Pontificating about pricing and negotiation

Dennis,

Thanks for posting this. How can someone so smart (SB) be so dumb when it comes to pricing based on hours or days? I am sure he has made a lot of money, but it is scary to think of what he has left on the table due to his unwillingness to see the truth.

As Martin so effectively pointed out in his story of the shower. Efforts are meaningless. Customers pay for results.

Good stuff from you and Martin. Thanks for this.

Among many bits of good advice given to me on the eve of going freelance, this one on fees was one of the best: decide what you want your annual salary to be, then divide by the number of days you can realistically work on client projects. That's your day rate.

If it's too high, you'll know fairly quickly - enquiries won't convert into work. If it's too low, you'll also know it: you'll get too-quick confirmations from most clients. And if you keep winning repeat business, it's unlikely to be because you're cheap - it's because you're good, so you can probably work on a more accurate pricing structure.

But setting your salary is still the best way. Realistically, I'll never be properly rich from writing, editing and training - especially not if I'm effectively capping my own earning potential using this system. But I'm doing better financially than I did as a salaried employee and I don't have nearly so much stress. Plus, my billings *feel* about right. I never worry about clients feeling ripped-off.

(I appreciate this may be different for other types of consultant. But I liked Dennis's point about, effectively, the problem being one of charging for inputs rather than outputs.)

@Ed: Stowe operates a multi-tier pricing strategy that effectively talks to the issue of shared risk. Part of that is from taking equity. I'm not necessarily in agreement with that but it fits the profile for companies with which he works. Martin works on value based pricing. Me - well you know.

@Dennis - I caught that, but the danger is his thinking or rather lack thereof. As you said in you opening comment, "very 19th century." He is espousing the tired and worn belief that your value is your labour. I get his shared risk notion of taking stock in some cases which is good, but many of the people in the audience (including the moderator) heard some really poor advice from him.

I am sure he is very smart and a good consultant, but I shudder to think how much money he has left on the table over the years and now he espouses that others do the same. It is (and many will object to this word) evil.

Thanks for posting this Dennis; having just recently gone freelance I found it really worth taking the time to watch.

I started with a notion of working to a daily rate but have already found that it's bad for both me and potential clients, so I've been thinking hard about how best to price myself on a project by project basis - what is it worth to the company I'm working with, how much do I need to make etc?, all the things you guys talk about in the video.

I thought I'd been really clever the other day by offering a client my services on a retainer basis when they were squeamish about the one-off cost I qouted - I knew they'd need more work doing and figured that a guaranteed income each month for half a year would be nice. They went for it (to my surprise to be honest) and I was delighted.

After I finished congratulating myself though I realised that because I didn't expect them to say yes I hadn't thought about the number I quoted at all. I'm now going to be doing a hell of a lot of work for them (for a while) at a rate that really undervalues me (imo). Live and learn I guess.

Thanks again for sharing.

@James: Blimey - I'm amazed you worked through it and glad it added value for you. As to the lessons learned - yep - we all go through that one - and often more than once. The journey can be painful but the end result is worth the effort.

A little uncouth, but I posted a link to this on the VeraSage website and there has been some banter (comments) over there as well --> http://www.verasage.com/index.php/community/com...

Well, my impression was that SB was unhappy with the 'one price for a project' (which you could call a value based fee) before. As ppl where trying to get 'mor for their money'.
Working on a retainer model or (part-)equitiy model would surely be interesting.

@oliver: retainer mmodels are really dopey. A friend of mine is on a retainer and produced ZERO for a year. He wasn't chased and didn't make a noise. Now he's wondering how to renew. Duh? That's the extreme end of the chain. Retainers only wqork for the retainee and don't work for the client. If you want to deliver value and continue to be 'retained' then you have to find ways of continuing to deliver value. That's a fair trade.

@Dennis Right. That makes sense.

Now after watching the vidweo a second time I need to adress

@ed again ;)
Ed, where exactly do you think Stowe Boyd is doing something wrong and what money exactly is he leaving on the table?
(and BTW: my impression is that customers HAVE their limits on how far they wanna go for a specific thing they want achieved ;) )

@Dennis Right. That makes sense. OTOH: If you did not deliver value why would you want another contract? (money vs. ethics)

Now after watching the vidweo a second time I need to adress

@ed again ;)

Ed, where exactly do you think Stowe Boyd is doing something wrong and what money exactly is he leaving on the table?
(and BTW: my impression is that customers HAVE their limits on how far they wanna go for a specific thing they want achieved ;) )

@Oliver - It has been my experience and is proven that billing by the hour or day is always suboptimal. As Dennis noted, it is based on Marx' labour theory of value. Stowe insists on getting some payment for his efforts (although clearly he always takes stock on some occasions), but customers do not pay for effort, they pay for results.

