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Daniel: So we’re here today to talk about, “How do I come up with a price for client engagements? If I’m a consultant, an individual contractor, et et cetera.” And Steve, I believe you have a story to give us some guidance on that.
Steve: Well a little while back I was looking for a designer, like thousands of people do. In my case, I was looking for a high end designer, somebody that’s up there, at kind of the enterprise level of the expertise. I had two constraints, and three requests. Two constraints were, no change to the layout, and no change to the text, or the written information that we had, which was pretty severe. We were looking to change stock photos, and looking for recommendations on the color palette. And, recommendations for fonts.
So, I found a designer whom I was enamored with. Loved her work, thought it was a great fit, and so I’m all excited to reach out to her, “Yes, yes, we can talk.” And, we get into the conversation, you know, the usual exchanges. And after I’d explained what we were looking for, just kind of a recap of what I said in an email, the question which came back was, “What’s your budget?” Microphone drop. I was crushed. “I don’t know what my budget is, that’s why we’re talking.”
Now, let me be clear, she’s a very professional designer. She’s got a lot of experience with enterprise clients. But I didn’t … It just killed the flow of the conversation, and I was feeling the uncertainty of, “Well, you know, now I’ve got to kind of figure it out and this isn’t my expertise. I don’t know what stuff costs, that’s why we’re talking. I need advice, I need guidance.” It really stopped, full stop in the conversation. I’m thinking, “How do we do this?” ‘Cause I was still interested in her. But it told me a lot that, she doesn’t really know how to launch this kind of a project when there’s a lot of uncertainty.
And so, we talked through it, and kept dancing around it for two or three more loops. And she did finally come around. We’d almost given up on each other, and she finally came around, and she did what attorneys did. And I didn’t think of this, but as soon as she said it, it made sense. What attorneys do when it’s kind of an open ended project is they’ll say, “Listen. To get started, my retainer is this much.” And hers was pretty hefty. It was a few thousand dollars. But it made sense, relative to the quality of work that she does. And that’s how she reconciled the uncertainty. She said, “Listen, if you do … We can launch with this retainer, and then from then on we can chunk it up with payments for pieces of work.”
So that’s how we managed to resolve the question, but holy smokes, there for in the middle of the conversation, that was tough.
Daniel: Yeah, I’ve seen this a lot actually. And I think your point is that we need to be able to lead clients. It’s us that needs to step up to lead the clients to a pricing model that matters, or that matches. Even in the face of uncertainty. I work with another company that’s recently redefined their pricing models, and they’ve kind of cracked this nut. For them, they listen to the nature of what the client needs, and they offer either a project fee for a one time project. It’s best when there’s a very defined need, and a very defined time frame. Or, they offer a subscription fee for a recurring thing when they’re defining needs. But, there is a recurring defining time frame also, like monthly.
And then, when there are undefined needs, the needs are unclear. It could be a variety of different things we need over time, we’re not sure yet. And perhaps and undefined time frame, it’s sort of, “We need it as the need arises.” They go with the retainer model. And the way they explain their retainer model is, “We’re not going to break out what each thing costs, and we’re not going to charge you by the hour. You’re going to sort of trust us, that you’re going to load us up with a few thousand dollars, and we’re going to draw it down at the rates we normally do. And, we’re going to tell you when you need to reload.” So one point that they sort of brought out about that, is the retainer model sort of works best when you have an established relationship, you’ve gotten to know each other, and there is some of that trust. But beyond that, it’s gotta be subscription, or project based, or something like that.
So, my question to you then Steve is, how do you solve this? I mean, because in a lot of enterprise projects, I think a lot of companies are used to hiring consultants by the hour. There’s a certain sort of billable hourly rate, because there really is that uncertainty about needs and time frame, such as in a software development project.
Steve: Right, and I work a lot of projects that are on an hourly rate. And, they’re usually larger clients that have substantial budget and can afford it. But, even in those, there are certain parts of the project, especially initially during kickoff, where they’re trying to decide that they have to sell it internally to get acceptance. So, large or small, there are often parts of the project that needs sizing. And, an hourly rate just doesn’t cut it. And in a lot of cases, even a retainer, “Well you know, let’s start with so many thousands of dollars and see what happens.” You’ve got to be better than that.
What I find with a lot of consultants, and I’ve been there too, is you don’t want to get yourself into a position where you’ve accidentally low balled it, and you’ve set expectations too low. But, you also don’t want to blow it out and protect yourself so much that it’s just not interesting. “Look, the price that you just said, that’s a non starter. I can’t sell that internally.” So, the answer is, break it down into chunks of work that are fairly clearly. And this is the way
Agile Frameworks work anyway, in projects. Which is, let’s take what we know, and estimate that. And so, then you can present to the client things that are known, “This is generally what this piece of work costs.” Or, “This is generally how long it takes.” I usually provide both. I provide a price, and I then also give an estimated duration.
Not how many hours of work, but how much elapsed time. For example, if I think it’s going to take me three or four days, I might quote 10 days, or 14 days of elapsed time, because I’ve got other projects going on. And so, I leave myself some wiggle room, and to set expectations. Now, it also depends on their interests, and how fast it needs to be done. But, elapsed time is not actual working hours. So, I do those two things, and then I also leave open the uncertain part. “You know, these other parts that you asked for, I really don’t know, and I need to get in there and look.”
Or, I might do a semi firm estimate, which is, “A little more uncertain about this piece, generally it’s going to take this much time, or this much money. But, I’ll tell you what. If I get in there and it turns out there’s a lot of variability, say it’s more than 30% of what I thought. I’m going to stop, I’m going to back to you and say, ‘Listen, this is a lot more than I originally thought, and we need to revisit.’ And, same thing on the downside. If it turns out to be a lot easier, I’m also going to not keep the original amount that I talked about.” Now, these are, I’m not … These are choices as a consultant. But, what I’m conveying is, this is how you deal with uncertainty, to get the client to a point where they can discuss it rationally internally, and consider value for money.
