How I learned to charge my customers
idiallo.com
idiallo.com
1) I hate keeping track of time.
2) hourly rates aren't how my customers think of the issue. They think: "this product will make (or save) me $20,000/year" (making up numbers here). If I tell them that I can do the job for $5,000, that sounds like a great deal to them. But if I tell them I can do it for $200/hour, and I estimate it will take me 20/hours, then I just look like an expensive consultant. Notice that in the first scenario, I made more money and still seem cheaper.
Hourly fills me with dread as a client. I have no idea how much this is gonna cost or when you’ll be done and I can use it.
Retainers work well for ongoing work. Like when you need someone to do X, Y, and Z misc tasks every week.
Fundamentally I pay for results, time is an implementation detail. Why should I care how long it takes you?
Imagine paying someone an extra $10,000 because they missed the deadline. That’s how hourly works.
> Imagine paying someone an extra $10,000 because they missed the deadline. That’s how hourly works.
Yes it is.
You should probably ensure you only hire people who have experience predicting the costs of the projects you hire them for.
Deep Neural Networks who try too hard to maximize or minimize things will take weird misaligned actions. https://www.youtube.com/watch?v=Ao4jwLwT36M
I won't go into details, but my experience from the past year of trying to minimize the chances of losing my home and work visa has provided ample evidence that this also applies to human mental health.
> There is no way to know ahead of time what kind of contractor you are.
Which is why any strategy that resembles "fire and forget" is a poor one for anything that hasn't been repeatedly tested before with mostly the same components.
It's better to have a process where you repeatedly get visibility into a risk than to imagine that you can wall yourself off from it.
I'd rather charge by day/week to discourage those unproductive things and have the company get its act together in terms of scope/approvals so that there is no blocker (or they get expensive).
* A contractor who insists on an hourly rate for a project with unknown timeline does himself and the client the favor of killing the deal.
* A client who insists on a total-cost pricing for a project they need budget-certainty on does himself and the contractor the favor of killing the deal.
Charging by project would put me in an adversarial position with my client; I'd be forced to always push back when the scope / situation changes.
By contrast, charging by the hour lets me say yes much more often.
Of course, if I were to do more "turn-key" projects, scope would be much more predictable so it'd probably make a lot more sense to charge per-project.
For bigger things, it's important that expectations are set upfront and are clear to everyone. That way, if someone wants a new feature, they can have it for a price.
Main trick to mitigating feature crap I have used is by first I add extra padding to cost.
Second i tell my clients that I provide free maintenance for 2 weeks after the project si delivered. Mostly this helps because clients want speed over reliability. So we push and the next two weeks is bug fixing - sometimes it's three.
However no matter what happens I would never build a new feature in the maintenance period
First, it pushes that conversation to the beginning and can make it negotiable. Then it reduces surprises throughout. And finally, it gives you the ability to say "No, we agreed to.." when you need.
Nothing is perfect but it mitigates some risk.
BATNA is everything.
In general though my experience is most customers won't know what they want until you put something in front of them.
I've also found that the more they push you for a fixed price the more likely they will be causing problems down the road.
Of course you could argue this needs to be tied down before you start work but often this is the bulk of the work. Even if you did get something in writing it's turned into an adversarial relationship once you start refusing work or demanding more money.
I will caveat that I also generally enter long term retainer style agreements (though I dont usually structure them as a proper retainer) to handle various issues rather than fixed projects per-se. Things like "we want to scale up and dont know how" or "we are growing and need a hired gun to handle a broad spectrum of miscellaneous requests". Scope is a lot more nebulous in the first place for these.
I have difficulty seeing how you could charge for this other than by units of time.
I just can't charge hourly because I just can't imagine trusting someone who charges hourly.
"Development: 30 hours"
Again, nothing is a surprise in my relationships because we constantly are in communication, and I've raised issues with them beforehand if anything comes up / diverges.
1) The average person gets paid $27/hour. Even the average software dev gets only ~$50/hour. Since many people interact with people getting paid around this amount, they see high rates as greedy/outrageous. Less likely to get this reaction from clients that are used to interacting with other high pay/skilled work. If you give them a flat rate, they get imagine you’re putting in more hours.
