What’s In This Episode:
Brad: One of the things that I think is a difference between charging by the hour and charging by the project is that, when we charge by the project, we’re charging for a result.
Brad: Welcome to Episode 342 of Breaking Down Your Business.
Brad: You can find the show notes for this episode at breakingdownyourbusiness.com/342.
Jill: We’re going on tour, I think. The voice is hurting me a lot right now. This is Bruce, another Bruce, and we’re happy to be here.
Brad: I’m Bruce from Anchor Advisors.
Jill: I just was going to say we’re happy to hear ourselves. That’s so embarrassing. I’m Jill from The Founding Moms.
Brad: So then you repeated it to make it more embarrassing?
Jill: No, I just like to have all thoughts come out of my head into this podcast. It’s depressing.
Brad: Merry Christmas to all for whom Christmas is a thing that you celebrate-
Jill: Merry Christmas.
Brad: … because today is Christmas Eve.
Jill: Merry Christmas and Happy Hanukkah if that’s you.
Brad: Yeah. Light some candles.
Jill: Sing a song.
Brad: Eat some turkey.
Jill: Probably drink a lot of eggnog.
Brad: Jill’s going to drink eggnog.
Jill: A lot of eggnog.
Brad: I was actually at a party this week that had four different kinds of eggnog, only one of which was not alcoholic.
Jill: Wow. I didn’t know there were four kinds of eggnog.
Brad: Oh, I have a different friend who makes… He makes his own spiked eggnog that’s like…
Brad: You can use it as Sterno.
Brad: It’s pretty serious.
Jill: We need to get them on the show immediately.
Brad: He’s serious about his eggnog.
Jill: The price is eggnog. Amazing. Well, are you feeling good? Are you feeling happy? Are you feeling cheery?
Brad: Yeah, yeah.
Jill: It’s the holiday season.
Brad: I mean it’s good to be at the end of the year.
Jill: It is.
Brad: I took most of this week off, and I’m taking most of next week off.
Jill: I love this time of year because it’s like the whole world shuts down, and you can actually get a break.
Jill: It’s my favorite. I love this.
Brad: Yeah, and-
Jill: I love this time of year, and it’s not the mistletoe.
Brad: No, it’s not the mistletoe.
Jill: It’s deeper. It’s mindfulness.
Brad: You’ve been smoking the mistletoe, is that what you’re telling us?
Jill: I’m not going to say. I’m not going to say. What are we talking about today?
Brad: Today we’re going to talk about-
Jill: Because I just want to talk about eggnog.
Brad: We’re still talking about pricing, Jill.
Jill: Oh, good, because-
Brad: We’re going to talk about-
Jill: … the new year is upon us.
Brad: … whether you should charge by the hour or by the project.
Jill: Well, you know my answer.
Brad: I don’t.
Jill: You don’t?
Brad: What’s your answer?
Jill: Always by the project.
Brad: Why is that? What-
Jill: By the hour, that involves a lot of math. I’m not interested in math. By the project, I like to come up with a big number that sounds great and slap it on to the services.
Brad: Talk to me about that process. What do you mean by big number?
Jill: If you, let’s say, charge… I’m going to do easy math now for those of us like me-
Brad: I’m all about easy math.
Jill: … $10 an hour and I do five hours of work, right? That’s $50 for five hours of work, but what if I want to do the same hours of work, five hours of work, but I could slap a flat price on it and say, “You know what? This is actually worth 250 bucks not just $50”?
Brad: Okay, so that’s five times more.
Brad: Why would I, as a customer, want to pay five times more?
Jill: Well, you’re asking as though you know that there were two options.
Jill: I never go hourly ever, ever, ever.
Brad: Well, let’s-
Jill: I don’t do hourly work.
Jill: If you’re, for example, a virtual assistant who’s listening, that’s the only way you can really function. You could switch your entire business to sell flat-fee services, but for those people who can do hourly, you can’t. It’s not really the same thing, but for those of us who have the option and never have to reveal that there was ever a thought to the hourly, I always like to go flat fee because there’s a lot of value you can’t account for in the hourly that’s… It’s not as easy to explain, and I think I’m not doing a good job of explaining it. Do you understand and can translate to the listeners?
Brad: Maybe. I think what you’re saying is… Well, first of all, the first thing I want to affirm is if you’re charging by the project.
