
Why Your Customers Would Be Happier If You Charged More - hawke
http://www.kalzumeus.com/2012/09/21/ramit-sethi-and-patrick-mckenzie-on-why-your-customers-would-be-happier-if-you-charged-more/
======
thaumaturgy
I've only just skimmed this -- won't have time to fully read & listen to it
until much later today. But I wanted to bring up something that I didn't see
mentioned anywhere in there.

You _have to_ charge more. Aside from all of the arguments in terms of value
and avoiding pathological customers and so on, there's one more really good
reason to charge more: you need the money if you want to be awesome.

I've been running a small business for a while now that helps a lot of people
that need help but can't afford it. That's all fulfilling, heart-warming work,
but it's also put me into a very difficult position. Right now, I _need_ to
hire more people, but I can't afford anyone that's _good_. That's directly
hurting my customers. Our turnaround times are really hurting as a result.
I've got an opportunity to hire on a brilliant old friend of mine, but I'm not
sure yet if I can swing it, because the bank account really doesn't have
enough in it to afford him, and I don't know if I can work long enough hours
to get that kind of money in there.

I've resisted every other justification for charging more. Vacations? I don't
need more than just a few days off once in a while. Toys? Don't need those
either. Avoiding pathological customers? But those people need help too, and I
want to help them.

But not being able to build a strong business with lots of talent under my
current model? That's pretty hard to ignore.

~~~
tptacek
You can afford to hire people who are good. You just can't afford to do it the
same way Square can, or with exactly the same candidate pool Square works
from. Ping me sometime. The most important part of my job for the past 2 years
has been this problem.

~~~
dusing
Recruiter?

~~~
davidw
No, he isn't. He runs a services company that was recently acquired.
Definitely someone worth listening to.

------
patio11
This is the 2nd part of the interview mini-series with Ramit Sethi on starting
a consulting business, though we both talk products in this interview as well.

I'm happy to answer questions, as always.

P.S. I normally try to space out publishing things, to avoid a) reader fatigue
on my favorite topics and b) imposing on HN goodwill by showing up on the
front page too often. That said, the next two weeks are going to see a few
more posts on the blog than usual. Several independently managed processes,
with varying numbers of steps, people in the loop, and pipelines, all decided
to terminate roughly simultaneously. I apologize in advance if it's mildly
irksome -- believe it or not, it is the exact opposite of a planned media
blitz.

~~~
malandrew
I think it's awesome how aware you are of your own impact of appearing on the
front page more than normal and how considerate your attitude is towards the
impact of that on the experience of other HNers. Total. model. citizen.

~~~
csallen
It's also a self-serving attitude -- in a practical way, not a bad way. Part
of maintaining a successful relationship with people is to understand what
might piss them off, and avoid it. 99 times out of 100, being considerate is
the smart choice.

------
btilly
I am right now contracting, and I am learning a variant on this lesson that I
have reason to believe will prove very valuable to me and hopefully others.

1\. If the value of what you contribute can be measured, people are happy to
pay you ridiculously more on a pay for performance model than they are with
hourly consulting rates.

2\. A/B testing can provide a way for them to measure the value of your
contribution.

Why is this? Well in pay for performance, the company takes no risk.
Furthermore it lines the incentives up correctly from everyone's perspective.
Suppose that compensation model inspired you to spend 2x the effort that you
otherwise would for 1/3 better performance. Odds are that they've just covered
the amount they have agreed to pay you and are laughing all of the way to the
bank. But if you are compensated hourly, and they are not sure it will work,
there is no way that they want you to spend 2x the effort up front, even if
there might be a slightly better return.

I am not at liberty to share specific numbers. But keep this fact in mind in
the future. It may prove valuable to you.

(I should think about writing this up in a blog post, along with lesson #3.
That lawyers systemically fail to place a value on your opportunity cost...)

------
Alan01252
As a freelance developer myself, and thanks to Patio11, I've always had the
charge more mantra firmly placed at the front of my head. So it's a little
disheartening to hear on the basis of what was said in this conversation, that
I'm still selling myself short. Without the advice I've read here, I doubt I'd
of lasted the four months I have so far...

The hardest part of this "charge more" philosophy is finding the clients. For
example, I went to see a client yesterday, who knew my daily rate. We had a
very positive meeting and I was told "they were glad they'd found the right
man for the job". Yet today they stated they could get two developers for the
price I was charging and would have to think about hiring me unless I was
prepared to negotiate.

I do wonder if maybe the world of freelance developing does have a payment
cap, and that to reach the next level we need to sell ourselves as something
other than just developers.

Or does making the charge more philosophy work to its full extent in the
development game, mean joining big company x, or selling my soul to big
company y.

The question I'm asking myself right now is. Would Patio11 be able to charge
the same rate as a freelance developer as he does as a "I will help you sell
more software" freelance consultant?

