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Yet another question about charging
noob trying to define methodology
mgm_03




msg:787993
 5:00 am on Aug 4, 2004 (gmt 0)

Ok for starters, I've read all the articles about determining your hourly rate based on what you want to earn annually, the factor in overhead, # of billable hours, profits, blah, blah. This approach assumes you will have a regular flow of client work.

Then, there is the "10 page site plus doo-dads" for $### type of package choices. Seems to be popular among most developers because the client knows the price up front and other benefits to that approach, I'm sure. Then comes the a la carte options such as $x for an email form, $## for some widget.

Similarly there is " $ ### per page". A 20 page site is 20 x $ ###. I did this once and in hindsight, undercharged.

Then I have heard the "how much do we think they can afford without balking?" approach where presumably, bigger clients pay more. Uncomfortable to me but I know agencies do this all the time.

Then, there is "the project will take ### hours (approx) and my hourly rate is $##/hour. Is anyone really able to accurately predict his/her hours....consistently from one project to the next?

With the little experience I've had thus far, every project is different and requires different kinds of skills or thinking. Also I want to attach a value to the experience I bring from my former career in marketing at a Fortune100 company. The value of that experience to each project will vary. I want to help small-mid size businesses think and act more like bigger ones but it won't always apply....abridged explanation.

After reviewing the local competition...it's all over the map - hi to low prices.

Anyone care to share?

 

percentages




msg:787994
 9:53 am on Aug 4, 2004 (gmt 0)

It appears to me that you understand this industry fairly well. So what do you want from us?

You already know that one shoe will not fit all. You also already know how to angle competition.

Sorry, but I am lost. Are you looking for a solution that works in all instances? I doubt you really believe that exists!

There is no single solution to charging, the only one that works is tailored to everyone's needs, and that is most likely to be something special or something we don't want to share.

mgm_03




msg:787995
 12:31 pm on Aug 4, 2004 (gmt 0)

Are people using a singular methodology or a combination?
If a client asks how did you calculate the total cost then, how granular do you generally get (itemizing)?
If they ask "what can we do to reduce the quote", how do you respond?
If during the project, they say "I want to include a widget", how do you re-quote for the Change Order?
If a client asks any of these questions, do you provide answers on the spot, or do you say "let me get back to you on that"?

I never want to be the cheapest but also want to explain myself without sounding surreptitious by having an approach to pricing.

alain_bonaf




msg:787996
 10:39 pm on Aug 4, 2004 (gmt 0)

Did you hear about RUP (Rational Unified Process) or Extreme Programming? It's all about normalising process development. When you have done so you can predict things more easily, if not it can be as erratic as the stock market :). This cannot come from thin air but from experience of the whole team. If your teamgroup lacks experience they can't compete with more experienced ones.
And think about outsourcing : indians companies are now using these kind of processes because they need credibilities.

johntabita




msg:787997
 10:44 pm on Aug 4, 2004 (gmt 0)

Is anyone really able to accurately predict his/her hours....consistently from one project to the next?

Actually, yes. A couple of years ago, I bought a time tracking s/w and started timing how long it takes me on average for each task.

As a result, I automatically budget about 16 hours for the design phase (mockup + 2 revisions). Occassionally, designer's block hits and it takes longer, but I've also done it in half the time. But, I'm happy with that figure because I know I'll spend close to that amount 9 times out of 10.

I also continue to track how long projects take me, to gauge if I'm estimating them accurately. I'm currently 35 hours into a 40 hour project. I'll most likely finish the remaining production within the time left.

When bidding, I'll begin with the set amount of hours I've pre-determined that the project will take. Then I'll add 10-15% for the "optimism factor." I'll also add another 10-15% for project management.

I'll also add enough to pay myself some sales commission, to compensate myself for the time spent to land the job. I figure that if I ever need to bring on a sales person, a commission will already be built into my pricing structure.

All of that is my internal process. Clients don't know how many hours I budgeted or what my internal hourly fee I've used to bid the fixed price is. Like you, I want to bring the value of my experience and expertise to the table, and not be paid by the hour like a contractor.

