If you've ever been out shopping for custom services, you've run into this question. Some examples of custom services include branding, product design, website development and marketing.
In my experience, every successful startup has a budget. Regardless of the size of the budget, the type of budget has a direct impact on the responsibilities of the startup to ensure success. This blog post explains the different budget types and their pros and cons.
Broadly speaking, startup budgets can be broken down into three types - the Fixed, the Range and the Unknown.
This is the most straightforward type. These startups can afford to spend only a certain amount of money on a particular service due to limited funds. This budget type is recommended for startups with a precise scope of requirements.
- Saves time - With a 'take-it-or-leave-it' budget, startups can avoid wasting time on price-related negotiations and instead utilize this additional time to clarify the scope of work with contractors who have expressed interest at this price point.
- Better expectation management - With a detailed scope and a fixed budget, contractors have a clear picture of what the startup expects from them, leading to a higher probability of success.
- More research required - This approach requires significant effort from the startup to research the market prior to discussions. If it sets the fixed budget too low, it won't attract the rockstars contractors. If it sets the budget too high, it may end up over-paying average contractors.
- Small margin for error - A fixed budget imposes a lot of pressure to get everything right at the first attempt. The startup therefore needs to adjust for this by selecting a contractor with exceptional communication skills.
In short, choosing a fixed budget requires that the startup needs to know exactly what it wants! This also needs to be complemented with a strong grasp of the pricing, quality of work and technology options available in the market.
This is a complex budget type that varies between two limits. These startups typically have multiple paths ahead of them, each with its own set of opportunities and timeframes. Standing at the crossroads, they seek to simultaneously evaluate contractors of varying skillsets while optimizing their total spend. This budget type is recommended for experienced startups with a clear project plan.
- Flexibility - This type offers more flexibility to both the startup as well as the contractor in terms of the scope of work. For example a website can be designed using either an open-source or a licensed platform, depending upon the range.
- Larger pool - A range budget attracts a larger pool of contractors into the initial discussions, allowing the startup the possibility of finding a contractor that might be able to offer more services than previously anticipated. For example a startup looking for an SEO (search engine optimization) specialist might attract a firm that offers comprehensive SEM (search engine management) and SMM (social media management) services for a reasonable premium.
- Requires excellent PM skills - When the budget is variable, it becomes more difficult to compare two or more contractors, akin to comparing apples to oranges. The startup requires excellent project management skills to determine the tradeoffs between the competing contractors.
- Price trap - Startups fall into this trap when they capture multiple contractors within a range budget and subsequently waste time trying to convince the most expensive contractor to meet the lower bid of another contractor. This essentially converts a Range budget into a Fixed budget and often results in a loss of quality of service rendered, jeopardizing the success of the startup.
In short, choosing a Range budget requires that the startup has an experienced team that can prioritize its goals and objectively evaluate multiple contractors across a matrix of variables, not just price.
This is a TBD (to be determined) budget type. These startups either have too little or too much capital. This budget type is typically seen amongst inexperienced startups.
- Learn as you go - Having an unknown budget will attract a random collection of contractors leading to a variety of discussions. This allows the startup to understand the range of options available within the market.
- Maximum flexibility - Since the scope is usually vague within this type, the startup enjoys maximum flexibility in changing the scope of the service with each individual contractor.
- Waste of time: There are better ways to understand the pricing within the market. For example, by attending local networking events and asking people within the industry about what is a healthy starting budget.
- Poor image: Most service contractors will not take a startup business seriously if they appear ill-informed about what they want.
In short, having an Unknown budget is the sign of an inexperienced startup and while it may be an easy way to learn about the market for custom services, startups usually end up wasting a lot of time in undirected discussions that lower the probabilities of success.
If you want to have a successful outcome, make a sincere effort to research your market, detail your scope, and come up with a Fixed or Range budget. Good luck!