Results must be defined upfront and have an agreed upon value. I believe (and hundreds of years of economists have proven) that billing by the hour/day virtually guarantees leaving money on the table.

@Ed:
Thanks, OK, got that. OTOH I see his problem with 'if we define only results the customer decides on how often he calls/interrupts'. And I see Martins point, that the customer shopuld not be 'afraid of additional cost' when the point is to achieve the result agreed upon.

My experience is that the customers wants to see a certain result and usually has an idea what it is worth to them to achieve it. In a way they do not care how much time I need to prepare, or travel or whatever. Why should they have to care?

I know a consultant who charges 'a day' whenever he visits someone, as he says he can't "do" anything else while he is on the plane or train. (plane in Germany would be max 1.5 hrs + 2 hrs transfer, train would be max 10 hrs, one way each) - at least he cannot work directly with another customer :).

So it is in a way a 'metaphor' when you 'charge a day', it seems more a convention to me than really 'selling the time'. With 'innovative' companies you might be able to talk differently, other companies have fixed policies on 'how much they pay for a day' (and if it is more they need approval or whatever) so you need to talk to them in these terms.

I talked with Martin quite a lot about his value based concept. I just sometimes shy away from teh ahssle not only to sell my 'service' but ALSO and additionally the new concept of billing.

Probably it is a good thing to have an initial contact on a more 'classical' billing model and then move to a value based retainer model once the customer knows what "exactly" your value is to them.
I'll try that ;)

@Oliver
You are right on that it is a metaphor. (See my post on this subject from April --> http://www.verasage.com/index.php/community/com...)

What you are proposing for initial contact is called menu pricing. It mean having a specific price set for a certain event. In your case, I would call it a diagnostic or discovery session. I have no problem with offering a price for this. I would just not tie it to hours in anyway. Some people even sell these as lost leaders - think Gilette losing money on razors to sell blades.

With regard to Stowe v. Martin, I am in complete violent agreement with Martin. I WANT customers to call me if they have a problem. I would even create an expectation of how long it will take for me to get back to them. The shorter the timeframe, the more expense the on-going access contract would be.

Yup, I often do workshops with customers and tell them;
* this is going to be so and so much,
* we are not going to 'drop the hammer' (German expression, stop working) at 1600 or 1800 orwhatever,
* and If I need to ptrovide swome extra infos that I have somewhere and I could not give you on the spot: You'll get these included -
* IF I need to do EXTRA research (on somwthing we discover but did not agree upon in th furst place) that will take me (oops there it is) probably half a day I will bill you extra on that.

Nobody had a problem with that.

And:
I tried a first step towards the retaioner thing even today on a proposal. ( 1-1.5 day workshop (which is what the new customer asked for) + maybe later a retainer.) We'll see how this works ;)

Yup, I often do workshops with customers and tell them;
* this is going to be so and so much,
* we are not going to 'drop the hammer' (German expression, stop working) at 1600 or 1800 orwhatever,
* and If I need to ptrovide swome extra infos that I have somewhere and I could not give you on the spot: You'll get these included -
* IF I need to do EXTRA research (on somwthing we discover but did not agree upon in th furst place) that will take me (oops there it is) probably half a day I will bill you extra on that.

Nobody had a problem with that.

And:
I tried a first step towards the retainer thing even today on a proposal. ( 1-1.5 day workshop (which is what the new customer asked for) for a flat fee + maybe later a retainer.) We'll see how this works ;)

@Oliver - Welcome to the wonderful world of value pricing!

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Is there a download link for this video, please?

There is a URL and embed code in the 'menu' button on the video.

What a thought provoking session...I run parenting courses - just started - myself and business partner worked out our minimum per hour that we wanted to earn, then looked at the price per parent, per course that calculation gave us. I am reassured (I think) by your comments, that we then raised the price to reflect what we felt the market would bear. We are now at the stage of marketing/selling ourselves via local schools. I guess the feedback - and take-up - will inform where we take the pricing from here.
Tracey

"There is a URL and embed code in the ‘menu’ button on the video" - so that's a no, there's no download link then?