How I Earned A Lot More on Projects by Changing My Pricing Strategy

http://sixrevisions.com/business/earn-more-on-projects/

by jggube • 13 years ago

157 64 13 years ago

If I felt my agency couldn’t deliver the full solution, I saw that as an opportunity to partner with another service provider. I would pay them for the work, developing a lasting business partnership along the way. And in the process, I’d learn about their area of expertise to get better at both selling and delivering it to my clients.

This seems a little off to me. Would you tell the client that you're outsourcing?

pallandt4• 13 years ago

I would venture into guessing that the client wasn't told about this. If I was in a similar situation and I'd be told the company I'm paying to work on my project is outsourcing it, I'd think they're either a) they're too busy for me/I'm too small of a client for them, b) money is money so they're taking my project, but I shouldn't bet on spectacular results. Also, there'd be some broken trust involved. There would also be the risk of losing the client altogether the moment they hear you won't actually be working on their project, but someone else would be instead.

tptacek5• 13 years ago

Most boilerplate consulting contracts require you to notify clients of subcontracting arrangements, and many BigCo client boilerplates forbid subcontracting altogether.

But so what? You talk to your client about a prospective engagement, then you build a "dream team" proposal that puts you on the hook for the performance of the whole project and makes you the single point of contact for all project matters, but then uses the specialized expertise of partner firms as a sales point. You sell with the subcontracting arrangement, not in spite of it. It's not something you sneak in under the wire.

cmwelsh• 13 years ago

It doesn't have to be nefarious. Sometimes there are certain aspects of a project that are outside your company's core competences. It's only ethical to pass the work to a qualified professional. Clients pay for results - it's a business transaction.

StavrosK• 13 years ago

Really? I say "our agency is so busy at the moment that someone else will handle your project, but I will personally oversee and QA it. Our customers not only seem to not mind, but they're extremely happy after the project has completed.

tptacek5• 13 years ago

Yes! Note that you can get halfway to the place McDerment (and Patrick McKenzie) were at simply by not charging by the hour. Simply moving your pricing increment from hours to days or (ideally) weeks changes the conversation you're having with your client.

McDerment had to develop serious sales skills to pivot inbound requests for website paint jobs to strategic marketing engagements. But you don't need sales skills to establish a minimum billing increment of a day. Doing that will pull you towards more strategic discussions and allow you to dip your toes in the water of solution sales.

Incidentally, while my hat is definitely off to McDerment for pulling this off, I assume he'd be the first to tell you that this is the moral of every book on consulting ever written.

edanm2• 13 years ago

I'm completely on board with the "bill by the day, not the hour" idea. Having implemented it in our own consultancy, it's done wonders.

But it hasn't gotten us to the stage you're talking about - we're definitely making headway in establishing ourselves as (Python) experts, but I don't think we're really at the stage where we can sell based solely on the customer's value - building software is simply too replaceable a commodity (See note). Nor do I think we necessarily want to be there - lawyers don't sell on value, after all, nor do most professional services firms.

Also, increasing the billing increment too much and selling based on value starts taking you into "fixed-project pricing" territory, which is a whole different field. Not that it's better or worse, just different, with its own set of needs. This we discovered in retrospect after practically switching all our work to fixed-pricing, then realizing what a big difference that was (that we weren't equipped to handle).

Note: Building software is too replaceable in the sense that there are plenty of alternatives to get some software built (hiring, cheaper freelancers, etc). We certainly manage to sell ourselves as better than alternatives because of speed an expertise. But that's a far cry from building projects and selling on value, which IMO is again, a whole other field which is hard to shift into from any old software consultancy (different customers, different sales pitch, different needs). I mention this because tptacek's basic point of "switch to daily billing" is better advice in that sense - it's easy to do from just about any position with just about any set of clients, and by magic improves your life.

tptacek5• 13 years ago

Yep, that's exactly what I'm trying to say. Thanks!

tocomment• 13 years ago

What didn't you like with fixed price billing?

tieTYT2• 13 years ago

Why is hour < day < week? I read the patio article where he said that, but since I've never been a contractor, I don't understand the difference that would make.

Also, since an hourly rate is standard and job postings say how much they pay by the hour, isn't it common to be rejected when you ask for a daily/weekly rate?

tptacek5• 13 years ago

Too many reasons to re-list. You can use the search bar on the bottom of the page to find me talking about this ad nauseam.

We've never been rejected for a client for not billing hourly.

lifeisstillgood3• 13 years ago

1. You aren't billing for time - you are billing for a deliverable that will be done during the day / week (or part thereof) billed.

