photonis USA
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I think that if you can afford it, and you want to do it, then there is no moral dilemma.
You make it sound unlikely that anyone else would take this task - so you are not hurting another business. If you can do the work without bankrupting yourself or those who depend upon you then you are hurting no one by doing this task. You are probably helping the people you are doing the work for, generating good-will that might be returned in the future, gaining experience, and hopefully, enjoying yourself.
Ed H.
Wordsmith with proven ability to translate business objectives into communications strategies and tactics
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I would submit that compensation isn't always financial: the project is interesting, you love the organization. You have an opportunity to showcase your expertise and to really build a good relationship with the associated parties at the company in question.
I would say that if you can afford not to be paid at your usual billing rate, do the project.
Erica F.
Social Media Optimizer, Publisher at ALC Publishing, President of Yuricon
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If you're the vendor who lowballs, you're not probably going to get paid when the chips fall anyway.
If you really love them and love the work and it brings you satisfaction in some other way, then do it on spec, but don't be surprised when they never quite have the money.
Dave C.
Consultant Project Manager who boosts cooperation and motivation to lead extraordinary successes. Writer.
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The client is unlikely to be initiating a new project if it's close to broke - unless, perhaps, for example:
* the company is contractually obliged to fulfil an obligation;
* the project's success may contribute to the company's survival.
In the second case, I would particularly keen to help.
How could you know future work would be porly paid? The company's fortunes could change.
It is not at all unethical to charge a client a low fee, under any circumstances.
All that talk of unpaid rent, begging [and the dog starving to death] are a bit over the top. You'd hardly think about starting a low-fee job with all that expected. It really goes without saying.
As a business, you're expected to provide value for money, and attempting to beat competitors on price is an age-old method! Where have you been?
Undercutting competitors isn't unethical - it's normal business. It would hardly put theem out of business to lose a client that can't really pay, would it? Presumably, this isn't the only potential client in the world.
If one chose to undertake the project it would presumably be due to one of two CHOICES:
* Desire to help the company survive - even if it means a financial struggle;
* There's no other work so this is the only option!
There is no moral dilemma in charging "too little" - it's just a good price, even a great price, call it a "Special Offer" even.
There's no evidence of an issue of ethics here: no hidden dodgy deals, no dishonesty, no tricks, no cheating, no laws broken. Even the dog didn't die!
The Theory of Constraints tells us that if you have the capacity and you can make even $1, you should do the job. You must have an accurate cost structure. The TOC uses throughput accounting, this is a bit different from GAAP accounting but probably gives an easier, cleaner treatment to allocating salary expense all to fixed cost. So in essence if you have $1 of throughput after extracting your true variable cost do it. If not, unless you can justify the expense as goodwill, don't take it. Its all about utilizing your capacity to cover your fixed cost.
Links:
Rey S.
Global Demand Manager at Abbott Diabetes Care
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I understand that life is complex but I think you're throwing a lot of things into consideration at once and then wanting to come out with one comprehensive answer. I would suggest that you prioritize your considerations according to their importance to you.
1) "you want to do the work but you'll lose money." Can you afford to lose the money? Or, in other words, not make any money?
2) "The client is close to broke." Can you afford not to get paid? Or, in other words, not make any money?
3) Are you depending on this project to pay, at least, a portion of your ongoing expenses, i.e. rent?
4) Is there the option of getting a better paying work with another client? If you don't, a bird in the hand is worth two in the bush.
5) Undercutting your competitors? Can you afford to not take the money and have it go to your competitors?
There's no moral dilemma in charging too little given the above considerations. There's nothing unethical about entering an agreement to exchange value for value. It's not like you're lowballing in order to drive your competitors out of business and, thus, gain control of the market eventually. You're offering the lowest price acceptable to you wherein you still get some benefit that you otherwise would be foregoing. In return, the client gets a benefit at the lowest value due to the state of the market.
What would be unethical would be, if in effect, you are colluding with your "competitors" with a tacit agreement to not undercut each other. Or if you are lowballing just to get the work started and then, later, hold the project completion until you get paid more. Or that you refuse to place a low bid to get this work because you find it easier to beg off your friends and families.
Best wishes,
%
Dave M.
Professional trade show booth traffic builder and party entertainer. Corporate and private sector events.