~~~
patio11
_Would Patio11 be able to charge the same rate as a developer as he does as a
"I will help you sell more software" consultant?_

I charge the same rate for software development as I do for making graphite
etchings on paper in aesthetically pleasing patterns. Consulting clients buy
both of these things from me, in isolation or combination, on a regular basis.
So if that's the way you're asking the question, "Yes, I could."

If the question is "If you brought nothing to the table other than the ability
to write Ruby code, would you be able to charge $YOUR_RATE for writing Ruby
code?", I think I'll go with "I can guarantee you that _someone_ gets that
much for writing Ruby, and probably more besides, but it probably wouldn't be
me" and "Wait wait wait, you seem to want to sell yourself as a commodity
coder, don't sell yourself as a commodity coder, down that path lines
madness."

~~~
yourapostasy
It might be helpful to the wider community of freelancers if you used your
popular bully pulpit to expound upon the procurement tactics you have
encountered, and how you responded to still win over the clients.

The "we found someone else cheaper than you" line is used all the time. It
doesn't matter if it is true or not. Procurement's job definition is to
convince you, Joe Freelance, that you are a commodity that competes solely on
price for them. If you let them manipulate you into that mindset, then it is
time to re-evaluate your unique value proposition and your negotiation
process. This approach is also why you always see the business "hand off" to
procurement once you have convinced the business they need you. They are
trying to use the process to negotiate piecemeal and divorce the value props
you just used from price, and the failure of procurement to realize why you
are different and a better value is not a bug, it is a feature of their
process. There is a lot more to be said, but I find a lot of technical
consultants who look down on sales people are unaware of these basics of
negotiation.

~~~
tptacek
Walk away. If they really do have someone cheaper, you either got unlucky this
time, or you've positioned yourself as a commodity. Neither of those is a
problem you can solve with negotiation.

Often, procurement is actually at odds with the real buyer. All you have to
say is "sorry, I cannot offer you a discount" (or "cannot without a 6-month
commitment" or whatever value you might want to extract here). The buyer will
yell at procurement, and procurement will back down. Walk away, and the client
will often come back to you. Happens all the time. Be nice and don't raise
your rates on them out of spite when they do.

But if you're getting this constantly on potential gigs, I would worry that
you haven't done enough to position the work you're doing. If you're a (say)
"Rails developer", then despite the fact that Rails developers are in high
demand, a savvy client probably _does_ have someone who will do your job
cheaper. Don't be a "Rails developer". Be a world expert in solving XXX
business problem who, lucky you!, just happens to use Rails as their tool.

There's more nuts and bolts to know about handling procurements people; there
are rituals you'll have to do with some of them to close deals. But basically
it's all a game of chicken, except when you lose you don't die, you just learn
something important about your business.

~~~
yourapostasy
The rituals you mentioned is information I feel is too-frequently overlooked
by hackers trying to don their businessperson hat, and the wisdom of how to
respond is diffusely spread out on the Net. What most need to hear from
someone who has been-there-done-that is after saying "sorry, I cannot offer
you a discount", they are going to hear lots of scary talk from procurement.
Most hackers have no idea how this dance is done, and have never learned
before starting in business.

Procurement will shoot back with all sorts of lines, but basically they will
try to intimidate you by saying something along the gist of "we're going to
have to reconsider this/shop this around since you can't offer us a discount",
or "we're disappointed in you/to hear that". The trick here is to have a good
enough pipeline that you feel comfortable to stand your ground and not take it
personally when procurement finds someone else; learning how to shrug off
losses as long as we were pulling in on target was one of the harder skills
for me to pick up when I started.

Most hackers trying to freelance _need_ to hear the kind of talk they will run
into out there, and not just what to respond, but _how_ to respond. When
hackers hear about "don't sell on price, sell on value and positioning", many
don't know how to translate that into the nuts and bolts of what happens in
the trenches and thus even if they themselves do not sell, a key toolkit for
evaluating non-technical co-founders is underutilized.

There is lots of talk here on HN about how rare great non-technical co-
founders are, but there is precious little on actual pragmatic ways to detect
them or adopt their principles and methods.

