143

143 FS How and Why to Ditch Hourly Billing with Jonathan Stark


The panelists talk to Jonathan Stark about how and why to ditch hourly billing.

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CHUCK: Hey everybody and welcome to Episode 143 of the Freelancers’ Show. This week on our panel we have Curtis McHale.

CURTIS: Hello.

CHUCK: Reuven Lerner.

REUVEN: Hi everyone!

CHUCK: I’m Charles Max Wood from DevChat.tv. Before we get going, I just want to briefly ask for a little bit of help. This is something that I am not very good at because I’m a very proud person but this show in particular and a couple of the other shows; they don’t quite bring in enough to pay for themselves. And I want to keep doing them. I don’t have any plans to cancel any shows but I would appreciate a little bit of help. So, if you want to help out the show, you can do a couple of things. You can join the forum for this show. That’s at freelancershow.com/forum. You can also go sign up for JS Remote Conf, which is a remote conference for JavaScript developers. If you’re not a JavaScript developer, I don’t expect you to get excited about that. The other thing you can do is you can go to DevChat.tv/donate and if you want to just give away some money. And finally, I’m working on a podcasting book course, etcetera. And you can get all that information at pickupodcasting.com. I should have some webinars you can sign up for if you’re interested in podcasting, which is actually a terrific thing for freelancers. So I’m just going to throw all that out there and if any of that appeals to you then, I really appreciate your help.

Also, if you have any suggestions for sponsors for this show, I would love to hear them. And you can either tweet them at me, @cmaxw on Twitter or you can just e-mail me chuck@devchat.tv.

All right! We also have a special guest this week and that is Jonathan Stark.

JONATHAN: Hello.

CHUCK: Do you have a brother named Tony?

JONATHAN: I wish. Wouldn’t that be cool? [Chuckles] Borrow the suit once in a while.

CHUCK: That’s right. [Chuckles] I need to be in LA in 2 hours.

JONATHAN: I get a lot of Game of Thrones questions too. I’ve never seen that show but I guess there’s a family named Stark on there.

CHUCK: I listened to about two-thirds of the book and I was just done with it. I think there is. I think one of the families is Stark. What do you think about that?

JONATHAN: So you don’t catch up with my TV watching.

CHUCK: There you go. Do you want to introduce yourself really quickly?

JONATHAN: Sure! My name is Jonathan Stark. I’m a mobile consultant based in Providence, Rhode Island and I help retail brands Kick-ass and mobile.

CHUCK: So, do you help them with mobile apps or mobile webpages or just being awesome on phones or?

JONATHAN: That’s a combination of things. Mostly strategy – that’s my main income. So when a company is finally ready to take the plunge and address the mobile thing then I help them how to get from where they are to where they need to go. So it saves them a lot of time and money – stuff that they could probably figure out on their own but big companies could easily waste a hundred or hundreds of thousands of dollars doing something crazy – learning the hard way. But I also do trainings. So after a strategy session, usually what happens is, I often recommend that they take their existing web team. Because a lot of big companies already have a “dot com” site that they do in-house and train them on how to make the leap to mobile. It’s not really that different designing for the mobile web than it is for the desktop but you have to un-learn a lot of things and start small, work your way up aggressively, use progressive enhancements. A lot of times, there’s a messed clean up in the CMS or they need to put services in front of some legacy systems that don’t play nice with mobile. That sort of thing. So a little bit of training and then do Ad hoc routine and stuff or we’ll just pay them by the month to pick my brain, basically.

CHUCK: Cool! You know what I’m going to ask next, right? What’s your hourly rate? [Laughs]

JONATHAN: I do not have an hourly rate?

CHUCK: [Laughs] Well, we brought you on the show because we want to talk about “How to get away from hourly billing?” or “Why is hourly billing crazy?” And I get that question all the time. “What’s your hourly rate?” What do you say?

JONATHAN: Isn’t that funny? It’s a stupid question. I understand why people ask it but what they’re really asking you is almost an ego thing like “How good do you think you are relative to your peers.” because that’s how people get their hourly rate from. What they should really be asking you is “How much it’s going to cost me to do this project.

CHUCK: Yes.

JONATHAN: Because they never ask. They say, “Oh! How much was your hourly rate?” And if you say 100 bucks, they’re like, “Oh, it’s going to be expensive.” And if you say $1000 an hour, they’re like, “Are you crazy?!” But you never get the chance to say, “Yeah. But I can finish the whole project in one hour!” or whatever. So it’s just a silly question but it is the mentality though of the procurement process in our industry. It’s just set-up for that to be the default first question so you do have to get around it.

CHUCK: Yeah. I think it varies with my clients. I tell them $100 or $150 an hour and [Crosstalk 06:01] and half of them are like, “Wow! That’s a great deal!” and half of them are like, “You mean you’re $20 an hour?! I thought you’re just going to write a dumb little script to do this?!”

JONATHAN: Yeah. It’s not the question they should be asking, really.

REUVEN: I’ve been in this business to close to 20 years now. Shocking as it is, always to say, I don’t want to hear myself say it. And when I talk to clients, almost always, the first question or the second question or worst case, the third question is “How much do you charge per hour?” And I don’t think they’re asking it as a way of ranking or ego. I think they want to know, and in fact, this is what they tell me, “Will it fit into their budget or not?” Now of course, you could argue that hourly rate times number of hours, Well, they’re two variables – they’re not just one. But no small number of clients or potential clients that said to me, “Oh! No way can I work with you because of that hourly rate.” And yet, the solution and perhaps I’m jumping the gun here, the solution that you and some other people have suggest, in terms of value-based pricing sounds suspiciously like project-based pricing to me which I’ve always been gun-shy about trying because I’m still worried that my estimates will be wrong and that I’ll end up doing tons of work for free.

JONATHAN: I can jump in right there if you want. If you did give a fixed bid for a project or however you come up with a number. If you give a fixed dollar amount for a project and you can underestimate that just as easily as you can underestimate and hourly-rate project, right? The difference is the fall-out. So if you underestimate an hourly project and you exceed the hours, then your life turns into a nightmare. You end up fighting with the clients. They start going over your hourly reports with a fine-toothed comb. Asking you questions like, “How come the data import to this one last week and longer this week.” It just turns into a horrible administrative disaster. If you underestimate a value-based project, whatever the fixed bid is, however you come up with a number, the punishment is that you just do more development work and so your hourly rate for the overall project goes down but your quality of life stays the same. You don’t have to suffer through all of that fight with the client. And in the event that you do underbid a value-based project, the client ends up loving – they’ll definitely hire you again because you’re taking the risk with them and you’re basically putting your money where your mouth is. You’re saying, I’m an expert. I know how long this is going to take and if I’m wrong, that’s my fault, not yours.

