June 20, 2017

# How to determine your cost

In the context of pricing, I define the terms cost, price, and value very specifically:

Cost - The minimum amount of money you would accept for a project

Price - The amount of money that changes hands between you and your client (note: in the case of hourly billing, this number is not known until after the project is over - yuck!)

Value - The maximum amount of money your client would agree to pay for a project

Ideally, these numbers sorted in ascending order would be:

• Cost (lowest)
• Price (middle)
• Value (highest)

I talk all the time about how to estimate the client’s value - see previous messages about having a Why Conversation - but how do you estimate your cost?

For folks like us, cost most often comes mainly from the time we put it, BUT stress, risk, capacity, cash flow and a bunch of other factors can have a big effect.

Consider two scenarios:

Scenario #1: Taking on the work would mean adding 20 hours per week on top of the 40 hours you’re already working for other clients, AND the client is in a business that you don’t 100% agree with ethically, AND there is a huge amount of risk because it is dependent on a flaky 3rd party API.

Scenario #2: You have plenty of extra time per week to fit this work in, AND you are passionate about the business that the client is in, AND there is a low amount of risk because you’d be working on a codebase that you created for them previously.

Even if the actual number of hours required to deliver each of these two projects was roughly the same, scenario #1 has a much higher cost to you than scenario #2.

Back in the day, I used a complex spreadsheet to estimate my costs based on dozens of factors like these.

I’d enter a bunch of parameters and it would return a number that I would react to (too high, too low, or about right). If the number didn’t feel right, I’d tweak the parameters until it did.

After a while, I realized that I could chuck the spreadsheet and save myself a bunch of data entry by throwing more or less random numbers at myself and reacting to those.

For example:

• “Would I do this for \$10k? No way!”
• “Would I do this for \$100k? Totally!”
• “Would I do this for \$50k? Yeah, but not a penny less.”

The beauty of this approach is that it is automatically holistic, by which I mean, it takes into account everything I know about the client, the engagement, and my current situation.

So...

Whether you use a spreadsheet or not, take the entire situation into consideration when calculating your cost.

And remember... you’re not calculating your cost to set your price. You set your price based on the client’s value. The point of calculating your cost is to decide whether or not to take the work.

Yours,

—J