The Power of Outsourcing: Pricing Subcontract Work

This is a follow up to my last post in this series that related to the importance of having a contract when hiring subcontractors. This post is aimed more towards the subcontractor rather than the company hiring the contractor. Although the examples I’ll use will be specifically geared towards the video business, the concepts are universal and apply to any service business where one company hires a contractor for some aspect of the business.

Wholesale vs. Retail Rates

Our studio works with a hand picked set of contractors around the country. For most of our contractors, we have pre-agreed upon rates for the work they perform for us. Every now and then we’ll be in a situation where we need to determine a rate due to a unique project, or we’re bringing on a new contractor and we need to determine shooting and/or editing rates. One thing I come across every now and then are contractors who want to charge our studio the same rate they would charge a traditional client (e.g. a corporation or bride). In situations like that I then have to explain the concept of wholesale vs. retail pricing.

Just like in any other business where there is a series of costs that go into producing an end product, the price the end-user pays for the product is the retail price. The price the manufacturer pays the supplier is a wholesale price. The same is true for a service oriented business.

Let’s say you’re a video producer who takes on corporate clients, but also works for other studios from time to time as an independent contractor. And let’s say the going retail rate for video recording services in your area is $75/hour. That’s what an end-user can expect to pay for such a service. Now, let’s say ACME Video Productions wants to hire you to shoot a video for them in that area. You should not expect to receive $75/hour for your services. You’re now a wholesale service provider and ACME is the retail service provider. ACME will charge the end-user $75/hour. In order to make a profit, ACME needs to pay you much less than that. Maybe $40-$50/hour.

Your natural reaction may be that you’re doing the same amount of work, so you should get the same pay. But, it’s not that simple. Here are just a few reasons why it’s okay for you to charge less, and for you not to feel bad about it:

  • It’s ACME’s butt on the line with the client. If YOU screw up, it’s ACME that has to deal with the consequences.
  • Fewer headaches for you. All you have to do is shoot and deliver tapes. That’s it. No editing. No customer service or client management issues. No worries about delivery schedules or backlogs.
  • ACME paid for that client. ACME was the company that invested in both the time and the money to land that client. Chances are there were sales meetings, e-mails, phone calls, and budget proposals that took hours to write in order to land that client. Not to mention any marketing or advertising dollars spent ahead of time to get that client to find ACME in the first place. Every job ACME does has to pay for those expenses. All you had to do was show up.

Please don’t get me wrong. I’m in no way minimizing the work that subcontractors do for the studios that hire them. But, it’s just a simple reality in business. Wholesale vs. retail rates. If you determine that your business cannot survive on the wholesale rates for your services, that’s fine, then focus your work on the retail side. But, I bet if you work the numbers, you’ll find that the profit you make after your salary (i.e. your time), marketing, advertising, etc., will be pretty darn close to the profit you could make if all you did was work for other studios who kept you busy with contract work.

Ahhhh….the Easier Life

Imagine if you didn’t have to spend thousands of dollars on sales and marketing; didn’t have to spend hours writing up proposals or schmoozing; didn’t have have to spend hours on the phone every year with customers; life could be a whole lot easier. That’s the trade-off for charging a wholesale rate to a larger studio providing a retail service to the end user. Don’t fight it. Embrace it.

2 thoughts on “The Power of Outsourcing: Pricing Subcontract Work

  1. Another great article Ron. You are so right, if we didn’t have to focus on all of the handholding a customer needed and instead only had to focus on the task itself you are able to get it done without the extra drain. This emphasizes what I’ve heard Kris Simmons talks about this a lot in his e-books and podcasts.

    Since this is geared at a subcontractor being hired by ACME Video is it out of line for the subcontractor to ask ACME what their retail prices are for the requested service? Or are you better off investigating this on your own by going to ACME’s site? I just wonder because ACME Video may charge $150 per hour for services while Joe Independent’s Video may charge $75 per hour retail for services. Thanks again for these great articles.

  2. @Maria T. – It never hurts to ask. They may be relunctant to tell you because it’s human nature to feel “short changed” if you know the studio you’re working for is charging a lot more than you’re charging. The thing to remember is that there are typically a lot of extra costs the studio has to cover for that particular job. Your example is good. It is very possible that ACME’s rates are twice that of Joe’s. But, there are any number of reason’s a client would still pick ACME (e.g. peace of mind working with a larger studio; trust from prior working relationships; quality of end product; etc.)

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