CHUCK: I really like the way you put it – you’re taking the risk with them. I’m probably going to put that on my website.

REUVEN: That is one of the most insightful things I’ve ever heard in favor of project-based pricing or that combination of things.

CHUCK: Well, the other thing that I explained, because I’ve been pushing more toward either weekly billing or weekly pricing or project pricing or feature pricing. Where it’s, “Here’s what it’s going to cost: you put in this feature and this application provided it’s large enough that I just don’t feel like estimating or pricing out the entire thing and then you can decide if it’s worth it or not.” Is the hour-why consistent with what I’m telling you it’s going to cost to build it?

JONATHAN: Yeah. Exactly. You’re giving them the information they need to make a value judgment when they need to make it. Or if you give them an estimate and if it turns out that the ROI is not there, they don’t find out until it’s way too late. Like they’ve already paid you a ton of money, they’re 80% done. Let’s say they’re not going to stop now but everybody’s angry.

CHUCK: Well, the other thing that I’ve seen with hourly billing I want to point out is that, “So my hourly rate is high relative to most other dev shops out there and a lot of times, they compare my hours to other people’s hours. They think it’s apples to apples and it’s not just due to the skill sets and whatever but I’ve had at least 2 or 3 clients come back to me afterwards and say, “I went out spending 15,000 or whatever dollars.” I have one in particular, he’s $14,000 into a dev shop on a job that I bid for him at $4000 and he has basically nothing to show for it.

JONATHAN: Oh, that statement. That statement would haunt me when I used to bill by the hour.

CHUCK: Yeah.

JONATHAN: Where the client calls you, you’re 150 hours into a project and they say exactly that I’ve spent all this money and I’ve got nothing to show for it. And it’s true because the thing doesn’t work yet and it’s brutal. The fingers start pointing and you keep changing your mind about stuff I wish you know [inaudible 10:29] It just turns into a nightmare.

CHUCK: Yup.

JONATHAN: And it’s not good for anyone and they’re not going to hire you again, probably. It’s just a mess. It’s fundamentally flawed – the whole concept is fundamentally flawed because you’re measuring the wrong thing. You might as well charge by the pixel.

CHUCK: [Laughs]

JONATHAN: It doesn’t make any sense. It’s just this arbitrary thing that’s easy to measure so they measure it. But in the end of the day, we’re all building software for businesses. We’re all charging enough money, I’m sure that these aren’t hobby projects for people who are just putting up blogs. This are systems and websites for growing concerns so they don’t want their homepage redesigned because their sick of it. They want more sales or they want to get more job applications in because they’re trying to hire people or they want their customer service calls to go down. They want some measureable business outcome from the work and that’s worth something to them. And the only number that makes any sense whatsoever to base your cost on or your fee to them on is a subset or a percentage of that overall value to them. And if you know or if you can figure out at least ballpark what the value to them is for a particular feature or project or whatever, and you charge, let’s say a tenth of that, they’re going to hire you every single time. That’s like a 10x return on their investment every single time and they never have to worry about blowing the budget, going over, having to go back to the well for more money, change request – none of that stuff. The tricky part of course is figuring out what the value is.

REUVEN: Well, I’d say there’s another tricky part too which is figuring out “What are the goals of the project and what are the specifications?” Right? Because one of the reasons why I’ve been so adamant about using hourly billing for so many years, although in the last 6 months to a year, I’ve definitely be under change my tune, I’m just trying to figure out how to do it. It’s that software is so complex and so malleable and so hard to estimate in many cases and the projects end in different ways that I feel like, If I go in with a fixed bid, then I’m setting myself up for failure because either my estimate will be wrong because I was wrong or the estimate will be wrong because the client will claim, “Oh! Actually A, B and C were also included. Didn’t you know that?”

JONATHAN: Well, that, I mean, come on. That’s a problem –.

REUVEN: So hourly bid has been my –. Well hourly billing has been my way to say, “Okay, you know what, sometimes, things take longer than others.” But believe me, you’re very convincing, right. I’m not saying you’re wrong. I’m just saying that this has been my attitude for many years that I’m slowly but truly peeling back in the face of the things like what you’re saying.

CHUCK: Yeah. But we still need to address it, right? I mean if they add things in then hourly billing just slides up to accommodate it, right?

JONATHAN: Yes and no. It depends. Sometimes, people like sculpt can creep – the person who probably knows what the goal is –. Where do you start with this?

First, you shouldn’t even take on an hourly project if you don’t know what the goals are because you could get a list of deliverables from the company, your project contact or whatever. You could deliver all those things. But if it was a bad idea in the first place, if you get no ROI from it or if the people involved don’t understand what the goals are – what the desired business outcomes are from the people above them who told them to go hire you, then you could do exactly what they told you to do and still it will be a failure. They might not blame you because you did what they asked for but it’s still a failure so you really shouldn’t take on any project unless you know what the desired business outcomes are. Because if you do, in my opinion, doing a major disservice to the client. You’re just a pair of hands doing as you’re told and it may or may not turn into an increase in sales or whatever. There could be lots of different goals and if you don’t know what they are, you’re basically flying blind.

REUVEN: Right. So I have this one project that I worked on for a few months over I guess, July through October and it was on hourly basis but the client basically saw this as a fixed budget thing and they also had, in my opinion, totally crazy total unrealistic opinions or ideas about what was included. So we did what they asked for and they said, “You know, we have this short list of fixes you need to make.” And the short list of fixes was actually 75 things long and one of them included completely overhauling the log-in system. And when we said to them, “You know, these aren’t really small fixes.” They said, “Oh yes they are.” Now, we then said, “Fine, we’re billing by the hour on this. But then, and this is why you’re being so convincing, there was a lot of arguing about it. At the end of the day, what happened, we gave them software that I believe was excellent but they left us. And they left us because they were convinced that we had screwed them over or cheated them.