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If you want the business, you lower your price... Simple as that...
Successful companies identify market segments who are willing to pay for the product or service you provide, and they walk away from prospects who cannot pay what is a profitable price for their product or service.
If you still want to do the business, even if you think it will not lead to more work, or if it does, just as badly paid, I suggest a career change.
Rama B.
Chief Solutions Specialist, Lev Promotions
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The short answer: No, it is not unethical. It is, however, bad business.
You want to take on a job that will lose you money.
If you work for yourself, and you don't mind throwing your money away, then go ahead - there is no ethical problem.
If you work for a business which has shareholders, and you deliberately take a job that loses money then yes, it is unethical, dishonest and probably illegal - you are basically stealing money from the company owners.
Paul B.
General Manager at Dynamic Machine Design
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Been there, done that, won't do it again. Not only are these "poor" customers not paying bills, they tend to be the most annoying, demanding, unsatisified, whiny people you will ever meet. There is a reason they have no money. Do yourself a favour and avoid them. And yes, if you are working for a corporation, then you have a fiduciary obligation to your shareholders that will be outlined in your employment contract and has plenty of presidence in courts, and they will have the right to sue you into the stone age for taking on charity work.
Pieter D.
Corporate coach and consultant
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I see nothing unethical about having a hobby, as long as you don't make other people pay for it. It is however important then to appreciate the difference between a hobby and work...
David S.
Visionary Logistics & Supply Chain Consultant/Coach - Industrial Engineer - Material Handling Professional
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Why discount?
Many will discount because they really want the work or they really need the work.
Personally - I never "need" the work. Not that I don't want business, but my attitude is that I never "need" a specific piece of business.
I look at the value that the work is going to be to the client. There is a ton of upfront work I do on my dime where we develop the payback, the Return on Investment, the effort needed and the schedule, and once I know those factors I price the work. There are time that I do that and my rate per hour is over $1,500, and others where the rate is $200. It is based on the value of the work to the client, not on my rate or the time involved.
Competitors? They discount, cut rates, drop their pants. That is OK by me - the client that buys that is not my kind of client.
I have done work in a "pay it forward" mode for clients. They needed it and I needed to create some revenue or savings for them so they could pay their bills and get moving again. But those clients always had some paying work later - always.
DKS
Robin L.
AMDS (Finance) PhD Candidate
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I think this is one of those situations where actually drawing out a Porter's Five Forces model and itemizing it can actually help you decide where you stand. It's interesting that you bring it up, because just a couple of months ago, I peer reviewed two papers for the Academy of Management pertaining to game theory, pricing, and strategy.
First, as for undercutting competitors and putting them out of work--I normally dislike bringing economics into any practical discussion because of how theoretical it is and how I have a distaste for applying reductionist models to social science situations--but this, of course, depends on how much of a commodity the product or service is, how closely the competitors can substitute, how active the market is, what their chosen positioning is, what their individual cost structures are, and their own strategic positions (just to name a few). I did have a situation about 15 years ago during my undergrad in the early 1990s, before everyone had a computer, where I provided a word processing service to people who were more comfortable writing out their papers by hand first. Because of how fast I typed, I could charge 75 cents per page, still make nearly $20 an hour, and not feel bad about being overpaid. There was, however, only one real competitor, and after I had taken all her business, she asked if I would raise my prices closer to hers because there was no way she could compete. Now, most jurisdictions have competition laws that would make collusion illegal, but in this case, I did want to be fair and doubled my price, which brought hers down as well but to a level where she was still a viable alternative. Due to my lower cost structure (because I typed faster, I assumed), I otherwise felt I was gouging if I charged the rates she was already charging.
