NotitiesHourly Billing Is Nuts
Jonathan Stark
Het boek "Hourly Billing Is Nuts" van Jonathan Stark stelt dat uurtarieven schadelijk zijn voor zowel bedrijven als klanten, omdat ze een gebrek aan vertrouwen en productiviteit bevorderen. Het pleit voor waarde-prijsstelling, waarbij de kosten zijn gebaseerd op de waarde van de resultaten voor de klant in plaats van op de tijd die aan een project wordt besteed. Hierdoor kunnen consultants betere relaties opbouwen en hun winstgevendheid vergroten.
In a flash, I saw with total clarity that billing clients by the hour was hurting me, my company, and our clients. It was the source of just about every problem that we faced as a company. (Location 49)
You can’t truly partner with your clients if you’re billing by the hour, which means that you can’t do your best work. (Location 52)
If the estimate turns out to be low then things get ugly fast. (Location 55)
Billing by the hour encourages you to invoice in arrears (i.e., invoicing your client AFTER you’ve done the work). (Location 57)
Billing by the hour allows you to “get to work” before the client’s actual desired outcome has been identified. (Location 59)
If you don’t have a goal, you can’t succeed. If you can’t succeed, you must fail. If you fail, your client will be sorry they hired you. (Location 60)
Billing by the hour punishes increased productivity. (Location 61)
Billing by the hour creates bureaucracy. (Location 63)
Having had this epiphany, I just couldn’t continue working by the hour so I left to start my own firm. (Location 66)
Sure, hourly billing was (and is) the norm with my colleagues and the expectation of my clients. But just because everyone does it doesn't mean it's sane. (Location 88)
Billing by the hour is just as bizarre as billing by the pixel, or by the line, or by the color. They are all arbitrary units of measure that have nothing whatsoever to do with the outcome of the work. (Location 89)
How many hours it takes you to deliver it is irrelevant; in fact, the fewer the better! (Location 109)
These days, I don't think twice about dropping $500-$1000 for something that will make my work go faster or better. (Location 112)
After all, clients don't buy hours; they buy results, which is what I sell. (Location 118)
an industry that bills by the hour will never get any better at what they do. (Location 124)
More importantly, it creates a trust fracture between the two parties. (Location 144)
It's a vicious cycle-more time is wasted debating about hours, mutual distrust is increased, and the project is further delayed. (Location 147)
Most software consultants try to solve the inherent problems of hourly billing by optimizing the process. (Location 149)
optimization treats the symptoms and ignores the disease. (Location 152)
Mutual trust is the natural result of the two parties sharing in the risk (and reward) of the undertaking. Value pricing creates a shared risk/reward environment. (Location 156)
hourly billing is corrosive to client relationships across all professional services. (Location 161)
Hourly billing misaligns the direct financial incentives between you and your client (Location 165)
This erosion manifests itself as questioning hours, micromanagement, and lack of testimonials/referrals. (Location 167)
Hourly billing allows you to get started before knowing your client’s goal. (Location 168)
Hourly billing places an artificial limit on your income. (Location 175)
Value Pricing is like fixed bids on steroids. Unlike typical fixed bid quotes-which are based on cost-plus or time and materials calculations-the prices in a value priced quote are based on the client’s perceived value of the project outcome. (Location 204)
Value is the maximum amount that a consumer would be willing to pay for an item (Location 207)
Many people are uncomfortable with the fluid nature of value but embracing this truth is the key to scaling your business in a sustainable way. (Location 211)
Yes, value pricing results in you providing a fixed price quote to your client. (Location 215)
I’ve talked to a lot of consultants who have dabbled with fixed bids and gotten burned. In every case, they had based their fee on time and materials or cost-plus calculations. (Location 218)
The secret sauce of value pricing is understanding why many clients are happy to pay more than double what you or your competitors are currently charging. (Location 222)
“Nothing in the world is worth doing unless it means effort, pain, difficulty.” (Location 229)
But how do you figure out what something is worth to your client? You can’t figure it out exactly (even they typically don’t know exactly) but you can get close enough to drastically increase your fees. (Location 234)
You're going to try to talk them out of working with you. (Location 239)
Just keep asking "Why?" until you are convinced that the client would benefit from hiring you. (Location 239)
"Why do this now? (Location 241)
"Why hire someone expensive like me? (Location 241)
"Why not use something off-the-shelf? (Location 242)
"Why even bother with what will clearly be a very expensive project? (Location 243)
"Why pay me to advise you on this for a year or more? (Location 244)