JONATHAN: Right. And, in a sense, I’m not going to say you did. I don’t know what the details are but in general, in the industry – in our industry, billing by the hour is basically, it’s what gives consultants a bad name because when you deliver a bad estimate, people don’t here estimate. People hear that’s how much it’s going to cost.

REUVEN: Right! Right! [Laughs]

CHUCK: Yes. That’s always true.

JONATHAN: Yeah. And maybe it’ll come under? How often do you actually come in under estimate? Never? One in ten? One in a hundred?

CHUCK: I think I’m playing the game where it’s like, “Okay, here’s the best case. Here’s the worst case. We’re going to come in somewhere between. And then, they still hear it’s going to cost, “best case” and then they get upset when I actually say, “Here’s where I think I’m going to land.” And I usually land pretty close but they saw “best case” and that all they heard.

JONATHAN: Well, so here’s my thing. If we’re making an estimate like when someone comes to me and says, “Hey, we’ve got this project we want you to do. Can you give us, ‘How much is it going to cost?’” I feel like, I should take the risk for my estimating. Why should I put the risk for my bad estimating on them? I should find an expert – I’m charging expert rates. Why should I put the risk on them because I’m a bad estimator? It’s my fault, not theirs. And you could even say, “Well, what if the client allows the sculpt to creep?” Again, I blame the expert. The expert should be able to control the client. And if the client is an expert at their business – they’re an expert at their job. They’re not an expert at building websites or internal systems – that kind of thing. They need guidance. They need a trusted partner and that’s where we come in. And if we’re basically just turning around and saying, “Oh well, you didn’t tell me you wanted all your data imported from the old system in the new system. That wasn’t part of the deliverables.” And they look at you like, “How are we supposed to use the system with no data in it?” Then you’re not really being an expert. You just really didn’t think it through. And I feel like, if that can get complicated, so with my quotes, I take it up a level and I don’t talk about deliverables. I talk about what the outcomes are. What are the desired outcomes? You guys want to have a 50% increase in job applicants? You guys want a 20% decrease in customer service phone calls? And I don’t put anything in the quote about what color the log-in screen is going to be or anything like that – nothing like that. That’s not on the table. So my quotes are three pages long at the most and that includes a cover page.

REUVEN: Okay. So what stage do you then get into the nitty-gritty of not “Why you’re doing it?” – the value they’re going to get but what you’re going to do specifically? [Crosstalk 18:03]

JONATHAN: That’s not up to them.

Oh, I see. So they basically say, “Fine, these are our business goals. Go.” And you basically come back to them and you say and it could be that you’ve developed software; it could be you’ve waved the magic wand. They don’t have to know or care if they’ve achieved their business goals then you’re good. And if not, then you go back and do more.

CHUCK: Right. I think the big difference here that he’s saying is that he goes in as the consultant – which he said at the beginning, but not just a consultant to build some software – a consultant to help them achieve their business goal. So that’s what I usually do. I help someone get more sales on their site or get more members or they have a log-in issue or something I got while going in as a consultant, overall and I happen to write software at the same time. Reuven, you’re thinking of it more as a, “I’m going in as a consultant that write software for you.”

JONATHAN: Right.

REUVEN:  So, that’s true. But that’s also, and maybe this is my positioning right? But that also often help people approach me, right?

CURTIS: Oh, yeah, yeah.

REUVEN: They have a business problem. They know what the business problem is and they need someone to fill in the hole. And so when I start pushing back on business goals, sometimes it works really well but often I get these very funny reactions like, “Why are you asking about that?”

JONATHAN: Yeah, yeah. Absolutely. Almost always, when someone comes to me, they already think they know what they want me to do to solve the problem and they skip right over where the problem is. They say, “Oh, we need you to rebuild all of these reports that can automatically be generated and downloaded as PDFs.” And we’re like, “Okay. Why? What are we trying to achieve here?” And they might say, “Look. We just want you to do it. We don’t need you asking these questions.” And I say,  “Well, there’s a million ways I could do that and if I don’t understand the ultimate goal, I might go off into the gutter.” When you’re building software, you make thousands of decisions a day that you’re not going to contact the client about.

CHUCK: Hmm-hmm.

JONATHAN: Like, “Is this software a stop-gap into your getting a huge enterprise solution any year but you need something in the mean time?” or “Is this software solution going to be a foundation for the next ten years of your growth?” because I’d build it differently in those two cases. Even though they’re still going to get downloadable PDFs at the end of the day. You can’t do a good job if you don’t know what the ultimate goal is. And they might feel like, “I’m the customer and you’re the vendor and the consultant. It’s like you’re looking a gift to ours in the mouth – kind of challenging their assumptions by pushing back on them but that’s the difference between being a laborer and an expert. Like if you just want to be a pair of hands and dig a hole, then they say, “Dig a hole over there.” and you dig a hole over there. But that’s commodity-level type of work. An expert knows why they dig the hole. Otherwise, there’s just no reason to dig it.

CHUCK: Right.

CURTIS: And you don’t go to surgeon and like, “Hey, I need heart surgery because the heart feels funny.” [Chuckles] They go and they diagnose you and they treat you for that diagnosis, right? Even if you go in and say –. like, we had our kids in the hospital a few times over the last few weeks with different things and we said these are all the symptoms we see – we believe it is –. There’s a doctor who did a whole bunch of checking and then gave us prescriptions for that. If they just give us prescription based on what we said, they’d lose their job right?

JONATHAN: Right! Exactly! And that ties into a big underlying premise of mine, which is, “Why do I go around telling people to stop hourly billing?” That’s just going to make more competitors for me right? Why am I evangelizing this? And the reason is because our entire industry has this cancer on it that there’s no regulating body. There’s no AMA for consultants. So we’re like self-policing. And I just feel like, as an industry, we’ll never get better at things like doing estimates or achieving business goals or actually adding value to our clients if we don’t, as an industry all grow up a little bit and focus on the real goals and not the task that we were assigned.

CHUCK: Well, I want to push that button a little bit too because, I mean, “How many of us have had that client come to us and they’re like, “We really, really, need this problem solved.” “We really need this app built.” “We really need this service available.” Or whatever it is, right? And then, you start talking to them. You start figuring out what their problem is and the second you start actually talking about delivering something or getting into some of the nitty-gritty details to really understand what they need solved and what the factors are, they start getting skittish because they’ve already been messed over by two other consultants, right? And so, well there are these “bad consultants”, so to speak, out there. I don’t think they’re being bad on purpose. I just think they weren’t the right person to work on that client’s project. Some of them aren’t the right person to work on any projects but that’s another issue. So, you can genuinely help them at a price that makes a lot of sense for the value they’re going to get but they’re gun-shy because somebody else already messed it up.

