Sent by Jonathan Stark on October 3rd, 2016
Reader Peter D wrote in to ask:
“If you haven’t gone more in-depth on the subject in your videos or book, in which case I’ll encounter it eventually, I’d love to hear more about how to convert hourly clients to the value priced model.”
I have talked about it before, but perhaps not called out explicitly as such.
In my webcast “How To Increase Your Income Without Hiring Junior Developers” I talk about adding a fixed priced option to a normal hourly estimate and letting the client decide if the premium price is worth the risk mitigation.
You can check out the recording here:
If you don’t want to watch right now, I have attached a transcript of that section below.
It’s a little less coherent without the audio, but you will hopefully get the idea. Yours,
Jonathan Stark, author of Hourly Billing Is Nuts
The first way is to add a value priced option to an hourly proposal. In this approach, you do nothing differently. You get your leads the way you already get them. You talk to the clients or the prospect the way you always talk to them. You ask them all the normal things that you ask them and then you do your estimate the way that you always do it.
Let’s say you do an estimate and you think it’s going to be about ten thousand dollars for the project. Then what you can do to experiment with value pricing is you can add a second option, a separate payment option where you say, “This first option is hourly. It’s an estimate. I don’t know that it will actually only be ten thousand. I just think it will be about ten thousand. If you want me to lock in a price that is fixed that I will commit to and will not go over, then we will finish this project with no additional cost whatsoever, no change orders, none of that. We’ll finish the project for a fixed price.”
The fixed price that you give, should be somewhere between 1.5x to 1.9x the estimate total. In this case, if the estimate was ten thousand dollars, then you’d give a fixed price that’s at least fifteen thousand, but probably more like eighteen, nineteen thousand. What you’re doing there is you’re charging them premium for the risk that you are taking on. You’re taking risk away from them and they’d be paying you between five to ten thousand dollars … five to nine thousand dollars, let’s say, to take on that risk for them.
If you try this, I think you’ll be surprised that clients will go for it. Clients hate risk especially in the situation where, the person you’re speaking with is not the boss and they have to report to a boss. They don’t want to have to maybe go back to the boss in six months and ask for more money. They might not be spending their own money. They just don’t want to ask for more later because it makes them look dumb.
If you say, “We can do this hourly estimate thing. It’ll probably be about ten thousand dollars but it will probably be more or you can lock it in at nineteen thousand and we’ll just get this thing done. I won’t charge you a dime over nineteen thousand.” You’ll be surprised how many people go for that second option.
I’ll just quickly add that some people ask me, “What about those multipliers. How do I decide if it should be closers to 1.4X or closer to 1.9X or higher?” A couple of responses to that, if you’re doing less than 1.4x, it’s not worth doing it. You’re not charging enough. You’re not insulating yourself from enough risk that way. Higher than 1.9x the estimate for your value price means you probably did a bad job with the estimate.
If you feel like there’s too much risk, that you’re so scared for whatever reason that the client’s going to kill you on scope creep, and you feel like to commit to a fixed price it needs to be more than double your estimate, then your estimate’s too low. You should raise your estimate and then add 1.8x, 1.9X value priced option.
This is a really good exercise to go through even if you don’t submit the proposal. If you just go through this exercise to help you calculate the estimate, it can be valuable.