You're right that in introductory marketing, one problem with promotions such as free giveaways and loss leaders is that customers begin to value the product at the extremely reduced price and are not willing to pay the regular price after the promotional period. In an established market, though, everyone pretty much knows what the product or service is worth (at least to themselves); if your undercutting is below your own cost, then it was a poor decision as far as cost accounting is concerned and it cannot be a long-term solution. If, as you also suggested, it made the difference between bankruptcy and living to see another day, then I think that decision would place servicing debt at a higher priority, since losing money on a single deal is not going to put you out of business, but missing a payment to a creditor can. In cost accounting, this issue is addressed by relevant cost analysis, which would state that the lowest price you should charge for a one-time deal would be the variable costs to you. As long as you meet that requirement, you can evaluate the customer's strategic position and their willingness to at least meet that price. If you don't even meet your variable cost then you're paying them to not pay you to do the work. I'm not even sure a creditor would want to loan to a borrower who would agree to a contract below variable cost and it might be better to try negotiate a later payment date than do that deal, since if your creditors can see a potential for you to make future payments, it would be in their best interests to negotiate another date than for you to do something that might make this payment but would erode your ability to make future payments going forward.
If you're concerned about the poor competitors you undercut, after you go bankrupt, about the reduced perceived value, then don't be. If there is a demand for it, the perceived value will eventually work its way to where it should be at the equilibrium between supply and demand, since when you're gone, the other competitors will not maintain that lower price and the customers will have to pay the real value or find a substitute.
Clarification added July 3, 2010:
If you're B2B, though, you don't have to worry much about the poor businesses that are laughing at you for undercutting yourself out of business--most of their analysts will be competent enough to have a good estimate of the value of the product both to themselves and to you as part of their strategic assessment. Your concern about the reduction in perceived value probably applies more to B2C consumer goods where your customers aren't constantly evaluating their relative strategic positions.
Another thing, incidentally, that competition bureaus don't like is when you charge less than your variable costs--the lowest price you should ever charge, and even so, only on a one-time deal--by subsidizing with income from another jurisdiction or by playing around with transfer pricing.
Clarification added July 3, 2010:
One more thing I think you have to remember here--and your question gave me the impression that you were mixing the two--was the concept of a business relationship versus a personal one. No one you do business with would expect you to agree to a deal that was even below your variable costs, even for a one-time deal. Personal relationships can be irrational for all sorts of reasons, but in business, ultimately relationships can exist because of values (eg. fairtrade products), because of real or perceived benefit, or because of other strategic reasons. If you even propose selling to another business in a way that hurts your chances to continue, your B2B customer probably already perceives this as a good reason to find another partner since you are either desperate and therefore unreliable or unpredictable or both, neither of which make good business partners along the value chain (in which case they probably could vertically integrate you--buy you out, manage your business better and get better prices at the same time for themselves).
Kevin H.
Web Business Consultant since 1998
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Stop. You cannot take care of others if you do not take care of yourself.
I have a saying: "If it isn't worth them to find a way to get it done, it isn't worth it for me to find a way to do it."
You should never sacrifice simply so the responsible party does not need to.
I have also found this: Those parties that I go the extra mile and mile and mile and mile and mile for....they are the ones who appreciate it the least and resent me for the hardship of serving them at below cost.
I have been in such a situation, unable to put the time into the project and pay my bills...unable to hire help on that budget...and what happens? They resent my failing to meet their unrealistic demands that I made the mistake of agreeing to, as I directed my main energy to actually making a living and paying my mortgage.
YES, I DO SEE A MORAL DILEMMA: Business is a mutually beneficial transaction. I trade you a bag of oranges to feed your family for a bag of apples to feed mine....now we both have apples and oranges. In charity, I will give some for free. But in business, we sustain others and they sustain us. If they will not sustain us, then there are other parties who will. If I continually give more oranges than I get, my family starves and you thrive at my expense.
There are millions of people who could use a bag of oranges. How do I decide which one to give it to? I give it to the one who goes out and picks me a bag of apples.
Clarification added July 3, 2010:
And meanwhile, while you are giving away a free bag of apples, someone is looking for an orange grower for a major contract and you were too busy to serve them.
Clarification added July 3, 2010:
I mean, "And meanwhile, while you are giving away a free bag of ORANGES, someone is looking for an orange grower for a major contract and you were too busy to serve them."
Mitch K.
Author, Top-rated Speaker, Leadership Coach and World Traveler
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A Timex and a Rolex both tell time. The difference is the perceived value of the two.
You AND your client must perceive your value or else why do they want your services? Why do you offer them?