JONATHAN: Right. And that’s part of the thing I’m rallying against but a way to address that is to, first of all, say, “This is not going to go over-the-budget.” “This is a price I will not charge you a dime over that and you can talk to every client I’ve had since I’ve started my business and every single one will tell you that I honored the original price. Even when that meant I worked an extra year on projects. So that is definitely one-way to address that client who’s been burned before. And the other thing is to just to focus your marketing and raise your profile in the industry so that people already trust you when they have come to you. So I’ve written a couple of books and have this sort of, “Magic Wand” effect where like, “Oh, this is the guy that wrote the book! We definitely want to hire him. We just don’t know if we can afford him but definitely, this is the guy we want.” So that also mitigates some of the “we’ve-been-burned-before” type of issues because they’ll trust someone who’s a recognized expert more quickly than someone they found on Fiverr.”

CHUCK: Right. Fiverr [Chuckles].

CURTIS: And most freelancers and small businesses I talk to want to jump right to being that expert without writing a book first or blogging a lot or really releasing a lot of open source code. They just want to be the expert with no work. And that’s the same “Magic Wand” that a lot of clients come to us from and we tell them they can’t do it. It’s like the mechanic that has a broken car.

REUVEN: Curtis, I know that you don’t do hourly billing. I know that you do weekly billing.

CURTIS: Sort of.

REUVEN: But my impressions of your weekly billing –. Okay, I didn’t think that you tie it to a certain specification. You’re not doing a project-based estimate or project-based quote. You’re basically saying, and again I might have gotten this wrong, “I’m going to do as much as I can to give you value during each week and I’m going to give you more value than what you’re paying for.” Thus, you have a good ROI. But that means, potentially, you do three weeks of work and you’ve not gotten through everything. And if I understood that correctly, that’s different than what Jonathan’s talking about, right?

CURTIS: Yeah. I would say it depends now. Last time, we had a really long talk about it and yes, Reuven, you’re exactly correct. That’s how they did it. Now, I do value-based pricing and breakout my billing sequences into weekly. So, if it’s four-week project or that’s the plan, then by the end of four weeks, they’ve paid me 100% of the project. Now, I’ve been hired, on a few times, as I guess, Staff Augmentation. In which case, we talked about value a bunch then we work out what the weekly rate is for basically having me on your team for a certain amount of time. And I go in as a consultant and then it’s a flat rate per week but we get done what we can get done each week.

JONATHAN: Yeah. I do value-based fees. The value-based fees that I’m talking about are specifically for software projects. So, the kind of thing that takes at least a week but probably more like a month. Maybe three months? That kind of a thing – like build – a thing that has phases and release and all of that. And it’s interesting that you bring up the payment terms because I think that’s a critical piece of working this model successfully. One of the things that I insist on is 100% payment up front. So part of the benefit of telling the client, this is how much it’s going to be is that we know how much it is going to be [Laughs]. If it was an estimate, I can’t say, “Oh, I want the money up front.” because we don’t know how much it’s going to be yet. But since it’s going to be $100,000, 100% paid up front and you’d be surprised how many people are like, “Okay, here’s a check.”, get the money behind us and then you never have to worry about money again for the rest of the project. There’s no hours tracking. There’s no invoicing. There’s nothing. Sometimes, they’ll balk and you say, “Okay, how about 50% up front and 50% in 30 days?” regardless of the status of the project or whether or not it’s been released. And they’ll usually say, “Okay, that seems fair. You compromise with us and that seems fair.” So, what ends up happening is you’re never waiting for that last check because software projects don’t end on a particular day. There’s usually a launch date or delivery date but it’s kind of like a lake freezing. At some point, you know it’s safe but you’re never sure exactly when it happened. And that’s what’s like with software projects where it’s really hard to say, “Okay, all the bugs are gone. It’s done.” So I just say, “We don’t want to worry about that. I don’t want to have a cut-off date for that last payment. You pay me that last thing and we’re done.” I’d rather have the payments out of the way in advance and I’ll just keep working until you’re happy with it. People are busy. They’re not going to keep bugging you for stuff if their goals have been reached. They don’t care. They have other things to do.”

REUVEN: That was going to be my next question actually. I can so easily imagine, and maybe these are just some of the clients I’ve had over the years. If they were paying me up front, fantastic for everyone. I just totally see how that gets rid of the money thing. That gets rid of the hourly tracking and billing thing, great. And I can see where I would achieve their business goals and I would be super happy with it they say, “Yeah, but.” And then they keep coming back to me. And you’re saying, in the real world, at a certain point, it peters out because they just have better things to do with their time?

JONATHAN: I’m hearing loud and clear that you had that experience. That you’ve been nickel-d and dimed by clients and then you pull out your baseball bat and hit them with it. With a change request or whatever. And it’s like, “Oh, we can keep working on this but it’s going to keep costing you.” And to me, you’re setting yourself up for a contentious relationship with all of your clients. And so, they’re responding to that. If you’re having that experience a lot, I don’t think it’s the clients. I think it’s a natural response to being in a contentious relationship. And if you put your neck on the line with them, first of all, it’s predicated on not working with jerks. I mean, you want to work with people you get along with and trust. Like my rule is I’m not going to work for anybody that I wouldn’t want to go out for drinks with and if you reach a consensual agreement before the project starts and you see eye to eye with the project contact, they’re not going to mess with you. They’re not. If you trust them, they’ll trust you. And they’ll treat you with respect because you’re partners – not some guy digging a hole.

CURTIS: Yeah. I think a lot of the people that try this don’t have a good client vetting process in any fashion. They just take people that come in and then they say, “This didn’t work for me.” and they nickel-d and dimed me and bugged. You just took whoever came. It’s not good. I didn’t marry the first girl I found. [Chuckles] I dated someone for years and say, “Hey, I’m going to hang out with them.” So why wouldn’t I do that with my clients? I spend more time with my clients than I do with my family. I chose my family to be someone I would want to spend all my time with so that’s the type of clients you should choose.

JONATHAN: Right.