Brad: You want to have a lot of margin in there. If you’re charging by the project and, in your math, it was $10 an hour for five hours, you don’t want to go out with a number like $75.
Brad: Because there’s just not enough room in that-
Jill: That’s what I was saying.
Brad: … if something gets screwed up.
Brad: If you’re doing it by the project, you’re doing it by the project cause you’re putting a big… You’re putting a lot of margin in there for yourself because then, if something comes up or goes wrong or you miscalculated, there’s still room in there for you to get it done without having to go back and-
Jill: It’s just padding. It’s padding.
Brad: It’s padding.
Jill: It’s not illegal and it’s not immoral. It’s what you should do as a business owner.
Brad: One of the things that I think is a difference between charging by the hour and charging by the project is that, when we charge by the project, we’re charging for a result, right?
Jill: As opposed to?
Brad: When we’re charging by the hour, we’re charging for our work or our effort or our time. I mean it’s inherent-
Jill: Well, that’s a nice way to think about it.
Brad: … in the idea of charging by the hour, right?
Jill: Yeah, yeah.
Brad: When we charge for a result, then I don’t really care how long it takes, right?
Brad: I don’t care if it takes you 5 hours or 50 hours, right?
Jill: Right, yep.
Brad: I just want the thing. I want a website.
Jill: To some degree, people might care. I want a website, except I don’t want it to take seven months for you to build a website.
Jill: Deadlines are still important, but it’s not-
Brad: How many hours between now and the deadline.
Jill: … accounted for so specifically.
Brad: In fact, that’s a really good example. I might be willing to pay… You might say, “It’s $3,000 to get a website in six months. It’s $7,000 to get a website in three months,” and that might be a bargain to me. I might be willing to pay twice as much to get it in half the time-
Jill: To get it done faster, yep.
Brad: … or I might be more price sensitive and willing to wait longer and pay less.
Jill: Right. Well, what are your thoughts on when people charge a flat fee, and I see this a lot, up to a certain point? “It’s $3,000 for the website, but after I finish working for 10 hours, it’s going to be $150 an hour going forward.”
Brad: This is where you started to say something, and I kind of cut you off. You said, “I don’t do hours.”
Jill: Yeah. Thanks a lot.
Brad: Well, because I wanted to have this conversation about that.
Jill: Oh, wait. What do you do, Brad?
Brad: I only charge outcomes. I do not charge by the hour.
Jill: For project. Yeah, so we’re on the same page.
Jill: Even though your face tells me you were disagreeing with me.
Brad: No. Well-
Jill: No, it’s fine. I am offended. It’s totally fine. Carry on.
Brad: What you just said, it’s $3,000 up to a certain numbers and this-
Jill: Oh, my God. That drives me bananas.
Brad: It’s the worst.
Jill: It’s the stupidest idea.
Brad: I’ll tell you all the reasons why it’s a stupid idea.
Brad: Then you can add some on because you probably have others.
Jill: Oh, I’m busy raging. Go on.
Brad: Yeah, so the first is, as soon as you mention an hourly rate, so if you say, “It’s $3,000 until I get to 10 hours, and then it’s $150 after that an hour,” oh, $150 an hour, but that’s 20 hours for $3,000.
Jill: Also, you’re then making me do math. Then I can count up. Up to 10 hours, it costs 3,000? Wait. Let me do some math and divide and figure out your hourly.
Jill: Then you’re giving me… [inaudible 00:07:13].
Brad: The other thing is-
Jill: The point of the project is to not do that.
Brad: … it’s heads, I win, tails, you lose.
Jill: [inaudible 00:07:18]. What?
Brad: If everything goes well, the service provider is doing a heads-I-win-tails-you-lose. If everything goes well, I make more money. If it goes poorly, you pay more money, so why is that good for me?
Jill: Wait. Then you still make more money because then they keep paying you.
Brad: Right, exactly. Who knows more about how much this should cost?
Brad: The service provider knows more.
Jill: I’m realizing, right now, that I think the people who do this methodology… If it’s you, shame on you. It’s because-
Brad: Before we heap shame.
Jill: No, I’m going to share them because I don’t… I think you are too scared to offer a bigger flat fee is the problem.
Brad: I think that’s right.
Jill: You think, “Well, 3,000 sounds like a lot already, so I’ll do that, and then I’ll add on more because I know they’re going to extend, and they’re going to make me work more.” You’re pissed off at them already before they hired you.
