211 FS Philip and Jonathan's Student FAQs
02:21 - Jonathan: How do you calculate a value price?
- “The Magic Formula”
- ROI (Return on Investment)
- Agencies and Value Pricing 15:42 - Philip: How do I specialize?
- Vertical/Horizontal Specialization
- How do you validate that a vertical is big enough to support your business?
- The Forktruck Repair Company Invoice Checking Company Example 29:45 - Jonathan: How do you get paid 100% up-front? Picks
- The Consulting Pipeline Podcast: The One Thing I've Never Heard Anywhere Else About How to Do a Great Interview (Jonathan)
- Bomber Jacket Cord Roll (Jonathan)
- Freeze (Philip)
JONATHAN: B-team takes over for [inaudible].
JONATHAN: Reuven just does it so naturally in Chuck’s absence.
PHILIP: I know.
JONATHAN: We’re like two monkeys banging rocks together.
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PHILIP: Hello and welcome to episode 211 of the Freelancers’ Show. Chuck is on vacation, Reuven is busy, and so this episode is brought to you by the B-team – myself, Philip Morgan, and Jonathan Stark.
PHILIP: So we thought since both Jonathan and I run – I run a mentoring program and Jonathan runs a coaching program, and we therefore get a lot of questions that are really interesting excellent questions about freelancing and consulting, we thought we’d compile our maybe most frequently asked questions and just alternate talking through those.
So why don’t we start with you, Jonathan, if that’s ok. I’m going to read your first question. How do you calculate a value price?
JONATHAN: Great question. [Chuckles]
I get this all the time because I am super anti-hourly billing. I think it’s bad for everybody involved with a software project. So if you do things like software projects and you're billing by the hour and you are sort of drinking my Kool-Aid, the first thing that you start to forget about is to how do you actually calculate a value price; how is it different than a regular fixed bid – that sort of thing.
So what I tell people to do – long story is that you need to have a value conversation with the prospect very early before you do a proposal and keep it – I call it a “why” conversation – you keep asking them “why, why, why, why, why” they want you to do to the things that they asked you to get on the phone and talk about.
And eventually you'll get down to some sort of root cause motivation that is either some kind of pain that they need solved or some sort of opportunity that they want to take advantage of. And you can start to get a back-of-the-napkin calculation of how valuable that might be to the business. So it’s especially easy if it’s a cost that you would be removing or an expense that you would be removing. It’s a little trickier when it’s an opportunity that they want to capture, but you can get an order of magnitude feel for it.
So once you have that, I give newbies a crutch to use. It’s a formula which you probably – not probably; you definitely shouldn’t use it as you get better at this, but it’s a helpful crutch at the beginning where once you have a rough idea of the value, you can calculate a price by taking the maximum of your cost for the engagement versus the value that you're guessing at more or less divided by 10. And so what that looks like is P=max(C, 10/V) – (V/10), sorry. Anyway, podcast for reading code on the podcast now. [Chuckles]
But anyway, I call it the magic formula and it is a crutch, but it gives you something to go on and it does a couple of things. One, it keeps your – assuming that the value divided by 10 is greater than your cost, then it would probably increase the amount of money you would set for the price. If it’s below, if the value divided by 10 is below your cost, or rather your cost is higher than a tenth of their value, then this formula prevents you from basically putting yourself in a negative ROI situation where you're doing the job for less than it cost you to do the job.
As you get better at this, you really should ignore your costs and it becomes very simple to ignore your cost later on because the value was so incredibly high for – if you're doing much more high value things that have a very low cost implementation for you, it becomes irrelevant to calculate your cost anyway. But when you're first starting out, I always feel like I’m giving people a loaded gun when I try and get them to switch from hourly to value, so I give them that formula to help them on the hump.
PHILIP: Do you see any kind of patterns where a certain kind of project is almost guaranteed to have that negative ROI or not be something that you can value-price?
JONATHAN: There are some things that are horrible for value pricing that just don’t fit. You can’t value-price everything. If someone just really needs a pair of hands to fix their MailChimp, change the way Mandrill works, and now the SaaS is broken because it can’t send the password reset emails. They just want a thing done quickly and they're not going to be in the mood to have a – “why do you want that fixed?” It’s like “just fix it” [chuckles]. And they will easily find someone who will just fix it. It would be hard to imagine the situation where you could differentiate yourself there and be like the go-to person in the whole wide world for fixing MailChimp when it breaks; at least that particular situation when an API goes south.