2) If they don't have extensive experience working in the space, I think there's a belief that someone cheaper will deliver the same value.. because they don't understand the variation in skill among those in the same field. Especially in a field like software development, and the client comes from a field that's more structured and slower changing (which is most fields).
There's also a delivery risk that could increase the bill substantially.. but it seems to me that there's more to the reaction than just analyzing the risk and value.
200/hr for an independent consultant is someone making ~130k annually. It's a lot but not insane.
If you charge more for a fixed cost, then it doesn't really matter if you are off 3x one time. Yes, it's annoying, but you make up for it with the majority of times where you work the estimated number. If you are consistently underestimating, then you need to up your estimates.
For example, if I know that an automation that I can create for a client is going to take me 100 hours to setup and save them £20,000 per month I can either:
Charge 100 x £100 per hour - so a one off income of £10,000. Seems like I'm earning good money right??
OR
I can charge them £100,000. They'll make that back in just five months. A BARGAIN. Most businesses would bite your hand off.
The catch for achieving number two is knowing the value I'm providing. I can only do that when I know their business really really well.
Success = Connections x (Niche knowledge + Skills)
For connections:
Given the current state of the world networking is hard but not impossible. However you go about it, you need to build trust with people rather than hard sell them which doesn't work in 2020 (unless what you are selling is a commodity). Note that I said people, you're selling to people - not businesses.
You can shortcut this by leveraging existing contacts, ideally in a niche that you already have knowledge in because you worked in it.
For niche knowledge + skills:
With your connections at first you might need to find ways to cheaply provide value. Build up trust. Grow relationships. Get referred.
You'll make your life easier by specialising in a niche. So for example mine is financial services. A niche in a niche is even better. Again, for example mine is asset management, which sits within financial services.
So now you have your niche in a niche and detailed knowledge of that niche. You know what problems they have (the knowledge), and you can add your skills to solve their problems.
It's not easy, it takes years - but it's possible. Once you have all the elements of the above formula, you can switch your pricing from by the hour to by value.
Also everything you said here is extremely generic, it doesn't address the initial problem of finding a problem that a company needs solved and will pay for, but wouldn't solve themselves internally.
I'm working with a client right now at a 30h/wk retainer. I solve problems for them and communicate with the team regularly as if I were an employee. In my experience it's easier to sell your value to the C-suite because they focus more on outcomes than line items or specific tasks. Relationships, reputation and positioning are key.
Duh. If a general way to find such problems existed, everybody would be using it - meaning every problem would already have people on it. Which means no problems for you.
Welcome to the market.
Really depends on the client and your reputation though, you can definitely pull it off with the right pitch to the right people at the right time.
Basically, you want to charge a percentage of the value you're promising to provide for them. And then that's going to get multiplied by their confidence in you.
If I'm bidding on a project that I think can make $1MM/yr for my client, and I normally charge 10% of the first year's worth of value, then I'm looking at $100K. If the business I'm working with only has a 50% confidence that I'm a safe bet to produce that value, or an 80% confidence, that's going to get reflected in what price we negotiate to. Probably more like $50k in the 50% confidence bucket.
But the more proven you are, the more you can say, "I said this thing would make $2MM and by gum it actually made $5MM" the more you're going to be able to charge.
N.B. That 50% isn't "It's a coin toss whether or not they'll complete the project", it's more like "When they complete the project, we're confident that we're going to get at least 50% of the value they're selling us on"
You just need to match it so it's worth more than what anything else would be.
My experience is that customers will always want more features than they initially ask for. That's why I make sure to tell them my hourly rate, then give them an estimate. For example, I can say $5000 for a 1 month project. Here I'll break down the average time I will work a week as a courtesy.
This helps me justify charging them again when we are at month 3 and the project is not done. I learned this the hard way, charging a flat fee and continue to work long after I had spent all my earnings.
It's well recorded and the music is not too loud either.
fyi Your humans.txt page is broken
"Urgency" strikes me so much less compelling of a pricing conversation, but I guess it works.