To calculate your price, divide the value by 10 and ask yourself, "Would I do the project for this price?" If the answer is "hell, no!" then you probably aren't a good fit for the project and should politely refer the prospect to someone else. (Location 247)
you should emphasize that the roadmap is completely portable with zero lock-in. In other words they don’t have to hire you to execute the plan-they can shop it around to any firm to do the actual build. (Location 283)
I could offer a site teardown that was delivered as a report (Location 293)
The trick here is to think of new ways to leverage your expertise. (Location 295)
You want to charge for your head, not your hands. Smarts, not labor. Results, not deliverables. Outcomes, not activities. (Location 297)
You can underestimate just as easily with value pricing project as you can with an hourly billing project. The difference is the fallout. (Location 304)
To really understand the difference between value pricing and hourly billing, I think you need to do at least one project yourself. You need to feel the internal shift (Location 310)
I first guess at how many hours I think it will take me, and I multiply that by $200 to come up with X. Then, I guess how much it is worth to the client and I divide that by 10 to come up with Y. I then give the client a quote for the greater of X and Y. (Location 318)
if Y is significantly greater than X-say, five or ten times greater-then the risk is drastically reduced. The closer Y is to X, the more sure you want to be of your guesses. (Location 321)
fixed bids are almost always too low. (Location 325)
Payment terms are intrinsically related to the way I practice value pricing. You could do value-based projects and take payment in installments, (Location 326)
Rather, submit your quote with the most favorable terms (i.e., 100% up front). If the client balks-although I find that most don’t-it’ll give you something to concede in negotiations. (Location 328)
Products and productized services, for example, are bought on value but the prices are not set on value. (Location 331)
if you’re in a situation where you’re tempted to present an hourly estimate to a client, consider using value pricing instead. (Location 332)
I NEVER lower my prices once I have submitted a proposal. (Location 339)
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Since I refuse to budge on price, I need to give myself room to negotiate in other areas. (Location 340)
I never assess an hourly or daily fee, since you should not have to make an investment decision every time my assistance may be needed. This is a unique feature of my consulting practice. (Location 342)
You will not pay a dime more than your selected price. (Location 345)
I am available to start on Monday, May 11, 2015. This quote is good for 30 days. (Location 346)
My work is guaranteed. In the event that you feel that I am not meeting the standards described herein, or based on our mutual conversations and agreements, I will refund your entire fee upon such notification. (Location 347)
In the 20% of cases where a client doesn’t, their reply is usually one of the following: “Are you CRAZY?!” (aka Sticker Shock) “How about 50% now and 50% on completion?” (aka 50/50 Terms) (Location 349)
In the “How about 50% now and 50% on completion?” scenario, my prices are in the ballpark but I haven’t built up quite enough trust with the client. (Location 356)
In other words, we are not going to know exactly when this project is done. (Location 361)
If some bug crops up in a weird corner case three months after your sign-off, I’d prefer to just fix it for free under the terms of this agreement (Location 362)
No pressure for you, no pressure for them. (Location 374)
Ultimately, asking for 100% up-front is better for you, better for the client, and better for the project. (Location 375)
I have a policy of not agreeing to deadlines (Location 378)
Deadlines don’t keep projects on track-diligent communication keeps projects on track. (Location 385)
You probably shouldn’t be scheduling software projects back-to-back in the first place. (Location 389)
I maintain a balance of money making activities. Each has a very different profile in terms of how much effort they require, when that effort is required, and whether I can pick it up or put it down without significant switching costs. (Location 394)
Monthly retainers (Location 396)
Speaking engagements (Location 397)
Training classes and workshops (Location 397)
Miscellaneous dev work (e.g., code reviews, teardowns, prototypes, proofs of concept, feasibility research) (Location 398)
Monthly retainers have been the big winner for me. (Location 400)
I can run two or three of them concurrently and they pay five figures monthly. (Location 401)
I shoot for roughly one per month. I’ve gotten as much as $7500 for a 1-hour speaking engagement, but my average is probably closer to $4000. (Location 403)
Added bonus: speaking gigs are great for positioning yourself as an authority and often lead to high-value engagements like retainers or other consultative work. (Location 404)