PHILIP: That’s really what Upwork is for, right? That’s the use case for Upwork.
JONATHAN: Exactly. Yeah. So I think something – it’s like [inaudible] it’s just like getting [inaudible] unclog the toilet. But if you're designing new addition for your house, then all of a sudden, more subtle things start to matter. Why you're putting the addition on is because you're planning on having more kids. Is it because you need to put an office up? There are all these “why” questions. There's no “why” question for why do you want the MailChimp API fixed. It’s because it’s not sending email and we’re losing business right now.
Theoretically, you could give somebody a value-price for that, but it’s such a commoditized form of labor that they'll easily find someone to undercut you, so it’s kind of a junk job easily.
PHILIP: Mm-hm. I guess I want to ask the contrary question. Are there places where people new to this might start looking situations that are really amenable to value pricing? I don’t think we can construct some template for it, but are there places that are just likely suspects where value pricing really works?
JONATHAN: I think so. I haven’t thought about this, but my first reaction to your question was anything that’s risky. So in a situation where people – there are just a lot of unknowns and people are waiting into new territory – that’s a certainly common denominator with the work that I've done for the past 10 years is that it’s always a risky proposition; an entire website rebuild of an existing site or something like that. It’s like a million moving pieces that perhaps outsourcing to a variety of companies that needs somebody who knows what's going on to translate literally and figuratively between offshore dev teams and business units and – I would say the risk is a common denominator there.
PHILIP: Interesting. So are there cases where – my takeaway from the formula was you're going for a 10X ROI for the client at a minimum. Are there cases where it’s just astronomically higher?
JONATHAN: I would say so especially if you think about it if it’s something that continues to deliver returns year over year. If I was going to get a little bit more pedantic about the formula, I would say that the value that you divide by 10 should be annualized returns, so estimated annualized returns for the thing.
So if you get a rough idea that the thing that you're going to build for them is going to roughly correspond to, say, a customer service representative’s annual income because it’s going to increase capacity by approximately 1 CSR, let’s say, then it’s – and if you can roughly estimate that their annual salary is say $50,000, then it would be easy to charge $5,000 for the thing. If $5,000 is lower than your cost, then you're going to have – you probably shouldn’t bid it, or at least figure out your cost and bid it at that; say it’s $10,000. But if you're right about the value, then they're probably just say no; that you're too expensive.
PHILIP: So how do you figure a cost especially if you're a solo developer?
JONATHAN: Sure. Cost is weird because we’re not buying 2x4’s. So it’s usually not an actual financial outlay, although sometimes it is. You might buy a plugin or a library that’s not open sourced for a particular project, but that pretty rare.
The way I define cost is it’s the least amount of money that I would take to do the job. It’s right where my ROI turns negative. And it’s obviously gut instinct because it takes into consideration your time, the risk, the stress. It takes into consideration how busy you are with other work – all these things. It’s like it’s just not worth it for me to take this project for less than X. That’s your cost.
And it’s the inverse of the client’s value. The client might not be able to calculate exactly what their ROI is going to be, and in most cases they can’t, but there will be a point where their subconscious senses that they're crossing from positive to negative ROI, and that’s what the value is.
One other thing about cost for the developer is that developers tend to ignore their time as a cost. So they’ll sell a $150,000 website build and they're all excited because – “wow, I’m maybe getting another 150 grand. It should only take me about 6 months” and they're not considering their time as a cost. Let’s call that a high-revenue project. It’s not a high-profit project because if you imagine – as a mental exercise, imagine that you hired out all of the dev work and you just did project management, you probably end up with 25k or maybe 50k for 6 months of work, which is in my opinion, is low ROI when you could do something instead where you just do like a roadmap or a system architecture, something like that, that you can finish in a week and get $10,000 for very low risk, very high return for the customer and for you, much more – it’s better for everyone because the cost is super low, the value is super high, and it’s really easy to find a price that’s floating in the middle of those few numbers.