~~~
tptacek
All of these scary things you're talking about mean the same thing. "Give us a
discount or we're not going to give you a purchase order".

From what I can tell from dealing with this problem (not nearly as directly as
my business partners, but enough), there are basically just a few things you
can productively do:

* Walk. A lot of times, the company will come back, and procurements is bluffing.

* Cave. You need the money enough to permanently sacrifice your rate at the client. You should really avoid doing this, because it is extraordinarily difficult to recover a concession on your rate.

* Convert to budget discussion. Try to get procurements to talk about a "number" they want to hit across the project (you can't do this with hourly billing HEY WAIT MAYBE THAT HOURLY BILLING STUFF ISN'T SUCH A GOOD IDEA AFTE--- anyways). Now take that number back to the real buyers and massage the scope of the project.

* Trade. Procurements wants a discount, you want a committed pipeline of work, a customer reference, or whatever. Again: if you're negotiating, make sure it's on the project rate, not the hourly.

You do not need a nontechnical cofounder to understand this stuff. You just
need to know the role of procurements and you need to truly grok positioning.

------
bdunn
I'm putting together a fun little video this weekend where I'll be reading
aloud (and toasting to) emails from people who have read my book
(<http://doubleyourfreelancingrate.com>) and are now charging more.

The dozen or so responses that make up this upcoming video and the
corresponding shifts in worldview are _directly_ inline with everything
Patrick and Ramit have to say in this interview. Here are my takeaways from
these testimonials:

* Most people price themselves in the same way commodity markets price corn, oil, and hogs.

* Fear keeps us from breaking away from market/cost-plus pricing to a pricing strategy that's focused on the value we deliver to our customers.

* When you focus on _why_ people hire us (to increase revenue or cut costs) and approach everything with that end goal in mind, you can dramatically increase the value you produce and the cost for that value. Commodity pricing is thinking "I write Ruby for my clients" or "I setup Wordpress sites". Pricing based on the value you deliver is "I help businesses increase profits by minimizing the amount of clicks the sales team needs to make in order to process a new transaction."

------
jwwest
I would have never paid any attention to Ramit unless he came with Patrick's
seal of approval.

The problem is that I shudder inside a little every time I hear the word 'info
product'. The whole industry is beset by frauds and hucksters, and I think
that generally people are a little skeptical when they see yet another person
making claims such as "I will teach you to be rich".

Ramit provides great, actionable advice in his content. The problem is that he
sells himself the same way as everybody in his industry does. It's things like
the way he speak to his sales site that puts a small part of me off and puts
me on the defense.

------
ttcbj
I did not read the full post, but the basic gist reminds me of the book 'How
to sell at margins higher than your competitors.' I wasted a lot of time in my
early 20's reading business advice books, but that book is well worth the
time. It transformed my perspective on prices, what customers you want, and
how to sell. Although it was written for salespeople in commodity markets
(think lumber supply), it transformed my small software company. I highly
recommend it.

------
jiggy2011
Whilst I agree with the basic thesis of "charge more and compete by providing
value". The difficult part for me seems to be finding people who have money
they can part with in the first place, you can't really sell somebody on the
benefits of something they can't afford.

I've recently been trying to pick up some part time freelance work to
supplement my income and pick up a wider range of experience.