2. This is not the same as contracting for BigCorp on a 6 month java position at 600 usd pday. That's close but basically an employee without benefits

3. If you move from 100 dollars an hour to 4000 dollars a week (8000 seems to be more norm - you won't work every week) then the high price is to get then to focus on deliverables and not think o you as a person on a seat for six months but as someone who proved the last project did well

patio11• 13 years ago

Thomas has explained this in more detail, but:

+ The minimum billing increment switching to 8x your 40x your previous increment will, by itself, scare away the worst pathological clients in the pool. (If you have a $50 hourly rate, some clients might naively assume that they can get meaningful software development done in 3 hours. Where's my website? I've paid for three whole hours. What do you mean you're still setting up the dev environment?)

+ If you bill hourly, you have to account for your time in fractions of an hour. This will lead to more overhead (spend 17 minutes on a phone call? Record that fact somewhere! Maybe dicker over whether it's really .25 hours or .5 hours and whether this totally inconsequential $12 difference matters to the client.), more stress from your client reviewing your work on a minute-to-minute basis, and more friction about clients misunderstanding the nature of knowledge work. I can't just slam keys for 8 hours straight, and you wouldn't want me to do that if I could.

+ [I'll add something here in a moment but Ruriko wants breakfast.]

Good clients don't care about you charging daily/weekly. I never lost a client over it. I'm the professional, my standard practice for doing my thing is the standard way for working with me. If you can't deal with that, that's fine, there are other people out there. (Relatedly, I never, not even once, got a contract from a "job posting.")

zackmorris• 13 years ago

Unfortunately I just got hit by 2 projects in a row that passed 3x overage. I quoted 2 weeks to finish, but they both ended up taking over 6. I'm probably not even making minimum wage for the last couple of months.

So if you are going to quote by the job, be sure to put in limits in case it goes over your time budget so you can renegotiate.

Also I would not recommend having a "friend rate". Your workload just goes up exponentially with a proportionate decrease in pay.

If anyone could play devil's advocate on the article, with solutions to warning signs, I would sure appreciate the insight! (Not that I disagree with the article, just, my track record is really tiring me out).

tieTYT2• 13 years ago

I think you're missing the idea (but I could be wrong, I've never consulted): You're not supposed to promise when a project will be finished, you just set your rate per days/weeks. You estimate when it will be finished, but you don't promise.

Amadou• 13 years ago

Those are fixed-bid projects, not time & materials with time increments of days or weeks.

But the real reason I am commenting is to point out that your results - 3x overage - are exactly the rule of thumb that gets cited for fix-bid: Take your expected level of effort and triple it.

dave_sullivan• 13 years ago

An alternate pricing strategy that's worked well for me: charge by the "sprint" (roughly 80 hours) and peg it to an hourly rate. Now hire developers to help you with implementing the brilliant strategies you help come up with and make a reliable spread on the cost of your junior developers. Key: don't hire people to do things you can't do yourself, hire them to do things so you don't have to do them yourself.

When I sell, I'm still linking it to business value--I just make sure it's pegged to hours, which is my most direct cost (other than my time, which I make sure ends up being a very high number if calculated as an hourly rate + profit on developers) Clients know it's typically not me doing the actual implementation work, but because I've linked the overall solution to business value and presented it as an investment--which it is--it doesn't matter.

The problem I have with fixed bid projects is overages and who pays for them. In this business, they're quite common and quite often not the fault of an idiot programmer--but if you do fixed bid, you'll have to eat these costs sooner or later unless you are very good at estimating (I don't know anyone that is...)

dreamfactory2• 13 years ago

My plumber estimates and doubles for fixed price work. This is to cover the cost of e.g. discovering rotten floorboards under the bath halfway through replacing it. Paying a fixed price is on average a worse deal for the buyer, but most buyers think that paying by time incentivises low productivity.

chatmasta2• 13 years ago

What do you guys think of pay by milestone? Client and seller both agree to a milestone with a checklist that, when complete, signifies the milestone is complete. This provides clarity, transparency, and predictability. As a buyer, I prefer milestones.

themodelplumber• 13 years ago

That's sort of difficult to compare, because you're paying by milestones, but you probably didn't get estimated by milestone, e.g. "if we make it to the 3rd milestone you owe us this much." Your vendor is probably assuming you want all milestones completed.

chatmasta2• 13 years ago

Not sure what you mean? I'm saying the buyer has a project, and either the buyer or freelancer chops it up into milestones (in my case, I'm an engineer as well as a buyer so I can do this). Each milestone has a set price paid after completion. If the freelancer completes 3 milestones, he gets paid for each. If he completes 4, he gets paid for each. etc.