Brad: That last part, I think, is the key part. The people that I hear that do that, they say, “Well, Brad, but there’s so much uncertainty. Clients don’t know what they want in their website, and they’re going to make changes.”
Jill: How are they going to know how many hours I spent on it?
Brad: Who cares how many hours?
Brad: Get out of here.
Jill: It doesn’t matter-
Brad: Here’s the thing.
Jill: … if it took you two hours. Don’t care. You should get that you’re valuable.
Brad: I have three answers to the uncertainty question.
Jill: I didn’t ask uncertainty questions.
Brad: No, but I’ve talked to people who tell me that uncertainty is the problem.
Jill: Oh, oh, oh, okay.
Brad: That’s why they can’t offer a fixed fee.
Brad: The first one is you know more than the client does, right?
Brad: You can probably predict where they’re going to make changes, so lay out, “It’s $3,000 for the base website. I think there’s some other things you might want to add on, like maybe you need a scheduling module and a calendar and a…” Put prices on all those things right from the beginning so that when they say, “Oh, you’re right, I need that thing,” boom.
Jill: That’s funny because I would have done that in my earlier years in entrepreneurship, and now that sounds painful. Why are you doing add-ons? Just put it all in. Make it simple.
Brad: That’s another option. Another option would be a three-column price. For $3,000, you get a basic website. For $5,000, you get a website plus this plus this plus this. For $8,000, everything, the chicken, sink, everything.
Jill: Here’s why this is painful and experienced entrepreneurs know that that three-column list of those specific things is never going to be three columns of specific things. Every client is different. Every client’s going to add on their own unique bespoke way that they need to have it done, and then you’re tailoring three options in 50 different ways.
Brad: Or you just make the numbers big enough so you’re like, “It’s taken care of.”
Jill: Oh, so you don’t mind the tailoring. Is that what you mean?
Brad: The right-hand column should be whatever you want. It’s going to be a number so big that it makes their teeth hurt.
Jill: Which is actually a great idea because then you have to stick to only the other things in the other columns.
Brad: Correct. That’s right.
Jill: “Well, sorry, you could have had anything.”
Brad: Or we can upgrade. We can go up to the Cadillac, and then I can take care of those things.
Jill: That’s a great way to solve that one. That’s great. I like that.
Brad: Third option. If there’s just so much uncertainty that you can’t even scope A, B and C, then you’ve got a problem. Why are you getting into this engagement with this person with all this uncertainty? They don’t know. You don’t know. What do you-
Jill: Wait. What are you talking about? What uncertainty? Why do I have uncertainty?
Brad: We’re using websites as an example, right?
Jill: Yeah, of course. We all need a website.
Brad: Right, so maybe it’s a website that has some connection to some back-end system, and you don’t really know the scope for getting-
Jill: Oh, the projects where you don’t know what’s coming until it’s there.
Jill: Got it.
Brad: Why would you accept a deal where you don’t know what the work is? That’s crazy pants.
Jill: Because I heard they’re the best?
Brad: No, but why you, as the service provider, would you take on an assignment where you don’t know really what the scope is?
Jill: Oh, got you.
Brad: Offer a discovery or an assessment phase. “For $2,000, we’re going to go in and we’re going to evaluate that back-end system, and we’re going to figure out what it takes, and we’re going to deliver you back a specification that, whether you hire us or you hire someone else, this is going to help you to be able to get that done.”
Jill: This is funny because I’m falling in the line of thought of people who do design websites who are listening right now who are going to go, “Brad what are you talking about? An assessment phase for X amount, and then I’m going to add a package.” They’re going to go to the cheaper guy.
Brad: Then let them go to the cheaper guy because that was a crazy-pants assignment. Nobody knows what that assignment is going to cost.
Jill: Good answer. I like it.
Brad: Let your competitors go out of business doing that crazy-pants thing.
Jill: Yeah. That’s actually great to give folks permission who are listening to not have to take on every project. You’re not going to go broke if you don’t.
Brad: Correct. You were saying, early on, maybe there are some situations where hourly is the right thing, like maybe a VA or something like that.
Jill: There are some companies that have to or it’s preferred.
Brad: Tell me about what’s preferred. Give me some more examples beyond VA.