CHUCK: So, one other thing that I’m curious about is, sometimes I have clients come to me and it’s not just a, “Hey, we need this built.” but it’s we have a big trade show coming up or license expires in however long and we need this replaced. Or this is costing us so much money every day and so we need it done in X amount of time or it’s going to cost us more than we can deal with. So how do you make sure that you meet those expectations?

JONATHAN: Yeah. That’s a great question. I typically will never agree to a deadline. And the reason I give them is true, which is that, “This is a collaborative project and I can’t guarantee a deadline because I’m not in control of it. If I send an e-mail and it takes a week to hear back from you, that’s fine and it will not bother me. You can go dark for a month, that’s totally fine but I can’t promise you that we’ll meet a deadline in a situation like that.” So what I usually do is I say, “In a perfect world, this could be completed in 3 months or whatever and that’s if we are collaborating closely and there’s no communication latency and then I’m quick to report.” [Chuckles] That never ever happens and even at the beginning of a project when it’s the biggest thing you’re working on the client think that they’ll be getting back to you immediately, they never do. And so, I just won’t agree to a deadline. The trade show example that you brought up is an example of a potential exception. There are sometimes specific dates like that. And what I’ll do then is I’ll make the scope variable. So I’ll say, “All right, we will build this in a way that you will have a working version in time for the trade show. It might not have every single bell and whistle so we’re going to prioritize the things that we wanted to do, whatever. If it’s a trade show thing, it’s probably some kind of lead capture software or maybe some sales software that they’re using in a booth or something like that or something they want to announce. And I’ll make sure we will have a working version by then but it might not be done. But I try to avoid those. I really try to get away from the deadline and stuff because clients have incredibly unrealistic expectations about their responsiveness and I like to accommodate people’s schedule. As the expert, I can say, “Look, I know you guys are not going to be as responsive as you think you are. I’ve been in this to this road here before and I’m set-up in a way that that is fine. But I can’t promise you a deadline because of it.”

CHUCK: Hmm-hmm. The other thing that I’m running into that I’m looking up here is, let’s say that I do have a potential client and I do have a potential client. And he’s coming to me with a project that us fairly large – large to the point that it’s going to be a decent size estimate and so, I’m really leaning toward breaking it apart and say, “The deliverables are Phase 1 and then deliverables for Phase 2, Phase 3.” Do you ever do that or do you just go for the whole big pie and count on getting it built and figured out in the time frame that they need?

JONATHAN: I break it up as much as possible because it’s safer for everyone.

CHUCK: Right.

JONATHAN: So, I’ve tried to mitigate risk as much as possible and the way I work with clients – we’re partners so that mitigation rolls up to both of us. I like to have lots of stable points of release, if you want to call it that. So, if it can be phased, I definitely try and convince them that that is the way to go. And they’re usually pretty open to that because any big business is way more risk averse than a solo consultant like I am. So, if I recognize a risk and I say, “Hey, you’re really biting off a lot here. You should break it down.” Here’s the path. These are the core features. We can make this work. This second tier V2 stuff clearly slots in here and then there’s some really fancy stuff that would be nice-to-haves that we can put in to a third quote. So I definitely do that.

CHUCK: Curtis, are those questions you’re asking questions that we should ask in the episode or you’re trying to [crosstalk 33:36].

CURTIS: Oh, they’re more of questions for Reuven. As I’m bugging him about why he isn’t saying “No” more often to clients and he’s saying he needs some more in his funnel.

CHUCK: Because –.

CURTIS: I’m asking him questions to be directed about, “This is what you need to do.”

CHUCK: Well, I’m looking at them and I’m thinking that they’re good questions for this topic. So for example, “How do you build your sales funnels so that you’re getting people who expect to be built and priced like this as opposed to going to the default for the industry which is you give me [crosstalk 34:01] so much time and I’ll give you so much [crosstalk 34:03]. No? But my sales funnel tend to bring me people who expect to work on an hourly basis. And as much as I can communicate with them and I can educate them, you and I are both better off if we work this other way. “Can you build the sales funnel in a way that brings you people that just expect to get a direct bid or a phased bid on their project?”

CURTIS: Yeah. Long before you even talk about the sales funnel, you need to have your ideal clients identified and you need to know where they are and then do writing content for them, right? And though Reuven writes in a Linux journal and I bet you, I wonder how many of his clients are actually reading the Linux journal or that his peers?

REUVEN: Oh! Zero. Zero. It’s funny. People seem to think that I get tons of clients by riding in the mixture and all. And I think I’ve gotten two over the nearly twenty years I’ve written there.  It’s just nearly zero because the people who read the column are not the people that are going to hire me to either do projects or do training.

JONATHAN: It’s a nice credential though in your marketing. You can say that you write there. I mean that’s valuable.

CURTIS: Yeah. Yeah.

JONATHAN: Though they’re probably not reading it –.

REUVEN: Right.

JONATHAN: Third party. [Crosstalk 35:09]

REUVEN: That’s exactly right. When I go in, I have to prove myself less because I do that but I may be a recognized expert in certain things but it’s not part of the marketing funnel at all. Much that I fooled myself into thinking it was years ago.

JONATHAN: Gotcha. Was there a question for me in there? [Laughs]

CHUCK: Yeah. I’m just wondering, can you structure your sales funnel to get people who, well value-based pricing instead of hourly pricing. I haven’t done that. I mean, it says it right on my webs.., it’s like the second paragraph on my website. The differentiator between me and other consultants is that I don’t bill by the hour but first of all, that’s a relatively recent addition to my site and I know that when people come to my site, they’ve already heard about me somewhere else. The number one by far, the number one keyword referrer to my site is my name. So people already know who they’re looking for and anything they find in my site is more like, I have all those third-party endorsements as obvious as possible – books I’ve written and columns I’ve written, etcetera, etcetera – clients I’ve worked with kind of thing.

Honestly, I find that most customers, after they get over that initial, “How much is your hourly rate.” “I don’t have one” They’re kind of like, “Well, how do you do it?” And I’m like, “Honestly, I don’t think hourly rates are fair to clients because it puts all the risk on the client and none of the risk on the consultant. So as an expert, I don’t think that’s fair and I want to share the risk and the reward, of course of giving you a fixed price.” And that’s usually the end of it. There have been a couple of cases with, I can think of one, High Red client with the procurement process just required that they get an hourly rate because they saw that as a way to compare apples to apples and they were going to basically hire the person who had the lowest hourly rate which, as we said in the beginning is basically absurd because it totally ignores the number of hours and the quality – quality we haven’t even talked about. But billing in a value based way for a software project, quality is baked right in because the more bugs there are, the more your hourly rate goes down if you divide it out. So, it aligns everyone’s interests if I give them a price and I stick to it. Everybody is on the same boat.