Not sure what you're saying?

rch• 13 years ago

Try a fixed amount per week with milestone bonuses. An agreed hourly rate for ad hoc work and changes wouldn't hurt either.

kevingadd• 13 years ago

As a contractor, I avoid milestones like the plague. They're appealing to buyers because, on average, buyers use them to extort additional work out of the contractor or as an excuse to defer payment (because the contractor's only recourse is court). I used to make an exception and do milestone projects for clients I trusted, but I even got screwed by them. It's just too hard to estimate software projects for both sides to come out of a milestone project on top.

EDIT: Note that I'm not claiming that people who use milestones are evil. The problem is that milestone billing for software creates lots of incentives on the client side to underestimate and underspecify work, because the contractor eats most (if not all) of the cost of identifying those problems and negotiating to get the milestone revised to include them.

bostonvaulter2• 13 years ago

I'd like to point out that the linked free ebook (pdf) is an excellent short read about pricing strategy:

http://breakingthetimebarrier.freshbooks.com/

kohanz• 13 years ago

I have to respectfully disagree. While I think the ideas have merit, the book reads like "the secret" or some other motivational junk. It feels simplified or dumbed-down to the point where it doesn't feel authentic anymore. He got the wrong person to write his story, IMHO.

larrys3• 13 years ago

I don't read things like this (pricing and getting the most money is a specialty of mine so I don't have much need to mess with what is already working for me) but your comment piqued my interest so I took a look at a bit of the beginning of the pdf.

It's essentially an advertisement for freshbooks and agree with the "motivational" aspects complete with the obligatory testimonials (which I'm sure will or have been reciprocated). The story telling to me is annoying like a childrens book.

The "I'll show you how" uses this single example to make the point of why the information is valuable:

"I completely revamped how I ran my design firm to the point where I worked 19 days in one year and generated over $200,000 to fund my side project."

So we have n=1 here and no further data to back up the initial claim (could be elsewhere so if it is someone please correct me) of how all of this works.

I wouldn't base writing a book on making 1 or 2 smart moves that worked to generate $200,000 (I've done that by the way and over the course of many years so at least I could back the claim up with n= a much larger number btw.)

This is not to say these ideas don't work (some of the ideas do have merit) but we don't exactly a long history here of these tactics working from the author since it seems that after making that money he switched into starting freshbooks.

jacques_chester• 13 years ago

I think Patrick McKenzie / patio11 once threw out a recommendation for The Strategy and Tactics of Pricing. I'll add my voice, it's one of the better business books I've ever read.

I reviewed it at my blog -- http://chester.id.au/2012/09/12/review-the-strategy-and-tact...

Essentially, the core insight is as per the blog post. Identify what you are worth to the customer, prove it, then charge based on that. In the book Nagle, Hogan and Zale give examples of quite dramatic price changes where the customer agreed with the reassessment of value. The sellers could prove that a new product would quintuple productivity, so asking for a doubled price was damn near an act of charity, not highway robbery.

Also useful was their treatment of calculating the cash effect of pricing changes. Financial accounting 101 calculations can sometimes be misleading about the best pricing scheme.

badclient3• 13 years ago

Smart customers have their own method of pricing to compete with the value-based pricing suggested in the post. It's called market-based pricing. Even if my programming work will make the client $100,000, if the client is convinced he can get that programming work done for $5,000, he will pick that over my $20,000 quote.

I've read these several posts along these lines. The one huge assumption they make is that you have good clients who aren't on a budget and won't go shopping. Those clients are much harder to find as a freelancer.

larrys3• 13 years ago

"The one huge assumption they make is that you have good clients who aren't on a budget and won't go shopping. Those clients are much harder to find as a freelancer."

Agree. And it's not even so much budget as "not a schmuck" (sorry not a better way to put that).

When I saw this, I laughed:

"As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website."

So we are taking a totally speculative number of profit ($100,000) and charging $40,000 to get there. You would have to either be working for a large corporation (using OPM) and have no clue to buy into a proposal phrased like that or be new in business and totally naive. The entire presentation to me smacks of naiveness.

But here's the good part. I can totally see how things like this could and do work. That said you will have to find the type of customers who will fall for something like this.

Most business people who have been around can smell a sales presentation a mile away and to many of them (me in particular) it's an instant turn off because it reaks of "you are going to be paying a lot for this that's why we won't tell you upfront the cost. Because we are going to do some smoke and mirrors to make you go for it."