There is another method, called value-based pricing. In a nutshell, you must first determine what ROI the client expects from the project, then project that out 12 months. If for exampe, the client expects to increase sales by $2,000 a month, then the question to ask is, "Is $7,000 worth risking to gain back $24,000?" That's a highly-condensed explanation for a complex process, but you get the point.

mgm_03




msg:787998
 12:03 am on Aug 5, 2004 (gmt 0)

that's the kind of feedback I was looking for ...thanks very much.

createErrorMsg




msg:787999
 1:33 am on Aug 5, 2004 (gmt 0)

I agree. John, that was instructive and informative and given in the true spirit of this forum. Thanks.

vkaryl




msg:788000
 2:24 am on Aug 5, 2004 (gmt 0)

This is such a "person-specific" area....

I use QuickBooks Timer. I use it RELIGIOUSLY. I time EVERY TINY THING I do on a site, whether it's for a client or for myself.

Once a quarter, I run reports on everything I've done, how much time was involved, how much money each "job" made, how much time each individual "job" took....

Then I look at what I'm charging for what. I make adjustments based on which things took more time, which less, how much time I needed to learn something new (oh, yeah. I "timer" for that stuff too....)

Most of it is subjective, but solidly based on data, if that makes any sense....

attard




msg:788001
 3:35 am on Aug 5, 2004 (gmt 0)

>If they ask "what can we do to reduce the quote", how do you respond?<

The response would depend on the project, but if it's a project with many features (different templates for different sections of a site; storefront, back-end reporting, polls, newsletter subscription, coreg pages, etc., then suggest they start with only the essential features for the site and add in some of the bells and whistles once the site is up and making money.

>If during the project, they say "I want to include a widget", how do you re-quote for the Change Order? <

Don't wait until they ask for a change to quote a change price. Put it in your initial contract. Your contract calls for A, B and C to be done. Changes after (agreed upon point) will be billed at $xx per hour.

johntabita




msg:788002
 4:55 am on Aug 5, 2004 (gmt 0)

Thanks, guys. I'm glad you thought my post was helpful.

If they ask "what can we do to reduce the quote", how do you respond?

I agree with attard that you should reduce functionality whenever you reduce cost. Never come down on your price without taking something away. We'll ask the client what features are "must have's" and which he can live without. At this point, it's also appropriate to ask how much they'd like the price reduced.

I recently had a client tell me that my price was just a bit higher than they wanted to spend by a few hundred dollars. In this case, there wasn't any functionality that could be taken away, so I offered them two alternatives:

1. If they paid the full amount in advance, I'd give them 10% off the cost. ("Coincidentally", 10% came to almost the exact amount they wanted the cost reduced by.)

2. I offered to reduce the cost in return for a higher monthly hosting cost, plus a year's commitment in order to recoup the cost reduction.

They ended up not chosing either option and paid the higher price, but they appreciated the fact that I was willing to work with them. Plus, I think they respected the fact that I didn't merely reduce the cost without asking for something in return.

mgm_03




msg:788003
 5:33 am on Aug 5, 2004 (gmt 0)

more great feedback and ideas....you're on a roll.

On the topic of hosting... assuming I am simply choosing the provider (but not participating in any reseller program), is it reasonable to charge a mark-up?

I have found a webhost that I really feel is great, and I would likely use for most if not all my projects. But, I had to wade through countless websites, get informed, and invest time (and money) to find this "gem". The value is so good, that even a 50% mark-up is still a great deal for any client IMHO.

grelmar




msg:788004
 3:12 pm on Aug 7, 2004 (gmt 0)

I'm with John on most points. I have my designate x$/hr, and base everything off that. When I give a quote, I'm pretty aware of how long it takes me to do things, so I can safely bid 20x or 30x, because I know it will take me twenty or thirty hours, depending.

Sure, I'm off sometimes, but I'm off in my favor as often as I am in the client's, so it balances out.

A few exceptions:

Certain tasks fall under the "as long as it takes" category. Basically, they're those oddball tasks that can go from being very quick, to incredibly time consuming, depending on how much good old Mr. Murphy and His Laws are treating you that day. On those types of jobs, I tell my clients, "x$ an hour, for as long as it takes" and explain to them quite carefully why I won't give a hard quote. I've had a few clients balk at this, but usually, people are OK with it because they understand that certain with jobs it is impossible to predict how long it will take to complete.