So first stop was elance.com/Guru.com and similar sites. Looking at the jobs
it seems like around 90% of the bids were from individuals in India or the far
east happy to work for $7 per hour. So I figured I could "compete on quality"
, however a lot of the individuals I would be competing against had CS or
design degrees (often from western universities) , 5+ years experience and
portfolios full of slick looking corporate websites. Besides, at the rates on
offer I figured I'd have to complete at least one fairly large project a week
to match my current salary and I'm not confident about producing quality on
those kind of deadlines.

Most of the project descriptions were also either extremely vague (I want a
website), impossible (I want a website, must be #1 on google for <competitive
search term>) or possibly illegal (I want a keylogger, must not show up on
AVG).

It also seemed like a lot of the bids came from various outsourcing companies
who had a bunch of different skills in house and providing 24 hour coverage
which would kill my timezone advantage (besides a lot of buyers were in the US
when I'm in the UK or were in India/Far East themselves).

Looking at the profiles of freelancers from the US/UK etc , most of them
appeared to have never won a project despite being on the site for over a year
often.

So I gave up on that and figured, "It's all about networking right?" so I
attended a local business networking event for "entrepreneurs". First bad sign
was after sitting down and introducing myself to the lady next to me, "what do
you do?" , "I build websites , computer software and mobile apps" , "wow, you
TOO".

Everyone there who wasn't a freelancer of some description desperate for
business was either a recent university grad full of enthusiasm, bright ideas
but no funds at all or some small mom and pop operation who were stressed out
about meeting their mortgage payments that month and absolutely not looking to
drop a chunk of change on any kind of bespoke software.

Now I'm sure there are people out there with money to spend, but they are
probably hiding behind an army of secretaries etc. Besides even people with
money are looking to save it, and there are plenty of monied businesses like
investment banks etc who are still offshoring all of their dev work.

Any bright ideas on how to break through this firewall?

~~~
patio11
1) Don't use the freelancer sites. They're markets for lemons.

2) There are a variety of networking mechanisms besides networking events.
Anything pitched as a "networking event", explicitly, is going to self-select
for people who have nothing better to do than go to networking events.
Successful businessmen _largely_ don't go to that sort of place because _they
have networks_. They go to places which _promise value to them_.

One specific example is e.g. focused presentations or conferences on a topic
of immediate need to their business. For example, the Business of Software
conference charges something like $2k a ticket, and is pretty much totally
attended by people who own or work at software companies that can justify $2k
a ticket and a half-week at a luxury hotel if it sells more software. That
might be a good place to meet well-heeled software companies if you're in a
mind to do that. (How to avoid paying an arm and a leg for conference tickets?
One way is to get invited as a speaker. How to do that? a) Get really good at
something. b) Reach out to conference organizers. c) Tell them that if you
speak about your thing at their event it will receive high ratings and people
will talk about it after the conference.)

Another hack: can't get invited to a party? Throw a party. Invite yourself.
You must be a desirable person to meet at the party, after all, you're
throwing it. Ryan Carson talks about this all the time. It takes absolutely
nobody's permission and a budget in like the two to three figure range to say
"October 22nd: SEO For Law Firms seminar, Community Center Conference Room A,
2:00 PM to 5:00 PM with reception to follow. Register now to reserve your
ticket."

3) _they are probably hiding behind an army of secretaries_

Is this an obstacle that the world is presenting to jiggy2011 or an obstacle
that jiggy2011 is presenting to jiggy2011?

I know at least 30 people who can greenlight 5 to 6 figure engagements. 25 of
them have publicly routable telephone numbers... I assume, anyhow, because
calling people scares the heck out of me. Every last one reads their own
email. None has a bodyguard separating them from the hoi polloi at e.g.
industry events.

You don't need to get the CEO of Bank of America on the phone to charge $1X0
an hour. A company the size of a BoA _bank branch_ can be a great, great
client to have -- one or two people in the decisionmaking loop, monthly
payroll of $X00,000 to $Y million so your invoices won't threaten the ability
of anyone to make their mortgages.

~~~
jiggy2011
Thanks for the reply, certainly some food for thought there.

I guess there are a few things at the crux of this.

Having worked on mainly typical "line of business" type software and CMS type
systems I've tended to find myself on projects where the number of voices has
meant that everything tends towards mediocrity and anything approaching an
innovative idea gets shot down immediately.