Jill: I’m thinking, actually, just in my business, if I hire… I pay most people by project. I prefer that. If they go, “How do you want to do this?” I will always say project, but virtual assistants, whom we’ve talked about in the past, I very much enjoy.
Brad: Which we love.
Jill: If they are fantastic, I’ll flip them into flat. “Hey, can I just pay you a flat amount every month? We’ll just do this together.”
Jill: As the client, I like that I can start out hourly and just see what they do within that hour. It’s sort of like an introductory rate thing, so I get why is it-
Brad: Yeah. I don’t thin it’s a very good deal for the VA.
Jill: It’s not.
Brad: Right. The problem with-
Jill: That’s why I like to sweeten it later, which-
Brad: Right. I agree.
Jill: I think people also don’t realize, as the founder of your company you’re hiring out, you have options. You don’t need to do it how they’re doing it. Everything’s negotiable.
Brad: Right. I mean I actually have a VA that I pay her a flat monthly fee.
Brad: There are some months where she’s like, “Brad, I went way over on hours. Can I charge you more?” I’m like, “Sure.”
Jill: Yeah. The one that I most recently flipped, I pay her much more than she would have gotten for the hours that she works, so that I have now cushioned it so that I… She does a lot of work for us. It’s fantastic.
Brad: Well, and the other thing, then I’m basically reserving capacity. I know that she’s going to be there for me, and because I’m paying her a fixed monthly fee, she can count on those hours. We just have a much more easy relationship because she counts on the hours. I know that she’s going to be there. I’m not checking in all the time. I’m just throwing stuff at her.
Jill: I feel like it just makes everything so much easier. I can’t think, right now, of any other hourly situations, I’m sure you can, that it makes sense to charge hourly, but I think that’s because I don’t pay anybody else hourly.
Brad: Lawyers charge hourly, right?
Jill: Oh, but you know what? Their hour is essentially a flat fee. They’re so expensive. I mean we were just talking about 7, 20, 50 bucks an hour. Lawyers are a different ballgame, but yes, they are hourly.
Brad: I will tell you, if you talk to lawyers, the biggest trend in the legal field is fixed fee because clients don’t want to have that uncertainty. Clients want to have certainty. Unless you’re in litigation where nobody’s in control of it, right, the other side has input, the judge has input, there’s a lot of things there, but if you’re just setting up an LLC or writing a handbook or… These are standard processes that a lawyer should be able to do on a flat-fee basis.
Brad: Even if you’re in one of those industries where people are traditionally charging hourly, I bet if you could work out a flat fee, people would like that.
Jill: It’s interesting. I wonder. I don’t have time to do a PhD on this, but I wonder if, historically, hourly was just the way to go. In modern times, we have become much more of a flat-fee society. I think the evolution of a small business owner is that, at the beginning, you only think to charge hourly because you don’t want to put too much on the client. Then, as you sort of grow, I don’t know, you kind of discover what we’re talking about.
Brad: Well, you understand your value. You get smarter about what it is you’re delivering.
Jill: Yeah. You’re overworked and underpaid at the beginning.
Brad: Well, and you know the value of what you’re giving. You know what people say yes to and what people say no to, right?
Jill: Right, right.
Brad: When you’re talking about something, you kind of can tell whether there’s a fit here between the value that they’re going to get and the amount you’re going to charge.
Brad: I think that, in the beginning, we hedge that because we don’t really know how much people are willing to pay.
Jill: Right, right.
Brad: The more confident we get in our value, the more we’re willing to say, “Yeah, this is the price. If you don’t like it, I’m sure there’s somebody else that’ll do it for less, but this is what we do it for because we’re worth it.”
Jill: Yes. We are.
Jill: Aren’t we?
Brad: We’re totally worth it.
Brad: If you need more guidance about pricing, if you go to breakingdownyourbusiness.com/raiseprices, raiseprices all one word, that will send you to a blog post on my website where I go through a lot of detail about raising prices. There’s an ebook there if you want to get it. There’s all kinds of stuff that will help you with raising your prices.
Brad: We would love to hear your raising prices stories. 708-872-7878. Call us. Leave us a voicemail. Send us a text message. What we want is to hear how much more money you’re making because you raised your prices. That’s going to make us so happy. That’s better than a Christmas gift that you were thinking about sending.
Jill: (singing). Okay, I’m going to stop because we crushed it.
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