Ditching Hourly

Hello, and welcome to Ditching Hourly. I'm Jonathan Stark. Today, we're going to talk about how to transition to value pricing. If you've been billing by the hour for a long time, it can be difficult to transition to value pricing because hourly often is really kind of metastasized inside of your business. It's really central to many processes and systems, and in fact, in many cases, to people's thinking. So it can take some time to change all of these things, especially the thinking part. So I recommend that people take baby steps when they're switching from hourly to value pricing because it can be risky, and when you first start out, it's almost certain that you will set your prices too low because it takes a little while to get good at having a why conversation with clients to determine the value of a project to them. So there are three ways that I suggest that people sort of dip their toe in the water of value pricing, and strictly speaking, these aren't value pricing, but what they do do is break the trading time for money cycle. So you'll get a feel for what it's like to present a price, first of all, a fixed exact price up front. Your clients will be able to make a decision before work starts about whether or not that price is acceptable for the problem that they're looking to have solved or the opportunity they want to capture. And you will be in a position to optimize these approaches so that you can potentially increase your profitability so that your effective hourly rate starts to go up. So again, none of these approaches require you to have a proper why conversation, but they do break the trading time for money cycle. So you can get a feel for, sort of encourage you to make the leap with value pricing as you get better with asking why in sales meetings. So here are the three ways. Number one, add a fixed price option to an hourly proposal. Number two, set a fixed price for a small chunk of a larger hourly project. And number three, create a productized service. So I'll describe each. Number one, add a fixed price option to an hourly proposal. Okay, so the idea here is that you would get a prospect, would email you perhaps or you'd reach out to someone or get a referral, and you'd have an initial sales conversation with that client to get a sense of what was involved in the project. And you would do everything that you already do normally, just the exact same thing you always do, create your proposal the way you create it, estimate how many hours you think it's going to take, multiply that out by your hourly rate and say, you know, this is how much I think it's going to cost. Let's say that's $10,000. Then what you do differently is you add a fixed price option that's roughly an 85% increase over that number. So if you gave them an hourly estimate for $10,000, then you would give them a fixed priced option for $18,500 or thereabouts. And you would say, you know, with this option, I guarantee that this is the price. You know, in the first option, you're just estimating it's the price. It could be higher. It theoretically could be lower, but that's typically not the case. So what you're presenting to them is really two things. So first, what you're saying is that you're very much emphasizing that the $10,000 estimate is an estimate. In my experience, clients, when they hear an estimate, they tend to think of it as the price and they freak out if they end up spending more than the estimate, which I suppose you could say is silly and irrational, but is the case. So if you add a fixed price option and you sort of call out the fact that, you know, if you give us $18,500, then that's the final price. You don't have to worry about change orders. We'll get this done for that amount of money. You will not pay a dime over $18,500. Then that really emphasizes that the $10,000 is not firm. And I think you'll be surprised, I know a lot of people are surprised, that many customers will select the fixed price option because if you haven't paid someone by the hour before, you might not realize what a horrible feeling it is to have this meter running in the background. You know, it's like this cab is driving around without you even in it and it's racking up time on the meter and there's no sense of control and they're in their subconscious or perhaps even in their conscious, they're getting stressed out because they realize that

made probably a pretty big purchasing decision based on a very squishy number. So a lot of times they will pay a premium for that insurance that you will stick to this particular price. One side note I'd like to add is that if you feel uncomfortable giving a fixed price at 18.5 in this example, then your estimate is probably way too low. So in other words, if you think 18.5, if you imagine committing to that number as a fixed price and it makes you nervous, then your estimate's probably off. So you should probably redo your estimate until you get it to a place where you're comfortable charging a 85% premium over the estimate to guarantee a fixed price. Okay, so that was option number one is to add a fixed price to an hourly proposal. Now the second way to start transition to value pricing is to set a fixed price for a small chunk of a larger hourly project. So again, you're approached by a client for a project and instead of quoting the entire thing, or I should say estimating the entire thing, then you'd take a sort of a preliminary piece. So say a discovery phase or a design phase, maybe wireframing, maybe it's a system architecture, but some sort of early preliminary phase where you say, you know, this project, there's a lot of unanswered questions here. I can give you an estimate, but the estimate I can tell you is not going to be that accurate. Let's just say for the sake of example that you estimate the project would be about $50,000 or say $100,000. So it's a sizable chunk of work. So you could break off maybe 10% of that and say, you know, let's start off with a discovery phase where we go in depth with you and your team and we go through all the things that are going to be required to define the scope and define the outcome and all of the things that we don't know. Answer all the questions that we can't answer upfront. And we'll price that at $5,000, which is, you know, a fraction of the overall project. And then once we're done with that, you'll have a very clear defined scope, a spec. You'll have like a much more concrete understanding of what's involved. And that decreases the risk of the overall project either going over budget or never completing or solving the wrong problem, all of these things. So breaking off a small chunk of a large hourly project is a good way to have a fixed price offering for your clients. And the way that you sell it is to just explain that it's decreasing the risk and it will probably, it could potentially, but not necessarily decrease the cost of the actual project when they get to the implementation phase. So that was the second way to transition to value pricing, at least a value pricing feel. And the third way is to create a productized service. So what's a productized service? The definition of a productized service to me is that it's a relatively fixed scope piece of work that you sell at a published price on your website. So this could be kind of like the smaller piece that I described in the previous step where maybe you do a roadmap or a system architecture or a style guide or something like that. But it's the kind of thing that won't be that much more work. So in other words, the scope is relatively the same regardless of the size of client. So it's a thing that you know will take you maybe a week or two weeks regardless of how big the client is. And you publish a price for this. So it's like a hamburger in a sense where someone can come to your site or you can have a discussion with them and say, oh, you know what you really need is our roadmapping service or our wireframing service or our style guide creation service. And what that does is that makes the sales process very easy for you. It's much easier than a custom priced engagement because you can have people on your site all day long. You can just drive traffic to that and not have to have a discussion with them to determine their whys and all of the underlying motivation of the project because the price is already set. And what will happen is customers, even though you didn't set the price based on the value, customers will buy it based on the value. So some people will come to this page and they'll say, let's just say $10,000 for a roadmap. That's crazy. And those customers are probably not good customers for you. They don't value it for whatever reason. Their business is too small. The risk is too low. It's really, there's no reason for them to part with $10,000 to get your roadmapping service.

On the other hand, you could have someone from a very large enterprise land on your site that has a huge, say, website redesign in the works, and they're planning to spend half a million dollars to start to get the website redone. And when they see a $10,000 roadmapping product, that will seem like nothing. That would be a very low purchase to mitigate some of the risk of a really, really large redesign or whatever the large project is. So that's the third way to start to transition to value pricing is to create a productized service. And with these three approaches, what you'll do is you'll start to feel what it's like to not have to track your hours and to not have to really show up and do labor in order to earn your money. So with all of these things, it allows you to get more efficient, invest in your tools, invest in skills and education, and decrease the labor intensity of each one of these things so that given a particular price, more and more of that price is profit. Okay, so those are the three things. I'll just recap one last time. Add a fixed price option to an hourly proposal, fixed price a small chunk of a larger hourly product, and create a productized service. So that's it for today. I'll see you next time. Would you like to learn more about how to transition to value pricing? If so, please go to expensiveproblem.com slash list where you can subscribe to my six-day email course called Value Pricing Bootcamp. The course is free and within a week, you'll have a much deeper understanding of what it's like to transition from hourly billing to value pricing. Thanks. 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.