In other words it's difficult to produce something that you feel _proud_ of
and would be happy to show people as an example of your skill.

Also as very much a generalist (everything from server admin to dev to SEO)
it's difficult to find an area where I would feel confident speaking as an
"expert" on any particular subject.

Perhaps, I would be better off using the time to develop things of my own that
people might find useful/interesting and would give me something that I could
talk about?

~~~
patio11
_Also as very much a generalist (everything from server admin to dev to SEO)
it's difficult to find an area where I would feel confident speaking as an
"expert" on any particular subject._

This is a common worry in our field, even for people who are absolutely drop-
dead world-class experts in things! You do not have to be absolutely drop-dead
world-class expert in things to teach hugely valuable things to people,
because _the overwhelming majority of people are not experts at
$FILL_IN_SUBJECT_.

You do server admin? Hypothetical example: Have you ever administered a MySQL
server? Have you written a backup strategy for one? _Once_? Jiggy2011, you
know more than I do about a subject which very nearly cost me $$$$ and a heart
attack last Thursday. Would I be listening to hear you talk about MySQL backup
strategies? Heck yes. I burn with need for that right now. Are there other
people who know it better than you? Yes. Do I know who they are? No. I know
almost nothing about this field, which includes not knowing the
straightforward paths to learning more about this field. You know this subject
better than I do, maybe you could tell me who they are, but you can probably
also tell me that they're busy building Facebook and since you aren't you're
the one _actually talking about this stuff_.

~~~
jiggy2011
Mysql Backups:

Ghetto solution is to find a service that will allow you to rsync files to
them and take care of offsite backups etc themselves. Once you have done that
it's a simple case of setting up mysqldump to create timestamped .sql files
and setting that up on a cron job to rsync to the remote server via SSH (you
need to generate a key pair and copy the public key to the other end).

If you are using characters from weird character sets you definitely want to
make sure all of your unicode settings are correct which may take some trial
and error and I've never entirely trusted mysql in this regard.

If you are paranoid you should have a separate job that automatically
downloads and restores your backups after a period of time and runs a few test
queries on the data. Of course the hard part is knowing what the results of
these queries should be.

Of course the problem here is that this will chew up increasing amounts of
your remote storage over time, so it depends if you can afford to delete
backups of over a certain age.

You can also enable binary logging in mysqld and do incremental backups by
writing the binary log to the remote host at certain intervals (I think this
only works properly with InnoDB databases), though I have no practical
experience doing this because frankly I've never needed to. Nightly dumps were
always _good enough_ so my boss wouldn't want me spending any more time on it.

That's the crux of the problem with working for a non tech company, most of
the time once the solution is "ok" it's time to move onto something else so
you never get a chance to really kick ass which is what you need to do to
justify a high rate.

These are really commodity skills though, you could have figured all of this
out yourself by reading a few blogs (that's basically all I did).
Alternatively if you had posted "Mysql backup solution needed" on eLance you
would have probably had at least 20 offers to do the whole thing for $20 or
so.

~~~
patio11
_you could have figured all of this out yourself by reading a few blogs
(that's basically all I did)_

Could have. _Didn't._ Was too busy building my businesses to care to do the
research. _Many people are like me._ Would listening to Jiggy teach me about
MySQL in a nice, packaged, Jiggy-does-the-work-so-I-don't-have to format
provide value? Yes, clearly. You already quintupled what I know about the
subject _with an HN post_ , think of how entertaining talking for an hour
would be.

 _These are really commodity skills though... do the whole thing for $20 or
so._

You are no longer a commodity after you've successfully convinced me that you
are the expert who can e.g. listen to my particularized needs and tell me a
solution which will work for them. In fact, even if I were non-technical and
_stark-raving insane_ and thought that $20 was a reasonable price to pay for
this, the fact of having read the above would convince me that eLancelot
wouldn't have his uni-codes sorted on the cronSyncServer or whatever that was,
so I should entrust the _future of my business_ to the guy who seems to know
what he's talking about who is quoting numbers closer to what I pay for e.g.
insurance than what I pay for toilet paper.

