Ditching Hourly

Hello and welcome to Ditching Hourly, I'm Jonathan Stark. Today I'm going to talk about how to transition your existing hourly clients over to value pricing. I have to start off by saying that transitioning hourly clients over to value pricing is very hard. They don't think of you the way that you kind of need them to in order to switch over to the kind of relationship that lends itself to value pricing. It's probably, not always, but it's probably the case that you have the wrong kind of relationship with your hourly clients. They view you as someone that does what they say. You know, do these things and I'll pay you by the hour to do it. It's kind of like being in the friend zone to use a dating analogy. Once they see you in a particular light, it's very difficult to change their mind about how you're positioned. Basically, you're pigeonholed in the wrong place in their mind. So it's probably easier to find new clients who don't have you pigeonholed already in a particular way. But let's say you just really love the client or you think you have the right kind of relationship with them or you only have one big client and you haven't been getting a lot of leads and you're not sure how long it's going to take you to get new clients, but you want to get off of this hourly thing. For whatever reason, you want to give it a try and try and transition an hourly client over to a value price client. I'll give you some tactics. The first big thing is to quietly lay the groundwork for a transition while you're still billing them by the hour. So I'm going to assume you're in some kind of long term engagement with a client. You've been working with them for a while. They've been paying you on an hourly basis in sort of an ongoing way, not necessarily project work. As you continue to work with the client, try to get as much access to business people as you can. So these would be people like a founder, a president, maybe a CEO or other C-suite executive, a sales director, somebody who's not a geek, so not a dev lead, not a dev manager, not even a project manager, maybe not even a CTO or a CIO. Those people are fine, but if you want to value price, you need to get at business outcomes. You need to understand why the business is making decisions in one way or another. It's much more strategic. So you probably aren't going to get answers like that from technical people because they feel like they already have that information and they want to just tell you what to do and they'll pay you by the hour for it. Okay, so as you get new requests, requests for new work, say you just sort of on an ongoing basis, you're just charging a client by the hour to keep their website updated, add things to it, that sort of thing. Let's say they come to you and say, can you add this tracking code to the bottom of all the pages? What you want to do is probe for the business case behind that specific request or whatever this specific request is. So it would be something like in this example, something like, okay, I can throw that tracking code in there just to give me some perspective. What are you hoping to get out of that information? They say, oh, well, we really want to find out where our customers are dropping off the page, something like that. And you could say something like, oh, well, now that I know that, I know that we've already got Google Analytics in there. Is there something about Google Analytics that doesn't give you the answers that you're looking for? And the business person might say, oh, I forgot we even had Google Analytics in there. Yeah, forget about it. I'll just go check there. Or they might say something like, well, yeah, we've got Google Analytics in there, but this new one that we want you to put in, it maps into some other database or it gives some sort of visualization that we can't get elsewhere. Okay, fine. So they basically convince you that there's a good reason to do it. But you're having a conversation about an outcome. Why do they want you to do this thing instead of just, yes, I can do it? Or how do you want me to do it? It's why do you want me to do it? And then you either agree with what they want done, or like I said, you politely offer an alternative solution if something occurs to you. So maybe it's redundant. Maybe the thing that they want you to do isn't going to give them the outcome that they want, or at least you don't believe it will. Or maybe you know a much cheaper and easier way to get the same outcome. So start working with them to reach, working with business people to achieve business goals. And you'll find that this, if you're already doing this, great. But if you're not, you'll find that this has a strong effect on the nature of the relationship. They start to see you in a different way. After doing that for a while, you want to wait for an opportunity to quote a new chunk of work, like something that you could reasonably define as a project. Maybe it's a new module for a website. Maybe it's a new internal system.