There is always room for pro bono work for legitimate charities. Save for that, my standard answer for low/no fees is "in lieu of money, what is the fair exchange?" They often have something of value to trade. If they have something other than money that is useful/valuable to me, then I will barter for it. If not, If not, I respectfully decline so that I may be free to accept the next assignment where I can expect full value for my work. And they should learn not expect to get a diamond at a paste price.
Lubna K.
Experienced International Tax Consultant/Newspaper Columnist
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Have you tried barter? What can the client offer you other than cash? Office space? Referrals? Stocks? Products that it manufacturers and which you need?
If I love the company and will get satisfaction on doing the work, I would agree to:
1) A nominal flat fee, a higher success fee, payable over a period of time and if possible and it suits me, non monetary compensation (including sweat equity)
On the other hand, if I don't love this company or trust it, then I would not go ahead.
Wallace J.
Multimedia Producer, i3D Programmer, Acrobat 3D PDF, Android App, Virtual World & iTV Design, Kindle, Nook & Sony eBooks
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Never set a prescident that will ruin your business in the future. It's that simple.
Maria M.
Strategic Business Advisor from Planning to Execution, Speaker, Trained Life Coach, For Financial Advisors & Accountants
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Never again :) this type of situation always brings on more problems than it's every worth.
Find someone else who can use the project that makes your heart smile and get paid what you deserve.
Robert J.
Program Manager at Microsoft (Aditi Consulting)
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In looking at your question I think you may have overlooked the obvious - which is, if you have to ask if something is 'ethical' you've already answered your own question.
There is only an issue, if charging too little is a morally ambiguous issue.
If the work you're doing can be done for less (or nothing) then it's not 'work' - it's charity, and treat it as such. Do it, don't feel guilty and pat yourself on the back for doing someone in need a solid. That's your payment and good for you.
If the reasons for your doing this are merely to drive your competitors into the loss of work - at a penalty to you - there are consequences for your actions. You're not going to make a penny off it and you can't survive long doing business that way. Sure you'll hurt competitors, but you also hurt your ability to charge a successful rate for you going forward.
Is that a moral issue? No. It's not even an ethical issue. But it is a locic issue. Your damaging your economic ecosystem and it's not wise if you sometimes do things basically for free (and sometimes literally for free) because people will expect that.
So to answer your own answer, yes - you are in fact creating a vicious cycle by undervaluing your own work.
Now, if you can provide a service for free, which competitors must charge for, and recoup the loss elsewhere you're being pretty savvy. This is the difference between Google and Microsoft. Google makes money off a non-physical product (advertising) so there's little cost. Microsoft on the other hand, makes money off of physical product. Physical software, unlike search results - so they can't give it away - there are physical costs associated with it.
So yes, there are times when this model does work.
Is it ethical to devalue a product and destroy an economic ecosystem? The answers obvious. "Ecosystem" no longer applies to just you - it applies to everyone within it. No, it's not right to do that. If this is what you're doing, then morally that's wrong.
If you're attempting to survive in a collapsing economic ecosystem - you're not destroying anything. You may be hastening the oncoming death of it - but that's not wrong morally. It's like giving a cigarette to a man dying of cancer because he asks you for one. Is it distasteful? Not to the man who asked for it. The fact is he's dead/dying and nothing is going to change that and if he wants one last hurrah - so be it that's his business and it hurts no one.
So ask yourself - are you part of a dying economic ecosystem? Is this your last hurrah?
This is also a core argument in the debate over outsourcing. Is it ethical for those who can afford to charge 10 cents on the dollar for what it costs others a full dollar to accomplish? The reason they can charge 10 cents on the dollar is, laws, regulations, and standard of living in locations make it possible. It is the disparity of economic conditions which allows for essentially "lowballing" costs in that situation.
In time, due to the disparities equalizing, this won't be possible. The question is - can the economic ecosystem support such an equalization before it collapses? This has never happened before on this scale, we really don't know.
We do know that history has shown that when such models occur in biological models - the end result is that the native species are wiped out, leaving behind the transplanted non-native species, which, once there are no native species to feed off of... die out as well. The answer from a biological view is that no - it's probably not a really good idea.
It's a short term reward, that leads to long term consequences.
But that's not ethics... or economics - that's biology.
At the end of the day, ethics boil down to one simple argument - is what you're asking something you would be proud of? Would you share this accomplishment with others as a summarizing moment of your life?