~~~
mechanical_fish
Something about this exchange reminds me of the old Monty Python "Motor
Insurance" sketch:

<http://www.youtube.com/watch?v=kO2R_DDZPCM>

 _Well, Reverend Morrison, in your policy…_ [pause to remove wadded-up
document from the inside pocket of an old tweed jacket] _…in your policy it
states quite clearly that no claim you make will be paid. You see, you
unfortunately plumped for our "never-pay" policy, which if you never claim is
very worthwhile!_

(Incidentally, it's fun how well this sketch holds up today if you imagine
that Michael Palin's character is playing the role of the Internet.)

Anyway, the point is that it's not buying the insurance that's hard: It's
ensuring that you can collect when the emergency happens. The same is true for
backups. When you try to restore the backup, and you can't find the guy who
set it up in the first place, and the _second_ guy you hire for $20 from
eLance tells you that the first guy messed up the Unicorn settings or
whatever, or that his script broke four months ago and nobody noticed, now
you're screwed, and you _don't even know which of your two $20 minions made
the mistake_.

How much will someone pay, as a monthly retainer, to avoid that nightmare?
Well, how much is their data worth? How quickly will they want to restore it
when disaster strikes, and do they already have a full-time employee with a
pager who knows how to perform the restore?

------
stevesearer
While not in consulting, I have actually found the same to be true in selling
advertisements on my website.

My original plan was to sell ads at rock bottom prices - thinking that because
they were inexpensive, they would sell out quickly. What I found was that the
advertisements didn't sell out, and I was making rock bottom wages. I recently
upped the price by 10x and have already sold an advertisement at the price,
effectively making in 1 sale what would have previously taken 10 sales.

I have also thought that advertisements at such low prices signaled low
quality to potential advertisers, making them less inclined to purchase from
me.

------
alpeb
Great advice but gotta be careful this is really only applicable to
freelancing/consulting as an individual. Building a self-sustained company is
a very different beast. There certainly are scenarios where you're well enough
positioned to set the price you want (Barney's), but if you're not targeting a
very specific niche prices are already set for you (for example .99 in the
Apple store and zero in Google play) and it all comes down on having a great
novel and well presented product with tremendous operations efficiency and low
cost. Unless you're running on VC free money of course :)

------
wtracy
Best quote:

"If you got into this business to make peoples’ lives better, and you have
produced something which will succeed with that, and you are aware of truth
about reality such as “better marketed products beat better engineered
products every single bloody time”, then you have an obligation to get better
at marketing yourself."

------
ericdykstra
Has anyone here read Ramit Sethi's book? Thoughts? I'm thinking about picking
up the Audible version.

By the way, thanks for this podcast, Patrick, I'm about to listen to both
parts.

~~~
graeme
Highly recommended. It's a very quick read, and gave me multiple tips that
more than paid for cost + time invested reading the book.

As a Canadian, much of the investment advice was irrelevant to me. But I
switched to ING direct as a result, which simplified my banking (big time
saver) and eliminated a lot of fees.

He also has very good scripts for dealing with customer service reps. Various
other small tips have been useful, such as better tracking of recurring
expenses.

Conservatively, I've probably saved at least $1,000 since reading that book
two years ago.

------
strebler
Wow, perfect timing, I am just writing a contract proposal this weekend!

This (novella-sized) article definitely resonated with me, will try applying
some of their advice soon...

------
robbiemitchell
A long thread like this and no mention of price elasticity?

------
zupreme
Wow. This is a great piece, even though I realize I've been guilty of just
about every single thing they say NOT to do...

------
gambler
That's all wonderful form consultant's point of view, but if everyone reasoned
like this guy, there would be no open source software, no cheap consumer
software, everything would be SaaS and... well, I'm not sure I would want to
see a world like that.

~~~
bprieto
Why not open source software? They actually say something like "you can be
free, but you can't be cheap". Making money with OSS is not easy, but there
are certainly ways to do it.

And for cheap consumer software, it's just that you need to be really big to
win money being cheap. You can't do it as a one man company.

------
dsolomon
Got 2 paragraphs in - realized author lives in fantasyland.

------
bejar37
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