This mix of offerings has been so strong for me that these days I rarely code for money. It’s just not worth the time, risk, or stress. (Location 408)
I keep my dev skills sharp by working on side projects or creating educational materials. (Location 409)
every once in a while I’ll make an exception and take on a client project that I find particularly interesting or meaningful (but this usually only happens once or twice per year). (Location 410)
The truth is, I don't have to. I trust my clients to not take advantage of me. And guess what? They don't take advantage of me. (Location 419)
Consultants should jump for joy if clients are willing to share personal details of their lives! It builds trust, which is an essential ingredient to a successful relationship, business or otherwise. (Location 438)
If you are a consultant, value pricing will allow you to build trusting relationships with your clients. This will lead to more successful projects, repeat business, and in many cases, rewarding friendships. (Location 441)
Just because something is hard to measure, doesn’t mean that you can’t make a useful estimate. (Location 452)
Chris should not have had to estimate the financial benefits at all. (Location 460)
he should have had a conversation with the client before the proposal stage, during which he helped the client articulate what the project would likely be worth to the company. (Location 461)
11 Questions To Ask Clients Before Writing Your Proposal (Location 461)
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I don't bring up scope at all in my initial conversation. (Location 465)
I try to find out how valuable the project is to the client so I can decide if there's any hope of me delivering positive ROI. (Location 465)
This can be a simple thing to do if you know what to ask, are a good listener, and take good notes. (Location 466)
Once you have their answers, you’ll be ready to create a proposal that uses the client’s language and is priced based on the value they themselves have expressed. (Location 469)
How to make $2000+ "per hour" (Location 470)
Hiring more laborers is multiplying your hands. The real growth comes from figuring out how to multiply your head. (Location 481)
Solving bigger problems ...for bigger clients ...with less effort. (Location 482)
My talk is grounded in technical topics that I learned in my career as a developer. BUT I'm presenting it in a way that is meaningful to business leaders. (Location 488)
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you should be looking for ways to increase your impact without increasing your workload (Location 494)
Which of the following criteria should be used to calculate a student's exam grade? Amount of time spent working on the test The percentage of correct answers (Location 497)
Clients don’t want your time; they want their goals achieved. (Location 501)
the faster you achieve their goals, they more they'll be willing to pay! (Location 502)
Cost-The least amount of money a seller (i.e., you) will accept for a product or service. Price-The amount of money exchanged between buyer and seller. Value-The largest amount of money a buyer (i.e., your client) will pay for a product or service. (Location 507)
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When value pricing is working well, your cost is less than the price, and the price is less than your client's value. (Location 510)
The difference between cost and price (i.e., $500) is your profit. The difference between price and value (i.e., $1,000) is your client's profit. (Location 513)
As you get better at value pricing, you will dream up offerings that have lower cost and higher value. (Location 516)
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What if you continued to do all the biz dev, marketing, sales, admin, and project management, but PAID SOMEONE ELSE to do your dev work? (Location 530)
Development work is GREAT for revenue, but SUCKS for profitability. (Location 540)
Revenue is a vanity metric. What you want is profitability. (Location 541)
Increasing your headcount is not growth. Increasing your revenue is not growth. Increasing your profits is growth. (Location 547)
Value pricing is virtually impossible if you can't talk to the true stakeholder. (Location 550)
This makes venture backed startups a really unattractive target market for value pricing. (Location 551)
Bootstrapped startups are fine because you can talk to the decision-maker Creating productized services for venture backed startups is fine (since productized services have a published price, buyers can self-select based on the value that they think they'll derive) (Location 559)
Answer Bomb A value-packed post written in answer to a question posed by someone in a Watering Hole. The goals of an Answer Bomb are to increase your authority, attract prospects, and inspire trust with Buyers within your Target Market. (Location 611)
Beta Service A new service that you provide for free to a test client in exchange for feedback, pricing, and testimonials/case studies. See also: Testimonial. (Location 618)