REUVEN: So Jonathan, you made a very good case and a pretty compelling one, I must say for not hourly billing or for value based but presumably, you wouldn’t do this just to give you peace of mind or maybe so and your pre-payment is also nice. But presumably, you’re also making more now than you did when you did hourly billing. Is that true?

JONATHAN: Oh yeah. The first year, my income doubled. When I was the VP of a software firm, I think we had 12 or 13 developers when I left and I was making 90 and change. And I went solo and switched. I went solo because I realized that hourly billing is nuts because we were in a financial situation in the firm and I was like, “If we fire someone, I’m going to have to fire my best guy because he’s the most expensive. He’s the fastest.” [Laughs] And we have a junior guy who’s really slow and cheap and he keeps his customers super happy. He was very personable and he’s like a customer service type of guy and I was like, “I can’t figure this out!” Everything is pointing me on the direction of firing our best developer. He’s one of the best developers I’ve ever worked with. We were lucky to have him and I was like, “Something’s wrong here.” And I thought about it for a week at least and finally, I was like, “Oh! It’s because we’re billing by the hour. If we didn’t do that, then our top guy would be the golden goose that I know he is because he just finished stuff so fast; I couldn’t even keep jobs on. Like you couldn’t keep jobs on his queue. He just be like, “Yeah, I’m done with that again.” And like, “I just gave you that last week!” He’s like, “That’s done.” So that was when the white went on for me so I went to my boss and I said, “Dude, we got to –.” I was the VP and he was the Founder and the President. I was like, “Dude, we got to, this hourly billing’s killing us!” We’re spending so much time trying to optimize our way out of the pain of hourly building. Basically treating the symptoms with all sorts of reporting tools and me calling up the developers every day and be like, “Did you log your hours? Did you log your hours?” “The problem is, we’re tracking hours. We should just be giving fixed bid.” Then he just couldn’t get us out around it. He’s like; “We’ll go out of business in the first year.” And I’m like, “Yeah, because you suck at estimating. And the reason why is because you’ve never suffered from it.” You know what I mean? You get great at estimating if you are the one who’s eating all the hours. So, anyway, in my first year after going solo, I doubled my income and every year after that it’s going up. So you make way more money.

CHUCK: That’s just crazy. And it seems counter-intuitive as well in one way and it seems like it makes total sense in another way. But I think what it really comes down to is your ability to estimate what’s going to cost and being aligned with that value. And if you’re incapable of providing the value then your income will probably go down.

JONATHAN: Yeah. The thing we haven’t talked about is what happens when it goes horribly wrong which has happened to me as well. I think I briefly mentioned that I took on one gig that literally went a year longer than I expected and I just never charged them another dime. I worked on it for an additional year. Probably at least 10 hours a week.

CHUCK: Wow!

JONATHAN: And I never got –. Yeah. But, I mean, so my hourly rate maybe went down to 50 from 200. But to this day, we’re still friends. They’d still hire me if I still did that kind of work. It was fine! It was fine. Another time, I had an agreement – conceptual agreement with a buyer and they send me a $10,000 dollar payment for the whole thing and then the next day we had a conference call with the owner of the company who I immediately recognized that I was never going to get along with and I send them the money back. I was like, “Forget it. I’m not doing the job.” Because I knew that the personality type was going to destroy the project and that was going to bring me down as well.

And so things like that happen – things you can’t even imagine when you’re billing by the hour. Crazy stuff like that. It happens but I’m telling you that’s super rare – very, very rare.

REUVEN: And so you typically worked on this one project at a time or you were juggling a few things each week or each month?

JONATHAN: These days, I hardly ever do actual development. These days it’s almost all strategy and retainer stuff which is either like a half-day strategy session where I’ll fly to your company and do a presentation to your Board or the [inaudible 41:50] people. I’ll do training, which again is kind of like a productized consulting type of thing where you just, you show up and it’s like picking something of a menu. It’s like here are the modules; this is what it costs. Tell me where to go and I’ll be there. Those, I can do basically like 2 retainers at a time normally. They take 10 to 20 hours a week to really do well and to do all the research. When it comes time to do a software project, which I do still do one or two a year, software projects just to make sure that I’m still up to date on the things that I’m advising companies about because things change so fast in mobile, it’s really easy to get behind the times. So once or twice a year, I’ll do a software project as well and let’s see, in 2014 it was the responsive redesign of the entertainment weekly site and I think before that, I did TechCrunch as well.

So it’s kind of hard to say. I only ever do one software project at a time now. But thinking back to when I was doing only doing software development, I probably have two to four going at the same time. And they’ll be in different stages like one of them would go dark for a month; the other three will be hot and heavy. When somebody would be coming up to our release, you know it’s going to get crazy so you let everybody else know that your output’s going to go down because you get this one thing that’s going to have a crazy deadline – not a deadline, you know whatever it is. You have busy weeks and you have slow weeks so maybe two, three, four, something like that.

REUVEN: So, it sounds to me and I may have read a bunch of things in your blog as well in advance of this conversation and it sounds to me like I should just pick a date and they could even be, I think we’re recording this on December 30th so maybe the day should be January 1st or February 1st. I should just say, from this date forward, I am working in the following way: I’ll be working on a value-based way with my clients and pre-payment and maybe not put it as such on my website. Maybe just copy some of the fantastic text you have on yours but basically make the switch and I shouldn’t be afraid of it and I should not worry, “Oh my God, my clients are going to hate this!” Rather, I should say, “Uh-huh, this guy’s an expert and he’s willing to share the risk and let’s do cool things together and basically, if I do a good job and let’s hope that I do, then my satisfaction and income and client and quality will all go up, which sounds like a fantastic win.

