Sent by Jonathan Stark on May 2nd, 2018
List member Trevor Carr emailed me to share an Ah Ha moment he had while reading The Freelancer’s Roadmap (shared with permission):
I’ve generally been skeptical of fixed vs. hourly pricing debates. It seemed like both options required a conversation with the client if and when things started to go over budget. It just seemed like a semantic difference. It wasn’t until you described value pricing as an option during the proposal process, where you charge a premium for taking on the risk of a bad estimate. This can also start to solve an additional problem in my business which is we are just starting and currently eating a lot of over-estimate time ourselves. Definitely adding a value-based fixed estimate to my next large proposal. Thanks! Trevor
(Thanks for sharing, Trevor!)
The line I want to emphasize is this one:
It seemed like both options required a conversation with the client if and when things started to go over budget.
This is a common point of confusion so let me be explicit:
When you do fixed price projects there is no way to go over the client’s budget! The price you set is FIXED before the project starts.
No change orders, expense reimbursements, no nothing. If you said it’d be ten grand for the work, they pay you ten grand. Full stop. If the work takes you twice as long as you thought it would, too bad for you.
This is why it’s so important to use value pricing when you calculate the price for a fixed bid. Value pricing allows you to quote prices way WAY higher than you’re used to. If and when the project takes longer than you expected, you don’t care that much because your profit margin is so high. If there are surprises (and there WILL surely be surprises), you’ll still be doing fine financially.
Yes, value pricing approach is more risky. It’s also more rewarding.
If you’re thinking about trying value pricing, I encourage you to start out with small projects so you can get a feel for it. Most people get it wrong several times before they get it right. Experimenting with value pricing for the first time on a big project would be reckless.
P.S. Not sure how to uncover value in a sales conversation with your prospect? I devote an entire chapter of The Freelancer’s Roadmap to exactly that. Grab your copy now and start reading instantly -> http://thefreelancersroadmap.com