Daniel: Yeah, I like that. So, it’s sort of, you break down what the client is asking for into parts you can visualize, and parts you can’t. Now, this is a premise of Agile Project Delivery, in that the way it works is we want to take the shortest path to delivering demonstrable value, and not start on all the things that we don’t quite know how to get to yet. And so, if you look at a proposal, a pricing proposal as your initial act of delivering value. The proposal itself has value. Then of course you want to visualize, break down, and put pricing to the parts you can visualize, and maybe leave open some of the parts that you can’t.
You and I have both done those kinds of proposals, where we say, “Well …” It kind of creates a proposal timeline. So instead of, “This is what I charge per hour.” It’s, “This should be done by April first, and this part will probably take us into mid May,” et cetera.
And you know, you’re almost guaranteed not to get that initial proposal right. In some of, in a couple of areas, there’s going to be some negotiation, or some back and forth, or some questions, some areas of flex. But, that gets us to an initial proposal right away, instead of an endless process of discovery and asking them to commit. Or, sort of, “Here’s a proposal where I do try to represent those unclear things as though they are super clear,” and now I’ve asked them to over commit to something rigid and fixed.
I wonder though, what you do Steve when someone sort of asks for a price on the phone. I realize this doesn’t come up with larger companies who sort of get it. But, as the size of the company sort of goes into below mid market, you do hear that a lot. People are sort of saying, “Can you ball park it for me?”
And I know that one solution that we’ve done is to give people sort of a price if they insist, “Hey, I need more clarity, I need it right away.” We give them a price for an initial assessment, which also gives them a stop point. If they don’t like the relationship, they can break out. But in the meantime, we’ve got a way to get to value, the assessment has value because they can take this on to another vendor. Is that how you solve it, or is there another way to handle it when somebody’s sort of saying, “Just give me a range of pricing.”
Steve: Well an initial assessment works when it’s a larger project, unless you can do it over the phone. It depends whether we’re talking about remote, or on site. In a smaller project when the client really needs a price, and they ask that on the first call, I may not have enough information. And I often, just by the nature of the way I think, I often need to pause. So, what I’ll say, and I just did this is, I was on my first call, initial evaluation, and we both liked each other. And what I mean by like, is that it was a fit in terms of what I can do, and what they needed. And I said, “Let’s talk again in three days,” and that was based on my schedule. I couldn’t have talked sooner.
And I came back around to that second call with more specific questions, having thought about the conversation. And I wanted to do it in two calls. I knew there was no way I was going to have enough information, but this isn’t a big enough project to justify endless conversations. So, in that case I did it as a two step, and then also was pretty open, like I said about, like we said before about the parts that were clear, and the parts that weren’t clear.
Daniel: Yeah, so I wonder though what we do with dysfunctional clients. And sometimes it takes us a while to figure out their dysfunctional, and it’s in sort of the debriefing conversation afterwards. But, everybody has this. I should say dysfunctional prospects, because ideally they don’t ever become clients if we determine their dysfunctional.
They’re dysfunctional prospects. But, some will say … You’ve heard this with me in proposals we’ve done, where the phone conversation is, they want every single [inaudible 00:12:19] broken down. They’re asking the right question, which is, “Show me where I get value out of this.” But they’re dismissing anything that’s fluid, that requires gathering information or anything like that. So, in a proposal we might say, “Well if we need to travel,” and we recommend that we’re on the ground once a quarter, and that’s this fee. Then we’ll say, “Well, I need to know exactly how many times you’re going to need to travel, and why you would need to travel, and what you’re going to do when you’re here, and how many hours you’re going to put in.” And you start to hear a very dysfunctional approach to pricing. How do you handle that?
Steve: Yes, and I want to be very clear, that these descriptions we’re giving of techniques are not fixed bid pricing, not firm pricing. They’re approximate. And even, for example let’s imagine with an attorney, somebody who has a lot of particular experience in a particular field. They are rarely going to commit to what your situation is going to cost. So, what do we do in that situation, when the client, prospective client starts getting specific, wanting to quote a locked in firm price? I might indulge that conversation one or two times, loops through, “Well, we’re not really going to commit to a specific price, because there’s too many variables to know on this one conversation.” So that, when you see a prospective client start driving toward a fixed price, and in your line of work there’s too much uncertainty to quote a fixed price. And, there’s no sub part of that project that you could quote on a fixed price, then that tells you what kind of client you’re dealing with. And you have to ask yourself, “Do I really want to do business?”
There’s a lot of spirit of cooperation that goes into these initial conversations. You want to give them enough certainty that will resolve the question, “How much is it going to cost me about?” But leave enough room that when you discover these new things, that you can change it. When the client isn’t accepting that, or … I keep saying client, prospective client keeps saying that, “I need specific price, I need you to commit, you’re the expert.” You know what to do. You get that feeling how it’s coming down, it’s not really collaborative anymore. You want collaborative relationships, that’s the best way to deal with uncertainty, is when you have a client relationship of collaboration and trust. And, so when the tone violates your intentions, what you’re looking for in clients, in prospective clients, then you know what to do.
Daniel: So to sum up, lead the conversation around pricing, don’t put the burden on the prospective client. Hear the nature of the client’s needs, and apply appropriate pricing models to those needs. And in the face of uncertainty, identify what you can define, and price that. I’d like to remind you to visit ClientPipe.Com. Of course, stay tuned for the next episode, but you’ll find a lot more at ClientPipe.Com. Thank you Steve.