Maybe it's a native mobile application, whatever it is. But it's a chunk of work that is going to be focused on, it's going to be collaborated on with multiple stakeholders in the business, it's going to take a few months, maybe more than that. When the conversations around that start to happen and people want you, they'll probably ask you, "Okay, could you give us an hourly estimate for doing this project?" What you want to do is make sure your business contacts, the people that you've been laying the groundwork with, get pulled into whatever they're calling the scope meeting. There'll be some kind of meeting where you say, "Okay, yeah, let's talk about the scope." And I put that in air quotes because that's not all that you want to talk about. It's not even the most important thing. You want to make sure that business contacts are in there. Hopefully, if you've done your job leading up to this, they will be willing to do that because they understand that you need to, or that you want to know the business context because you might be able to find a faster, easier, cheaper way to achieve the goal because you've been doing that in small ways over time leading up to this. Once you're in that meeting and you've got the business people there, that's when you have this sort of why conversation that I've talked about in other episodes. You can look at the episode list and find, I think, one episode called having a why conversation. And you can use that approach to get at the desired business outcomes of the work. What are you guys trying to achieve with this big, complicated, risky project? And then when you present the proposal for that, you can give them your normal hourly estimate, but you also tack on a fixed price estimate. So say, hey, dear client, thanks for the meeting. I think I've got my head around this. I understand what you're trying to achieve here. These are the outcomes that you want. You're looking to me to provide this aspect of it. I think it's going to take me X number of hours that will work out to about $10,000, but that's just an estimate. If you'd like a guaranteed price, you give them a fixed price that's 85% higher than the rough estimate. So let's say it's $10,000. Say, I estimate if we do this on an hourly basis, you can pay me every week, and I think it'll work out to about $10,000, but I could be wrong. Or you can pay me $18,500, and I'll achieve these desired business outcomes, no change orders on top of it, none of that funny business. You'll know exactly that the outcome that you want, the piece that I can control, that's what you'll get for $18,500, and that's the price. You won't have to wonder if it'll end up being more. And now, if you feel like, in a situation, in this situation when you go to do a proposal like this, and you offer that fixed price, I do specifically want you to mark it up by 85%, not 100%, not 200%, not 20%. If in this scenario, if $18,500, if giving them that price feels scary, then you've probably underestimated the number of hours that it will take. So you want to up your hours estimate, maybe up the hours estimate to $20,000, and then multiply that by, and then add 85% on top of that, until you get to a place where you're comfortable with the fixed price, and then you kind of reverse engineer the hourly estimate. Because if you're not comfortable increasing, if you think you're off by more than 85%, your hourly estimate's probably terrible. The other thing is that I don't want you to do lower than 85%, because you'll probably get yourself in trouble. So if you say, oh, it'll be $10,000, I estimate it'll be $10,000, or you can pay me $12,000, and I'll guarantee that that'll be the price. That's not enough of a margin for you. So don't do that. You want it so that the two numbers are about 85% apart. It doesn't have to be ridiculous, like to the penny, but roughly 85% apart. I believe if you lay the groundwork properly and you can have a good business conversation in your sales meeting, that there is a decent likelihood that you could convert this customer over from hourly over to value pricing. I have been surprised, and I've had plenty of students that are surprised by the fact that people are willing to pay a premium in many cases to have a guaranteed price and not be wondering if they're going to end up going way over budget. So if you do this well and you have a little bit of luck, you might be able to convert an hourly client over to value pricing. But as I said at the beginning, it's very hard to do this because you have to change the way they think about you in most cases, which is not an easy thing to do. Okay, before I wrap up, I want to explicitly point out some things that I didn't suggest doing. In fact, these are things that I would recommend you do not do. So don't one day after listening to this podcast just barge into a client's office and say,

announce that, okay, from now on, we're going to do value pricing. And then you sit there and explain what value pricing is, and they'll just stare at you like you've got 10 heads. They don't care what value pricing is. If you're going to do anything, tell them that you're going to start doing fixed bids, but that won't even make sense if it's completely out of the blue. They see you as hourly assistance. They tell you what to do, what they want done, and you do it, and they pay you by the hour for it. It's almost, you know, there are obviously exceptions to everything, but odds are that they just see you like that, and they won't even be able to conceive of how you guys would work together on any other basis. Furthermore, how you price your work is not any of their business, and value pricing is not a word that I use with clients. When I talk to clients, when they ask me how I price, I say I give you fixed prices for project work. I calculate it using value versus time of materials or cost plus, but that's really none of their business, and honestly, there's no good reason for them to care. If they did ask something like, oh, well, you know, if I give somebody a fixed price, and they're like, well, how did you come up with this number? I would just say, oh, based on past experience with this kind of a project. You know, it's really, it sets off alarm bells if you say something like value pricing, or it's just really talking about the wrong thing. So I don't get into that with customers. I just say it's a fixed price. I stand behind my work. It's based on past experience with this kind of a project, and, you know, not take it or leave it, but, you know, that's really the end of that conversation. Okay, hopefully this will be helpful for someone. Okay, that's it for today. I'm Jonathan Stark, and this is Ditching Hourly. Thanks for listening. The next time a client asks you to justify an entry on your timesheet, go to valuepricingbootcamp.com and sign up for my free email course. Again, that website is valuepricingbootcamp.com. Hey, Jonathan again. Do you have questions about how to improve your business? Things like value pricing your work instead of billing for your time, or positioning yourself as the go-to person in your space, or maybe productizing your services so you never have to have another awkward sales call or spend hours writing another custom proposal. Book a one-on-one coaching call with me and get answers to these questions and others in the time it takes you to get ready for work in the morning. Best of all, you're covered by my 100% satisfaction guarantee. If at the end of the call you don't feel like it was worth it, just say the word and I'll refund your purchase in full. To book your one-on-one coaching call, go to jonathanstark.com slash call, C-A-L-L. That URL again is jonathanstark.com slash call. Hope to see you there.