Value pricing is easy

I used to be a dyed-in-the-wool true believer in “time and materials” hourly billing. I’ve now come full circle, and you should too.

The Price is Right

You already have an hourly rate, so take that number and multiply it by your best estimate of the number of hours it will take to do the work.

$150/hour x 100 hours = $15,000

Now, take that number and double it. Then round up to the nearest 4, in thousands.

($15,000 x 2) + $4000 = $34,000

That’s it; you’re done. That’s what the project will cost.

Everyone is happier.


My rationale in support of time and materials was reasonable: estimates are guesses and in a fixed price project, one party always wins and one party always loses. It’s usually the vendor that ends up taking a bath. If you do great work for your client on an hourly basis, they will happily to ask you to do more.

On paper, this sounds great and sometimes this is exactly what happened. Unfortunately, there were many other less fun situations where, due to miscommunication and mismatched expectations, the original scope would be blown out and “going back to the mountain” to inform the client that they’re going to spend more money was horrible for everyone.

My battle experience made me feel very confident that I really knew it all, which made reading The Win Without Pitching Manifesto even more jarring. A smart friend recommended it, and I decided to skim the first chapter out of respect for his opinion. Three hours later I had finished the whole book in one go; standing in the same spot, vibrating with excitement. Few books can truly turn your entire professional outlook on end, and this was one of them.

Amazingly, you can read the entire book free, here.

I’ll wait.


Let’s say that you have an opportunity to work on an exciting project with a new client. You bill $150/hour and you want to work up some concepts to start things off, but all the client hears is “expensive and unknowable”. They can only make guesses about how reliable you are, and what kind of value they get for their money. If you can’t make good estimates, how can they? This relationship starts with fear.

So you come back and say that you want to spend 100 hours doing these concepts, for “about $15000”. Now they are going to get scared that they have to spend $15k (or more! it’s usually more!) before even finding out what the true scope of the real project looks like. Worst case scenario: their kids don’t need to go to college.

This is usually when the client browbeats the vendor to come to the table with a detailed proposal, and they want to know what the overall budget is going to look like, even though you haven’t defined the project. The only way to come up with this budget is to do enough of the (unpaid and unappreciated) ideation work so that you can ballpark a timeline. Because you rush the planning, the budget and timeline is never accurate.

All of the risk has now been assumed by the vendor and the power will be held by the client, who doesn’t know they are ruining your life. This was my story; I kept doing it and expecting a different result each time.

 Or, it could go down like this:

Dear Bob,

Our team has discussed the project and we are excited, with ideas already surfacing. It’s a green light on our end.

The way I see this working is three distinct steps for a Phase One discovery engagement:

  1. A kick-off meeting with 2-3 of your team leaders to ideate and transfer domain knowledge while establishing a friendly relationship. We suggest going off-site to a local hotel to reduce distractions.

  2. We will design 2 or 3 interface concepts. You will direct us to either channel our creative energy into 3 outlines with less detail, or 2 prototypes that are more fully realized. We might have a better idea of which direction to choose after the kick-off meeting.

  3. Demo day! We would present our concepts to the stakeholders without ego or preference. Feedback can be gathered in a way that allows us to incorporate ideas into the design.

Start to finish, this process would take 3-5 weeks and cost $34,000. We are available for the kick-off meeting on or after July 15th.

Once your team has chosen a design direction, we’ll be able to assess the scope of the finished product and we can discuss Phase Two.

Let me know if you have any questions. Can we set a time to discuss this tomorrow? I am free at 10am and 2pm.

All the best,

Pete

The target hourly is still $150 and I still think it will take 100 hours to come up with some great concepts. However, the cost will be $34,000 and we’re in control of the relationship.

In doing this, I have done the client a huge service: I’ve given them a reasonable sounding round number that assigns a price to something that is utterly unknowable to them. I give them a realistic schedule for completion, while giving my team the ability to decide how long they need to do an excellent job without the client counting hours.

I repeat: value pricing gives your client the ability to make a purchasing decision based on knowable values for time, quality and money. Any investment in technology that doesn’t return 5X is a charity, so presumably you wouldn’t even be having the conversation if they didn’t think the end result will make them a million dollars or more. In the end, there’s no real difference between $15,000 and $34,000 to a good client; someone you actually want to do your best work for.

It’s not the hourly rate that stresses out a client, but the unknowable and terrifying risk that the project they initiated will fail and they will be humiliated to their family, friends and co-workers. Imagine the stress of taking your car to the mechanic and having them come back with a long list of questionable repairs that you don’t know enough about to dispute. You’re not an expert, and it’s embarrassing to admit that you have no choice but to trust them.

Maslow’s hierarchy of needs suggests that people are terrified of losing their jobs and/or being humiliated. You know that saying, “nobody ever got fired for buying IBM”? That’s what this is about. The only reason enterprise support contracts exist is that they are ass-covering insurance so that there’s someone for the Board of Directors to blame when things go wrong.

Given the two scenarios I present for the same client relationship above, the client and vendor will both be happier with the value priced engagement every time:

Rounding up to the next 4 in thousands is just a hunch that I borrowed from Robert Cialdini. I think it looks non-threatening and is less than 5, which is more likely to be a spending cliff.

If you don’t think the client can manage $34,000 instead of $15,000 then you should break down the scope of the project into multiple smaller projects.

Remember: you are the expert. They came to you because they want someone to solve all of their problems. The best way you can help any client is to remove complexity and unknowns from the equation so that they can focus on doing what they do.

They’ll love you for it.


This essay was inspired by a conversation I had with Jelle Prins about women.

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