The interplay between risk, price, and guarantees

Sent by Jonathan Stark on December 26th, 2018

When you bill a client by the hour for project work, the client is taking all the financial risk. In other words, you get paid whether the project is deemed a success or not. 

You might think, “Well, I did work, I deserve to be paid for it!” but this is a mercenary attitude that makes it hard to land highly profitable engagements. 

If instead you agree to take on some risk, you can increase your fees. The more risk you take on, the more you can charge. 

In fact, you could present a prospective client with a project proposal that has three price options where the only difference between each choice is the level of risk that you take on.

For example, let’s say a potential client wants you to build them an internal software system that will increase employee productivity. 

With option 1, you could guarantee their customer service team would be able to handle 20% more call volume. 

Option 2 would include option 1 and additionally guarantee that the manufacturing team would be able to produce 15% more product, and at higher quality. 

Option 3 would include options 1 and 2, and additionally guarantee that the management team would be able to make more informed purchasing decisions to decrease supply chain costs by 10%.

The price of each of these options would be based on two things: the value of the outcome to the client, and 2. the strength of your guarantee. 

If option 3 is worth about $1M per year to the client and you give a 100% money back guarantee, you could price it very close to (or perhaps even more than) $1M (regardless of how long it might take you to execute). 

If this guarantee feels too risky to you, you could soften it to something that you felt confident delivering. Of course, this would place some risk back on the client which would decrease the amount you could charge. 

This isn’t an exact science. There is no formula. The point of this message is to make you aware of how risk figures into pricing and how you can use a guarantee to distribute risk.

If this concept of accepting risk makes you too uncomfortable, you can certainly just do the safe thing - keep billing by the hour. 

But as the old saying goes, “No risk, no reward.” 

Yours,

—J


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