August 5, 2021
Hit Subscribe Prep Q&A
My online buddy and former podcast co-host Erik Dietrich invited me to do an AMA with his freelancer community over at Hit Subscribe.
Being the organized fellow that he is, Erik sent over some sample questions in advance. To prepare for our chat, I typed up answers to each question for my own reference.
Initially this Q&A was just for myself, but there are some interesting points so I thought I’d also share here with you on the list.
Here you go:
1) Take me through your background a bit… tell us about yourself.
I started coding in the 80s on my dad’s IBM PC. Simple stuff like DOS, Xywrite, BASIC. It was just for fun, nothing serious.
I didn’t get my first real computer job until about 1999. I worked my way into building workgroup software for the internal advertising agency at Staples using a desktop database solution called Filemaker.
In 2003, I took a position at The Moyer Group, which was (and is) one of the most prominent Filemaker consulting firms in the country. I worked my way up there and by 2005 I was the VP, which meant I was doing a lot of employee and client management. That’s when I had my epiphany that hourly billing is nuts.
In 2006, I went solo to figure out a business model that wasn’t based on trading time for money.
2) Let’s surface something up front – we want to talk through service pricing for new freelancers, but you have some strong opinions on this subject. Can you tell us a bit about that, for context?
For projects, I prefer value pricing, but it’s a pretty advanced approach.
For new freelancers, I’d generally recommend creating a productized service to get started.
3) What’s so bad about hourly billing? Isn’t that just the way the world works?
Yes and no. If you ask a barista “How much for a large black coffee?” they’re not going to say, “$40 per hour” LOL! Almost everything we buy is priced, not billed for.
But to your point, hourly billing is currently the “normal” way the freelance space. I’m working every single day to change that.
Hourly billing is an artifact of the industrial economy, factory labor, and scientific management.
If you don’t mind being an interchangeable cog in some machine, then hourly billing might be fine for you.
If on the other hand, you want to have a bigger impact for your clients and be compensated accordingly, trading time for money isn’t a good fit.
Specifically, here are three things that stink about hourly billing:
- It puts an artificial ceiling on your income. There are only so many hours in the year.
- It punishes expertise, efficiency, and optimization. The better and faster you get, the less you make.
- It encourages scope creep, micromanagement, and other “client from hell” behaviors. Shooting in the dark is expensive.
4) If you have a model other than hourly billing, how do you ensure you don’t take a haircut on the work? How do you handle scope creep?
Short answer: Add a zero to your project prices and you won’t care about scope creep.
The problem most people have with fixed pricing project work is that they base their prices on how many hours they think the work will take.
This approach will reliably produce prices that are too low and have razor thin margins. When your margins are razor thin, the slightest increase in scope can feel like you’re “losing money”.
Flipping this model on its head looks like this:
- First, roughly figure out what the client’s desired business outcome is worth to them (i.e., the value)
- Then, set three prices that are a fraction of the total value
- Finally, design a scope for each price that you’d be fist-pumpingly happily to deliver
Doing your scope last is a totally new mindset for most people, but it is how you escape razor thin margins on a fixed price project.
5) Even if I accept that hourly isn’t clients’ favorite, isn’t that a “them problem?” What’s the downside for me to ensure I get compensated for every minute I work?
It is a "them problem" in the sense that they (i.e., the client) is taking all the risk. But it’s a "you problem" if you’re trying to build a business instead of just having a job with no boss (and no benefits).
6) What are the different ways to price services?
There are lots of ways, but these are the most common:
- Value Pricing
- Time & Materials
- Cost Plus
- Hourly Not-To-Exceed
Of these, Value Pricing is the most profitable but trickiest to get good at.
T&M and Cost Plus are low margin and stressful but can work.
Hourly Not-To-Exceed should be avoided at all costs.
7) If someone is just getting started with moonlighting or freelancing, how do you recommend that they price services? Can you start right out of the gate with non-hourly pricing models?
Yes, you can start out of the gate with non-hourly pricing.
Probably the best starting point for a new freelancer would be to offer a productized service, which is a fixed scope service that you sell at a published fixed price on your website.
For example, "Shopify Setup for Bricks And Mortar Knitting Stores" or something like that.
8) If you have existing hourly clients, can you transition them to other pricing models? Or is that a lost cause and you need to find new clients?
It’s probably easier to land new non-hourly clients than to convert hourly clients to another pricing model.
There are a couple of conversion paths that I have seen work, but it’s pretty hard.
9) Hourly billing is so incumbent that one of the first things most moonlighters or freelancers ask is “how do I set my hourly rate?” What would you say to someone just starting out like this, for whom the idea of pricing a service as anything other than hourly is just unheard of?
I’d ask them where they want their business to be in three years and then do the math with them to see if they think they can reach their goals with an hourly business model.
10) In most of the world, especially on labor brokerages and matchmaking sites, “what’s your hourly rate” is a ubiquitous question. If people are trying to get away from hourly billing, what should they do?
Don’t be on those sites? ;-)
But seriously, if you get a good flow of leads from Upwork et al, and are afraid to go cold turkey, you can use that money to bootstrap your way into a better business model.
Long term, your goal should be attract your own leads and not have to depend on an intermediary.
11) What do you think of labor brokerages like Upwork or Toptal? How about RFP processes in general? Do these affect pricing options?
Upwork, Toptal, RFPs, etc all position you (i.e., the seller) as "just one of many" so you end up in a race to zero on price.
To race to the top on price, you need to position yourself in the market as "the one and only". It takes time but once you do it, you’ll basically have no competition and can set much higher prices.
Okay, that’s it!
As always, please feel free to reply if you have follow-up questions :-)
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