The Endless Revision Client:

(Or: Why I won't work for Realtors anymore.) I despise clients who want endless revisions, and niggle and nickle and dime you over the time to do it. In your intial contract, be VERY specific about the amount of revision or re-edit work is included in the quote. After that, it's by the hour. And the hours don't include just the time you spend working on the project, but the endlees hours wasted sitting in their office "discussing" the revisions. There are some people out there who just can NOT be pleased, and if your not careful, they'll eat your time for no good reason other than they feel they can get away with it. Make sure they understand quickly that they can't get away with it. Tell them that "they're on the clock" now and stand by it.

If you've got any sort of a client base, you can do without the time-killer clients. My personal recommendation is to price yourself out of their business. I've had to do this 3 times over the years, and it hasn't hurt my business. There truly are clients out there who you just don't want to deal with.

mgm_03




msg:788005
 5:12 pm on Aug 7, 2004 (gmt 0)


For charging by the hour...are there not a situations when the value you add far outweighs your cost to the client?

Let's suppose the client request is to add a form with 7 form fields (as an example) to accept user data. You have a script (using Javascript and PHP) that filters user data, does form error-checking, and emails the data to the client. The script (or class) needs very minor mods, or you've done this a hundred times and in both cases you can fulfill the requested functionality in just under an hour. You have suddenly and signficantly increased the value of the site to your client. Think of similar instances when this has happened.

Let's say your hourly rate is $75 and it took 45 minutes.
Do you charge for the time it actually required to implement? Frankly, I would be hesitant. But how does one quantify the true value that was just added? If that could be ascertained, pricing problem is solved.

Alternatively, if you decide to charge a fixed fee for a simple form and perhaps add a % for additional form fields, where does the base cost come from? Competition?

grelmar




msg:788006
 6:22 pm on Aug 7, 2004 (gmt 0)

If it's a method or a script that you've created, I would lean towards charging a premium for it. You're not just charging for the time to implement it, but also the time it took to develop the method (or, at least part of the "development" cost).

ggmike




msg:788007
 8:11 pm on Aug 8, 2004 (gmt 0)

I have a question about people who charge based on value added:

Example: I know the job will benefit the client at at rate of $200 / hour, so I decided to charge $150 / hour (I normally charge $100). What incentive does the client now have to choose me at $150 instead of my competitor who just charges $100? From the client's point of view it just looks like I'm trying to take advantage of the situation to make more money.

How do you guys deal with this?

johntabita




msg:788008
 10:19 pm on Aug 10, 2004 (gmt 0)

I have a question about people who charge based on value added:

Example: I know the job will benefit the client at at rate of $200 / hour, so I decided to charge $150 / hour (I normally charge $100). What incentive does the client now have to choose me at $150 instead of my competitor who just charges $100? From the client's point of view it just looks like I'm trying to take advantage of the situation to make more money.

How do you guys deal with this?

First off, I'm no expert on this. I'm moving towards value-based pricing, and much of what I'm about to say are things I'm still learning and attempting to implement.

With value-based pricing, you don't simply charge more because you know how much it will benefit the client. You establish with the client what the cost vs. benefit is, and together you reach an agreement that the benefit is worth the investment of his money. The one thing that you don't do is charge by the hour, because that's task-oriented. Value-based pricing is results-oriented. The key is to establish that your job is to produce the results the client wants, not perform a set of tasks.

Establishing this requires that you close business differently. You must first reach a "conceptual agreement" with the client. This is a verbal agreement that your solution is the best fit for the client. To reach this agreement, you must:

1. Determine what the client really wants, his true ROI. (This may not necessarily be money.)

2. Determine what must increase or decrease to bring this about.

3. Demonstrate what you bring to the table to accomplish this increase/decrease and achieve the client's true ROI.

Once you establish the client's true ROI, the "incentive" the client has to choose you over the lower-price vendors is that you have become his collaborator, because you know what he really wants. The lower-price vendors do not, because they haven't established this type relationship with him/her.