Lastly, one of the reasons in favor of discussing pricing in advance of a presentation is also to qualify people. I've seen to many salesman stupidly come in and not qualify people in advance simply not realizing that the local small restaurant simply isn't going to part with $10,000 no matter what you promise or tell them (or will have contract signers remorse and back out.)

badclient3• 13 years ago

Speaking of schmucks, here's one that got me to give up on consulting from couple years ago: http://cliffkaplanfraud.com/

ProblemFactory2• 13 years ago

That said you will have to find the type of customers who will fall for something like this.

I don't think customers that who accept (and find value in) this proposal are necessarily fools. Writing code is a cheap commodity. Making business decisions is not, and development cost is inversely proportional to how precisely you know what you want.

A business owner who has made all the business and technical decisions, and approaches developers with extremely detailed photoshop mockups and specs can probably successfully get an app or website made for $10/hour on elance.com, and keep all the extra value.

A client who has made all the business decisions and knows what development they want on an approximate "outline" level needs to hire a 10x more expensive local developer who is willing to meet and push back on any technical assumptions. They are paying 90% for the decision-making expertise on understanding what they want, and writing code is a tiny part of the service.

A client who may see value in a $40000 website offer is one who has not or cannot make the business decisions themselves. They are paying primarily for the business or marketing strategy consulting, and the entire development side is a tiny part of the service. Perhaps the client should make these themselves to be able to use a cheaper developer, and keep more of the value - but if they can't, then an expensive offer may still be profitable.

Silhouette3• 13 years ago

When I saw this, I laughed:

"As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website."

Exactly. Leaving aside the sleight of hand of comparing hypothetical/perceived benefit with actual cost, what you've really got here is a consultant offering you $60,000 of benefit this year. If another consultant can do the same job but only charge you $20,000, then they have offered you $80,000 of benefit this year. Assuming both are being honest about the expected benefit and can do work of a similar quality within their quoted budgets, so one really is just pricing higher arbitrarily, who are you going to choose?

Value-based pricing is interesting to discuss, and it's certainly a more rational and business-like way of handling engagements than billing your time out hourly in something not so far from an employment relationship. However, the value added is benefit minus cost. Unless you really are the only game in town, you can't just raise your rates until they are 99% of the value you claim to generate for your client and argue that it's still a good deal for them because they're 1% better off if they use you than if they hadn't. That ignores the third option of using someone else.

That third option is a possibility for almost every client of almost every consultant. If you as a consultant have the sales and marketing skills to find clients who will believe that they don't have that option and convince them that you really are the only sensible choice and they should pay your inflated rates accordingly, then good for you. However, please don't pretend that winning jobs at those inflated rates has anything to do with some natural value proposition rather than simply being better at sales and marketing.

reedlaw• 13 years ago

Can a smart customer really get the job done for $5,000? Of course, because this customer will have clearly defined his requirements up-front. The average client will not have clear goals or requirements thus forcing the programmer to iteratively come up with a solution that meets the client's unwritten expectations. This overhead will generally add up to the amount of the higher asking price. So in the case of a poorly defined project, a $5,000 job will be woefully inadequate and will require the client to start over from scratch.

ww520• 13 years ago

That's truly impressive to work 19 days and made over $200,000. I wonder what's the story.

rdouble2• 13 years ago

The linked PDF would have been more interesting if it actually got into detail about that claim.

Tichy• 13 years ago

I wonder if the secret just boils down to "I started offering SEO services instead of design services"?

To be honest I wouldn't know how to guarantee a client that a new web site would earn them 100000$ more. I suppose that is simply SEO territory.

chrischen• 13 years ago

"As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website."

You can only do this if what you offer is not a commodity. Otherwise, what you charge is the minimum of expected value and the market rate for the work you do.

triplesec2• 13 years ago

Value pricing is a great idea for many spaces, but the headling and intro rang "I'm being sold to" alarm bells. The copy is a little too SEO sorts of people for tastes around here.

Eliezer• 13 years ago

Whenever I see a page selling anything and it won't tell me the price and I can't find it in a click, I move on. My time is valuable, and someone who plays games to waste it is not someone from whom I want to buy anything.

benmanns• 13 years ago

Are you in the market for $40,000 websites?

Additionally, this is not about playing games -- it's about finding what is valuable to a client and delivering it.

oz• 13 years ago

I used to think like that, and it used to piss me off, until I learned about market segmentation.

If SIAI approaches me to buy $WIDGET and Google approaches me to buy the same $WIDGET, I'm charging Google an order of magnitude more than I'm charging you.

How I Earned A Lot More on Projects by Changing My Pricing Strategy

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