JONATHAN: Yes. I will caution you though that it’s very different. So your proposal process and all the conversations leading up to the proposal will be new for you because you can’t be satisfied with, “Oh, I’ve captured the deliverables that they want me to provide. You can’t leave it at that. You need to go in and push back and get to the ‘Why’. You got to drill down to the ‘Why’ and if the person you’re talking to doesn’t know the answer to ‘Why’ then you got to go up the chain to somebody that does. Otherwise, you can’t take the project. So usually, and I do believe that you’re right. In the long term, it would have a very strong benefit to your business in both income and quality of life but there’s also cash flow worry about and making a drastic shift like that might be better done in stages.

I left a company and started a brand new company and there’s no transition phase. I just started new. So if you are in a situation where you have clients, you’re not starting a new company, it’s really hard. I mentor people about how to do this and they have a lot of trouble converting people who are used to working with an hourly in perceiving them as a freelancer, as basically a pair of hands. They’ve a really hard time converting them over to the new kind of relationship because it’s not just a new billing style. It’s a new kind of relationship. So all that said, I do think that no one will ever understand exactly what all these entails and how it makes you feel internally because it feels differently internally unless you try it. So you do need to try it but I would recommend doing it with one client. So a lead comes in, I’m sure you get leads all the time, you get these leads and when you want to identify one of them that’s a perfect fit for this. So it would be someone who you get along with, someone that you have a really good rapport with. You see eye to eye; you watch all the same shows; you like the same music, like you really get this person. That’s number one.

Number two is the job’s a slam-dunk. It’s not some crazy new thing like, “Oh, I’ve never used redist before but I always wanted to and this might be a good time to use redist. I can learn that. You don’t want that. You want to have something you’ve done a million times and be like, “Oh, I am really confident in what my costs are going to be and then when you talk to that person, as you’re going through this, make sure you drill down to find out why they want you to do it. Get behind the scenes. Find out what the business goals and maybe even personal goals are behind the reason they picked up the phone to call you. And when that person comes across your radar and do it, make the quote, fixed bid. Say, “This is the deal. It’s going to be X amount of dollars, I’m not going to charge you another dime.” And see how it feels. You’ll almost certainly underbid it the first time so I wouldn’t say switch your whole business over in one date because you will start out underbidding.

REUVEN: That’s interesting.

JONATHAN: Does that seem like something you can do?

REUVEN: Yeah. Yeah. But your cautions were also very important because quite frankly, yesterday, two days ago, I got a call from someone about a fantastic sounding project and I was even thinking, “Wow. Maybe value-based pricing will work with them.” because it’s super important. They’re a company. It’s high stakes. They look around for other people; they couldn’t find anyone, they called me. But, it’s a lot of stuff I’ve never done before and I’m not even sure how to estimate it and beyond that, they set a very strict deadline. And so taking into account everything you said, I don’t know if that’s where I want to start with value based pricing because I could end up really getting in trouble on that one.

JONATHAN: Yeah. Lots of red flags there. You want to start out with something that’s, I don’t know, what’s a typical length project for you? Is there a typical length one?

REUVEN: No. I mean, sometimes, there are a week or two, you know what, I’d probably say two to three months – something like that, probably about two or three of those a year at least.

JONATHAN: Hmm-hmm. So you probably want to do one that is –. The tricky part is, what I want to say is you want to do the smallest ones possible but the hard part with that is smaller projects get the less, there’s any value there. It’s just some annoying thing that, like the MailChimp changed their API and so you just need to update the PHP code and it’s like, “This thing broke, we need someone to fix it.” That’s not a good fit for value-based project because it’s just a repair basically. But when someone is laying the groundwork for a big change –. It’s really hard to do a value-based thing that’s shorter than at least a month. I suppose it’s possible that you could do software development project in a month that actually does have tons of value for some reason. In fact, if came on your way, that would be the one to do but they were usually around 3 months when I was doing a lot of that stuff. Occasionally they’d be longer but we’d have exceptional circumstances in those cases. I never want to take a check from someone that’s more than a $100,000 because that just means the project is probably too big for me to do by myself so it’s hard. It’s a little tricky. You just want to take on as little risk as you can and another good time to do this – when you are having a good cash flow period and you could take a hit in case you underbid it, that’s another thing to think about. Oh and another thing to do is just bid it really high – double what you’d normally. In which case, you probably won’t get it [Chuckles] because if you’re not good at establishing the value in their mind before you send the quote, they’d be like, “Is this guy crazy?” And totally get sticker shock. But usually, when I send the quote to someone, it’s short document. It barely says anything. It basically reiterates what we talked about. We already agreed what’s happening and the only thing they need to know is how much is it going to cost. But I already know from talking to them that it’s going to be a major change for their business and I made sure that they understand how big a change for their business it’s going to be.

So let me put that in context, somebody who call me up and be like, “We need you to build a reporting solution that allows us to generate PDFs.” – like I said before. And I say, “Well, okay. Why do you need that?” “Well, we need that because if we don’t have these reports then we really don’t know what’s going on with their finances and last year we got in big trouble with the IRS because of that. “Okay, why don’t you just hire someone to do that? Software projects are expensive. You know hiring me is expensive. You can hire a full time accountant to sit in your office for $70,000 at the most. And they’ll say, “Well, we can’t do that because X, Y and Z, blah, blah, blah.” So now, I know right away that those who say something like, “Oh, we don’t have a desk. We have to move to a bigger office.” So they come up with some reason why they can’t just hire someone so I know right away that there’s at least $70,000 worth of value there because hiring a person is like –. The thing that I build is going to replace a person who they can even hire if they wanted too for whatever reason. So I’m like, “All right. Let’s say I do this for –.” So then figure, first year alone is probably worth between $70,000 and $100,000 in risk aversion, let’s say. And I’d say, all right, I’ll do it for $10,000. And they say, “Fabulous!” because I already put it in their mind that they’re saving that salary. This is a $70,000 year person you don’t have to hire because the software I’m delivering. If they say, “Oh, it’s just a couple of PDFs, what’s the big deal? $10,000? That’s crazy!” You know, you need to have that conversation first so they’re thinking in the same terms you’re thinking in. Otherwise, they’re just going to be like “Tsk.” They’ll just throw it back to your face. So like I said, it’s a whole different type of relationship. It’s like how you would treat your wife. If she needed some help, you wouldn’t just do it. She’d be like, “Oh, I need this thing for my business. I need this for –. You know how to do this stuff, right?” You’d be like, “Yeah! I could do that but why don’t you just hire someone?” And she’d be like, “Oh, I can’t hire someone because I work from home, as you know and then the lady would be in our house everyday [chuckles] and it would be super uncomfortable. “Okay, maybe there’s another way we can solve this.” And that’s how you would be with anybody that you’re close with.

