
How I Earned A Lot More on Projects by Changing My Pricing Strategy - jggube
http://sixrevisions.com/business/earn-more-on-projects/
======
tptacek
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.

~~~
edanm
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.

~~~
tocomment
What didn't you like with fixed price billing?

~~~
tonyedgecombe
The problem with fixed price work is you create a conflict of interests from
the start. It's in your interest to do as little as possible for the price and
it's in your customers interest to get as much as possible for the price.

That and all the issues of requirements gathering up front.

~~~
gabemart
Isn't it also true that hourly or daily billing creates a conflict of
interests from the start, because it's in the customer's interests for you to
finish as fast as possible and in your interests to finish as slowly as
possible?

~~~
sokoloff
Yes, but those are smaller than the converse, where the conversation is about
whether something ambiguous/new is in or out of scope (strictly adversarial
discussion), rather than whether such ambiguous items are worth it or not to
the client (simply a resource allocation discussion).

~~~
tptacek
I have a hard time believing that the potential conflict of interest situation
that emerges from a fixed-price engagement, where the customer ultimately can
accept or reject the work, would be _worse_ than the elemental conflict of
interest that emerges from hourly billing, where customers have little control
or even insight into hours billed.

------
badclient
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.

~~~
larrys
"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.)

~~~
Silhouette
_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.

~~~
mistermann
Exactly. The only way I can see this working with a non-naive person is if its
accurately measurable, and if you don't achieve the 100k, you don't pay the
40k. THEN, I can see it working. If that isn't how it works, then I can't
understand how you think you are righteous in selling these services at a much
higher place - put your money where your mouth is.

~~~
Silhouette
FWIW, I don't think righteousness is really the issue here. All consultancy is
ultimately based on selling valuable information and/or judgement that the
client doesn't have but the consultant does, so in a sense it's always based
on the consultant charging money because of the client's ignorance. It's hard
to find any objective standard for reasonable pricing other than "what the
market is willing to pay".

Maybe it becomes more ethically dubious when the consultant is taking
advantage not of the client's ignorance in the field where they're paying for
advice but of their ignorance of the consulting market itself in that field.
Even then, it's the natural position that a new customer doesn't know the
sellers' market, and a large chunk of sales and marketing is based on trying
to convince uncertain prospective customers to buy from you and not someone
else, so again it's hard to find any objective standard for what is fair and
what is unfairly taking advantage. (This is a major argument for licensing
practitioners in industries where bad advice can be particularly damaging,
such as healthcare, law and accountancy.)

One thing that is very clear is that the value-based pricing approach only
works if you can find some credible and quantifiable means to demonstrate the
value you might offer to a client. If you work in a field like conversion
optimisation, that's easy enough. If you (or your consultancy including
colleagues/subs) are building an entire system that will have concrete
benefits for the business, you can probably do it too. If you build software
in general, maybe as part of a wider team or making incremental functional
changes to an existing system as many freelancers/contractors do, then it's
not the same situation.

This is why it sometimes irritates me when a handful of HN celebrities post
repeatedly about raising rates and changing the basis for charging as if
everyone can do it, even in response to someone who would obviously have to
fundamentally change the kind of work they do before the advice would make
sense for them. It sets false expectations, and potentially damages the
careers of people who go out to customers/clients with unrealistic
expectations and wind up missing out on reasonably profitable work. Worse, it
could tarnish their reputation and leave unhappy clients behind, because even
though they did what they said they'd do, the client later discovered they'd
paid well over the odds and felt ripped off. It's never happened to me,
because I choose not to work that way, but I've seen it happen to others and
the results are never pretty.

~~~
larrys
"when a handful of HN celebrities post repeatedly about raising rates"

Exactly. An similar example might be me. While not an HN celebrity I do get
referrals for what I do from people who are celebrities (could do an entire
post on how that went down actually). I do it because it's a) fun (it's not
the main way I make money - very time consuming) and b) I do it to plant seeds
for future things (contacts with important people) as well.

Consequently I am able to say "I want $x for a strategy and research fee and
$y upon successful completion of the task". So far I've had no kickback from
anyone so I just have to evaluate and try to maximize x and y perhaps and
raise to make more iic. The "research/strategy" though appears to work even
w/o the celebrity connections because of my other obvious qualifications and
what I do.

There are lessons to be learned from how I operate but they would probably be
more centered around how I got to that place rather than "here is how you can
charge what I charge". Otoh if I wanted to become an HN celebrity (I don't at
least not now for sure) I could spin this any way I want. I could make
anything the "thing" that should be paid attention to.

There are lessons to be learned from all of this of course but I fear that
someone just starting out may have a much harder time seeing the 50% they
should pay attention to and the 50% they should not.

------
zackmorris
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).

~~~
tieTYT
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.

------
chrischen
"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.

------
dave_sullivan
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...)

~~~
dreamfactory
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.

------
Tichy
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.

------
Eliezer
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
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.

------
jackschultz
> 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?

~~~
pallandt
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.

~~~
tptacek
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.

~~~
pallandt
Nothing wrong with that so long the client knows, regardless of how it's
phrased. I agree that a 'dream team' sounds much better, good point.

------
jacques_chester
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...](http://chester.id.au/2012/09/12/review-the-strategy-and-
tactics-of-pricing/)

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.

------
ww520
That's truly impressive to work 19 days and made over $200,000. I wonder
what's the story.

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

------
chatmasta
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
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.

~~~
chatmasta
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?

~~~
dreamfactory
Depends whether your milestones are measured in time, features, business
outcomes. First would still be t&m - just be a larger unit than days; second
would be classic fixed price billing (which incentivises low quality hackily
bolted together solutions which will be a pain to maintain and extend); third
would be value-based consultancy.

~~~
lifeisstillgood
This is a fair insight - there are always milestones - the ones you agree to
get paid by affect the project as a whole

I would suggest talking in terms of features / business outcomes.

------
bostonvaulter2
I'd like to point out that the linked free ebook (pdf) is an excellent short
read about pricing strategy:

[http://breakingthetimebarrier.freshbooks.com/](http://breakingthetimebarrier.freshbooks.com/)

~~~
kohanz
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.

~~~
larrys
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.

~~~
rdouble
The PDF doesn't actually go into detail about how the author made over $200K
in 19 days. In fact, the rest of the story doesn't mention anything else about
that claim at all. It's a discussion between a fictional "Steve" and "Karen"
about how Steve should not charge by the hour.

~~~
fieryeagle
Sounds like I could give this one a miss. Too many motivational fluffs out
there already.

------
triplesec
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.

