Ditching Hourly

Hello and welcome to Ditching Hourly. I'm Jonathan Stark. Today I'm going to talk about the only three numbers that matter when calculating profitability. So for the purpose of the talk, let's imagine that you've been approached by a client to do a custom project, something like a website built from scratch or some kind of internal workflow system, something like that. So the type of project that will take at least a few months and will require ongoing collaboration between you and the client team. Like all projects, of course, you want this to be a win for both parties, meaning that you want both you and the client to realize a positive ROI from the engagement. You want both parties to make a profit. Okay, so when determining profits or ROI from a project, there are three numbers that matter. They are cost, price, and value. And these can sometimes be used interchangeably in general conversation, but I need to, I want and need to define them very clearly. Cost is the minimum amount a seller is willing to accept. So in this case, that would be you, the seller. The value is the maximum amount a buyer is willing to pay. In this case, the buyer would be your client. And the price is the actual amount of money that changes hands between the buyer and seller. Price is typically pretty concrete and objective, but cost and value are completely subjective. They're what the engagement is worth to the buyer and the seller individually. And this is based on a whole bunch of very squishy things like mood, context, timing, urgency, risk, desire, personal preference, and so on. They're squishy, but you can estimate them within an order of magnitude. So in a perfect world, it'll end up that the cost is lower than the price. That would mean that you made a profit because your cost was lower than the amount of money that changed hands. And in a perfect world, the price should be lower than the value because that would mean that the client makes a profit because they paid less than it was worth to them. Now, whether or not you bill by the hour, these three numbers, cost, price, and value, are in play. The difference, and really the weird part of hourly, is that the price is not known in advance because with hourly billing, price is a factor of cost. They're tied together. The more hours you work, i.e. your cost, your hours worked is increasing, so you work more hours, your cost is increasing. But since you're billing by the hour, the price is going up with it in a linear fashion. So this creates a double-edged sword for the seller, for you in this case, because on the one hand, it means that you can never have a negative ROI because your price will always be higher than your cost. But on the other hand, it means you can never exponentially increase your profits. Those two numbers are always tied, and they're usually pretty close together. There's no way to exponentially increase them unless you exponentially increase your hourly rate, which is basically impossible. All right, that's it for today. We'll talk more about this in the next episode. Hope to see you there. 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.