Charm Pricing The practice of using non-round numbers for pricing in an effort to make them seem smaller (e.g., $29.95 instead of $30.00). Probably works best for no-and low-touch offerings in the two-and three-figure range. Low four-figure prices can be okay depending on the context, but once you get to high-touch premium services in the five-or six-figure range, they're probably insulting to the buyer. (Location 626)
Conceptual Agreement The goal of a value conversation is to reach conceptual agreement, whereby you and your prospect come to an explicit and mutual understanding of the underlying motivation, desired outcome, and progress metrics for an engagement. I believe this term was coined by Alan Weiss. (Location 635)
Deliverable Typically a low-value, tactical activity or artifact self-prescribed by a client who believes it will reach some underlying goal. (Location 647)
Deliverables emphasize your labor, not your smarts, and are therefore to be avoided because the are not very profitable. (Location 648)
Professionals have a moral obligation to do a diagnosis prior to prescribing action. Failure to do so would be considered incompetent. (Location 656)
Economic Buyer Person who controls the money in the client organization. Preferably (but not necessarily) the same person as the decision maker (Location 662)
Expensive Problem A painful issue that a business is aware of. Potentially the answer an owner would give to a question like, "What keeps you up at night?" (Location 671)
FPPS Acronym for Fool-Proof Positioning Statement. A term coined by Dan Janal to refer to a two sentence message that tells people what a product or service is, how they will benefit from it, and how it is different than others. (Location 677)
many things are mistaken for growth. For example: hiring more employees, increasing gross revenue, capturing more market share, etc. These are growth tactics, and may lead to growth, but could just as easily lead to decay. (Location 687)
Laser-Focused Positioning Statement FPPS as applied to a professional services business to position the business in a extremely specific way. (Location 707)
Leverage An effort multiplier. For example, a pre-recorded video course has more leverage than a custom development project because the effort it took to create the course will continue to generate sales income in the future with no additional effort, whereas the custom project work only pays once. (Location 715)
The goal of marketing is to create leads. (Location 725)
A price is typically known to the buyer in advance of making his or her purchase decision. (Location 757)
The idea of the product ladder is to make it easy to turn prospects into customers regardless of the level of trust you have engendered with them. (Location 760)
Prospect Person who is likely to buy from you but has not done so yet. (Location 768)
Roadmap A plan for getting from current state to desired state. (Location 771)
Retainer A specific type of productized service where you offer your clients access to your expertise on a subscription basis-typically monthly but sometimes quarterly or even annually. (Location 773)
you answer within an agreed upon time frame (e.g., "within 90 minutes for requests made during business hours, next business day for after hours requests"). (Location 775)
Not to be confused with a typical legal retainer, which is really just pre-payment for blocks of hours. (Location 777)
Rolodex Moment A Rolodex Moment (RM) has occurred when someone you're talking to is inspired to mentally run through the list of people they know and successfully comes up with one or more who they should introduce you to for business reasons. (Location 783)
Sales The things you do to convert a lead into a prospect, and hopefully into a client. (Location 788)
Receive a Lead via email Have a Value Conversation Reach Conceptual Agreement Lead is now a Prospect (Location 792)
Submit a Project Proposal Prospect approves the Project Proposal Prospect is now a Client (Location 793)
Clients often come to consultants with a self-prescribed course of action based on an unstated self diagnosis. It is the responsibility of the consultant to validate the client's desired course of action prior to any engagement. (Location 798)
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Doing otherwise would be unethical and is grounds for losing the right to practice in other professions (e.g., medical, legal). (Location 799)
Teardown Constructive criticism of a web page, email message, sales letter, or other marketing piece. A teardown can't be done properly without knowing the desired outcome of the marketing piece. (Location 831)
Value The largest amount of money a buyer would pay for a product or service. (Location 842)
buyers will usually be unable to assign a dollar amount to a value if asked. However, they can usually react to a dollar amount suggested by the seller as "worth it" or "not worth it." (Location 844)
I prefer to use the term "demographic" to apply to segmentation that is not industry specific. (Location 858)
Watering Hole A place where Economic Buyers from your Target Market discuss business matters. (Location 862)
Watering Holes are a great place to do market research and drop Answer Bombs. (Location 864)