REUVEN: It’s almost as if, in your conversation, you want them to reach the conclusion that trust they’ve already reached because they found you as a software person. But you want them to reach the conclusion that there are so many different ways to solve this problem and all of them are worse than implementing software and so software’s the way to go. And so, it’s going to save them like it’s the best bang for the buck – the best ROI – the best whatever we pick you is better than everything out there.

JONATHAN: Yeah. It gets almost comical at times. I’m basically trying to talk them out of hiring me. I’d be like, “You don’t really want to hire me. I’m very expensive. You can do all these other things and they’ll say, “Now, we can’t do that because of this and we can’t do that because of this.” And they’ve basically talking themselves into paying my exorbitant fees but they’re not really exorbitant because, like I said before, it’s usually 10x return on the investment. So, where else do you get a 10x return on your money? Nowhere! If it was a 2x return, they’d be happy.

CHUCK: Hmm-hmm.

JONATHAN: But you need to make sure that that perception is alive and well in their minds, when they get the quote from you. Otherwise, it’s look like a giant number.

CHUCK: Right.

REUVEN: Very interesting.

JONATHAN: [Crosstalk 53:12] Confusing you more.

REUVEN: No, no, no. No, no, no. This is super helpful and I would say it dovetails a many ways with these Brennan Dunn says also but it shifted obviously slightly but I think I have a much better idea of these sorts of conversations trying to have with clients. And the fact that it will take some practice – take some time is also encouraging. It’s not going to be homerun on the first try.

JONATHAN: Yeah. You don’t just go from white belt to black belt. There are steps in between. You don’t just flip a switch. The light bulb really needs to go on and it did for me. I had, it was like epiphany style type of revelation to me so I was like, I was not billing by the hour again. I couldn’t live with myself if I did that. And to me, it’s almost unethical to do that because it allows you to [inaudible 54:02] we talked about. It just allows all sorts of bad things into the relationship that I didn’t like. I want to deliver 100% customer satisfaction every time. To me, that’s my deliverable – 100% customer satisfaction and I couldn’t do that billing by the hour so I had to come up with something else.

CHUCK: Very cool. Well, I think we’re kind of at the end of the time so should we get to the picks?

REUVEN: Yes.

CHUCK: All right. Reuven! Picks!

REUVEN: Sure! I got one pick for the week. It’s a shared drawing app called Twiddla. T-W-I-D-D-L-A (dot) com – that has just interest doing an online medium that I had last week and it was –. I’m sure there are lots of these out there but it was easy to use, fun to use, set-up, browser compatible – all that other stuff and there are many times when I wanted some sort of shared whiteboard; shared drawing program to just throw up on the screen and send the URL to my clients. If you don’t have one, I definitely recommend trying this. It’s easy and at least free for simple bad drawers like me. [Inaudible 55:08] Just one for this week but that’s it.

CHUCK: All right. Curtis, what are your picks?

CURTIS: Yeah. My pick this week is going to be “Kirk Bowman and The Art of Value Podcast” which just talks about all but how you should be sowing on value and he also does consulting if you want to learn how to value price, you can hire him as a coach and he will help teach you to value price. He actually tributes his conversion to value based pricing on a panel a number of years ago with our esteemed guest here today.

JONATHAN: Yes. I knew Kirk well. He’s one of my first coaches.

CHUCK: Awesome! I’m going to pick a book that I think I picked last week but some of the stuff we talked about was really relevant to it. It’s Become a Key Person of Influence. It’s a book about becoming one of the top known people in whatever field you’re in and there’s a lot of information there about finding a niche and things like that and then there’s also information in there on how to become recognized as a leader in the field. And then from there, you can basically do what Jonathan is doing here with mobile consulting because you become known as the person to go to for mobile consulting. Then you can start talking to people and finding work and things like that and then you can start offering your expertise and services based on the reputation that you’ve built.

So Jonathan, what are your picks?

JONATHAN: I would say The Pebble-still Smartwatch. I think that came up on a previous recent episode.

CHUCK: That’s okay. You can pick it again.

JONATHAN: But I absolutely love the Pebble watch and it was one of those things –. I have dozens of smartwatches. I test them for, you know, part of my business and it’s the only one I never stop wearing. I just love it. It’s great. Works on, you know, I have a million different phones so I can switch it back and forth between iOS and Android at least. The battery last forever. It’s just what you need and nothing more. It’s fabulous. It’s what a Smartwatch should be.

Other thing, if we have a couple picks, the other thing is another gadget. I’m a huge gadget guy – is the Google Chromecast dongle. I don’t know if you guys are familiar with that but it’s an incredibly low-priced HDMI dongle that you plug into the back of your TV and you can basically throw videos to it from tons of different devices and apps. It’s especially good on Android but I use it all the time. It’s fabulous and it’s incredibly cheap. It’s like 25 bucks. You can find it on sale but I highly recommend those. That’s all I have, just two.

CHUCK: Awesome! If people want to hire you for mobile stuff or get more information about value-based pricing and how to get away from hourly billing, how do they do that?

JONATHAN: If you want to find out more about value based billing, you can come to jonathanstark.com/mentoring and I do a 6-month program with people basically hold their hand through the process, focusing your marketing, attracting your clients, understanding how to do a quote or at least up to the quote, how to write it, etcetera, etcetera – the whole thing. If people are interested in training, you can find all that stuff there as well. I’m working on a book, which is going to be out in January called “The Mobile Retrofit Guide” which is useful for people who can’t do a responsive redesign of their sites. You should do a responsive redesign but sometimes people can’t do that and so I am writing a book with 10 ways or 10 sort of, easy tweaks you can do to your site in under and hour to make it a lot better on mobile. So those are all fun things that you can check out at jonathanstark.com.

CHUCK: Awesome! All right! Well, thanks for coming. We’re going to go ahead and wrap up the show and we’ll catch everyone next week.

[This episode is sponsored by MadGlory. You’ve been building software for a long time and sometimes it gets a little overwhelming. Work piles up, hiring sucks and it’s hard to get projects out the door. Check out MadGlory. They’re a small shop with experience shipping big products. They’re smart, dedicated, will augment your team and work as hard as you do. Find them online at MadGlory.com or on Twitter @MadGlory.]

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