I've tried to summarize a fairly complex concept into a few simple paragraphs. I'd suggest reading Million Dollar Consulting by Alan Weiss, if you want to learn more.

mgm_03




msg:788009
 12:10 am on Aug 11, 2004 (gmt 0)

That is an interesting idea...equating value to results. It also makes more sense than arbitrary fees for add-ons. However, it's not a model we find with most purchases. I would expect many potential clients to shy away from what appears to be an unorthodox pricing approach ...even if it is designed to work in their favor (by guaranteeing results) ...just because it's unfamiliar and perhaps too good to be true.

Personally, I would be hesitant to implement this because:...Most successful websites are content driven and that content must stay fresh (content is king, right?). If content is the responsibility of the client then even if you, the developer, build the perfect site, the results are heavily dependent on the client. Another example would be how much resources (time & money) the client puts into promoting his/her site online/off-line.

Also, if the deal is arranged so that you receive a percentage of revenues, then even with a contract, how can the client prove he's acting legit without submitting receipts or tax forms....seems like a sensitive area.

johntabita




msg:788010
 11:07 pm on Aug 12, 2004 (gmt 0)

That is an interesting idea...equating value to results. It also makes more sense than arbitrary fees for add-ons. However, it's not a model we find with most purchases. I would expect many potential clients to shy away from what appears to be an unorthodox pricing approach ...even if it is designed to work in their favor (by guaranteeing results) ...just because it's unfamiliar and perhaps too good to be true.

The value-based pricing model is common in the consulting industry. So when adopting this model, you must step out of the developer/contractor role and assume the role of a consultant. It really does require a different mindset; that's why I recommended the book in my previous post.

I've come to realized that many of my ideas and opinions about how to do business were based on presuppositions, because I was thinking like a contractor. In other words, what I think a client would "shy away from" is not necessarily accurate. Here's an example:

In my pea-brain contractor mind, I "presupposed" that writing proposals is the way to close business. As a result, I've spent many hours writing proposals for jobs I never got. Although I was becoming increasingly frustrated, it never occured to me that a prospect would be willing to do business with me without first seeing something in writing.

Because of some sales training I've been taking, I've since learned that it's possible to close business on a verbal agreement (the "conceptual" sale), then write the proposal to document the agreement. This means I don't waste time writing a proposal that won't get signed. (I actually did this for the first time a few months back.)

Allow me to challenge your thinking on this point. Your comment, "I would expect many potential clients to shy away from what appears to be an unorthodox pricing approach..." is a presupposition, because you're assuming it to be correct without it being proven.

Personally, I would be hesitant to implement this because:...Most successful websites are content driven and that content must stay fresh (content is king, right?). If content is the responsibility of the client then even if you, the developer, build the perfect site, the results are heavily dependent on the client. Another example would be how much resources (time & money) the client puts into promoting his/her site online/off-line.

If all you take ownership of is producing the "perfect" site, then of course you'd be hesitant to implement value-based/results-based pricing. The only "result" you've produced is a nice site with a lot of potential. (While it may seem like you've produced a "result", the reality is, you haven't produced the ultimate result that the client wants.)

But if you approach the project as a consultant, then you take ownership of the specific strategies and tactics that will produce the end result, and not leave it up to the client. This is where #3 of my previous post comes in. As the consultant, you must bring to the table all of the recommendations and resources to accomplish the client's ultimate objective. In the case of a content-driven site, this means well-written copy and some type of marketing campaign. The client must understand that their objectives are not likely to be met if they undertake copywriting and marketing themselves, unless they are professionals in these areas. As the consultant, you can provide these resources because [a] you have the necessary skills, and/or [b] you can hire/recommend people with the necessary skills.

Also keep in mind that, just like any other form of advertising or marketing, you are not "guaranteeing" the results, because you cannot control how people will respond to the client's offer. What you are doing is helping the client determine if the benefit is worth the risk (cost) of the investment. It's just as likely that you will help the client see that it's not worth the investment and end up walking away with no sale. But if the client realizes that you truly have his best interests in mind, then nothing will stop you from getting the job once the client commits to taking the risk.

Here's an article about value-based pricing you may find interesting: www.honestselling.com/articles/setting_your_fees.htm

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