Though it is still just potential value. There has to be some sort of payment for the early stages if you’re not planning on taking the same risks along with your client.
I have never worked on building any project like that so I’ve no idea but I guess the maintenance and future work could be tied to a percentage of the revenue generated for the company.
If I'm independent, I always work fixed fee & payment schedule. When I've had a big company at my back, I've also worked at X% of realized revenue, capped at $Y.
Now, the important thing this implies is ownership of the outcome. I'm not building "a website;" I'm building "an e-commerce product" (or whatever) with all the expectations that come with it.
Back to the article... looking at the rates again, I think this is the author's next step in pricing. They're obviously very good. To make it as an independent developer, you need to have a clear understanding of value anyway - so why not just estimate the outcome ahead of time and benchmark against it?
Have rates fallen so far?
I'm sure someone super specialized and in a hot market could get up to $300 an hour if they are delivering value.
For our customers, an hourly rate is a non-starter, despite the appealing nature of using a rate-based billing approach to head off scope creep and change requests. They need something more concrete with comprehensive up-front terms. We are starting to look at a model where the features are on individual contracts based upon their specific complexity:
"<Some Business Feature> will cost you $X to implement, another $Y/year to support and will take ~W months to reach acceptance testing phase. Minimum contract term is Z years."
This gives each customer an opportunity to prioritize specific sub-components of the product that are most important to them so that we are not implementing things without net positive business value.
We also figured out that we need to push acceptance testing and delivery timing back onto the customer so that they understand that longer timetables are a direct consequence of scope creep, change requests or their non-participation in the process. Since this is kind of a marriage between the organizations, we have built a "core" product that is a lower-stakes implementation and covers a few basic business processes. This allows for a less intense trial phase of the product where the customer can see how the overall process works for them. If they decide it's what they are looking for (i.e. they can see the business value), then we talk about tacking on the additional discrete feature modules and signing longer-term contracts.
I think our most important realization is that not all customers are compatible with our product, how much it costs, or the way we go about implementing it. The core piece of this equation is the customer being able to see through all the noise to the business value. If we cannot make the value clear to them, then we are not in any position to be talking about pricing or which features should be implemented in what order.
I can make half that with employment.
If I have a sales team, maybe we can split the $100/hr labor once I find a company willing.
I did a lot of research before hand on average rates for the type of work I was doing and my experience level, checked out other ads things like that.
I chose my rate because it was higher than the spammy looking cheap ads but was on the lower end for consulting rates.
I got a decent amount of work. I had one customer specifically tell me he chose me after finding out my rate because I charged more than the people with the cheap ads that had done poor quality work.
I never had anyone quibble about the rates. Luckily, my customers were mostly business owners and stuff.
I got some tine tracking software that also helped keep work stuff seperate from hone stuff. If I clocked in, I was working, I kept a list of tasks. In the end though, nobody really asked to see or check, they just wanted the bill.
Don't be afraid to charge a rate you feel is reasonable for your work ans don't feel bad when you hand over that invoice.
"I talk to a lot of consultants, freelancers, and small businesses who do web work, and I used to be a freelancer myself, so sometimes I get asked for advice on how to price one’s goods and services.
I think I came up with my best suggestion today, and it involves only two simple steps:
Slap the client in face.
Tell the client your hourly rate.
Your mileage may vary, this is not to be construed as legal advice, eye-poking may be substituted for slapping in some states."
As an individual going up against an entire company you want to protect yourself as best you can, charging by the hour helps ensure that. Also make sure you get yourself liability insurance.
Why do they deserve 50% of the billing rate (they can't even bother spending 30 seconds to google and note down what these terms mean)? Is their service that valuable? Heck, compared to them even the freelance websites that take 20% (Fiverr etc) seem like saints.
Another recruiter changed my resume without my knowledge. I found out during the interview. All kinds of shady stuff going on with these people.
In the UK, everyone even close to tech-adjacent has similar stories.
[1]: https://gist.github.com/CumpsD/696599d1bd4cd472a056586967293...
8 of those minutes are partly/mostly on you. (I’d give ‘em 1-2 minutes and then just hang up.)