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.
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.
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?
+ 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.")
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
We've never been rejected for a client for not billing hourly.
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.
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.)
"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.
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.
This seems a little off to me. Would you tell the client that you're outsourcing?
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.
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.
Not sure what you're saying?
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).
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.
Additionally, this is not about playing games -- it's about finding what is valuable to a client and delivering it.
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.
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 $200,000 (I've done that by the way and over the course of many years so at least I could back the claim up with n= a much larger number btw.)
This is not to say these ideas don't work (some of the ideas do have merit) but we don't exactly a long history here of these tactics working from the author since it seems that after making that money he switched into starting freshbooks.
When I sell, I'm still linking it to business value--I just make sure it's pegged to hours, which is my most direct cost (other than my time, which I make sure ends up being a very high number if calculated as an hourly rate + profit on developers) Clients know it's typically not me doing the actual implementation work, but because I've linked the overall solution to business value and presented it as an investment--which it is--it doesn't matter.
The problem I have with fixed bid projects is overages and who pays for them. In this business, they're quite common and quite often not the fault of an idiot programmer--but if you do fixed bid, you'll have to eat these costs sooner or later unless you are very good at estimating (I don't know anyone that is...)
You can only do this if what you offer is not a commodity. Otherwise, what you charge is the minimum of expected value and the market rate for the work you do.
To be honest I wouldn't know how to guarantee a client that a new web site would earn them 100000$ more. I suppose that is simply SEO territory.
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.