PHILIP: Yeah. This is an observation that I think a lot of newer business owners think of their available time as 40 or 60 or whatever amount of hours per week they decide they want to work and they're not factoring in stuff like marketing time, working on the business time. And I think that distort the numbers when people do that internal calculation about what their cost is.
JONATHAN: Yeah. It makes it even worse.
PHILIP: You mentioned or you were hinting at this, but I was thinking it [chuckles]. What about the agency situation where you get a lot of fix cost in terms of payroll, maybe office building or – you’ve got fixed cost. Can this value price model work for that situation?
JONATHAN: Absolutely. It’s easy to say yes it could and you just increase your fees to double or triple what you're currently charging. So if you view your current cost, which you do have much harder fixed costs in a situation like this, what you need to do is stop billing yourself up by the hour, stop thinking about it by the hour, and think about it by the value of the project. It changes the way you pitch a project.
So say a project comes in and they say “hey, we want you guys to rebuild our website”. Normally they would say “what's your hourly rate?” and you say “my rate’s 175 an hour for lead dev”. Maybe they've got different rates for lower junior devs, maybe they’ve got different rates for project management and account services, and everybody feels like all of this stuff is very concrete and laid out and there are spreadsheets all over the place. Really, all these numbers are just people just pulling out of thin air basically. They look at other similar agencies that they feel are similar to them and they set their hourly rates based on market rates for these things [inaudible] up or down based on their ego. And then you multiply it all out; it feels like there's a formula there, and they take that cost and they market up, and they say this is how much we estimate the project will take.
It’s really hard for an agency to break that thinking because the hourly model is so baked into their DNA through and through. It’s in the culture. It’s in the tax code. It’s everywhere. It’s in project management degrees. Hourly is everywhere. It’s just polluted the entire landscape. So it’s hard for people to envision this, but it’s not that hard to do.
When job comes in, you say “well” – they say “we need you to build this website for us. What's your hourly rate?” and you say “well, I don’t have an hourly rate, but let’s talk about why you want this website build because it might not be the best solution to your situation. So let’s talk about why you want it”. And you get into this thing where you drill down just like I said before, and at the end of it, if you believe that you are uniquely qualified to solve this problem and you’ve tried to talk the client out of hiring you because you're too expensive for them, then throughout the phone call, they will be convincing you that you should work with them.
So while they're doing that, they're talking to themselves and not hearing you. So at the end of the day, you can say “alright, well, I think we've established the value. You called us because you know we’re capable of doing this. After we’ve had this phone call, you toss us even more”, and then you can send a value-priced proposal that would be 2 or 3 times higher than what they would have sent out as an hourly estimate.
So the thing with the agencies are the stakes are much higher because they do have monthly payroll. But from a theoretical standpoint from my ivory tower [chuckles], I look down and see – because the next question that you maybe are getting ready to ask, and this is the one I always get is “how do we know if our developers or are employees are profitable? How do we know returns are profitable?” – because at the end of the year you see how much you send out, put out, and how much you put in and did you make money or did you lose money. And the notion of assuming that every hour is equal and every hour only went to this specific project that somebody’s on and that there's no cross-pollination between people working on different – it’s just nonsense. Anybody running an agency probably just shut the podcast off because they're like “no”, but – and yes, it’s an ivory tower; and yes, it’s easier said than done, but it’s the reality. It’s like you shouldn’t be measuring your productivity or your profitability on an hourly basis. It doesn’t make sense.
PHILIP: Hm. No further questions, your honor.
JONATHAN: Yeah, that was number one. [Chuckles]
Cool, ok, so let’s turn the tables; put Philip on the hot seat. So question number one for Philip of the mentee FAQs is: how do I specialize?
PHILIP: Excellent question [chuckles]. Actually, I asked my list today to give me a nickname. I've been known as the positioning OG.
So I read a book about positioning and within the pages of that book, it’s very simple; it’s like you choose some way to focus your services, narrow down your services that increases the value you can deliver to clients, we all live happily ever after.
In reality, people come to me in all sorts of forms through email or questions or the contacts on my mentoring program, and the reality is more complex. There's like the situation where someone has 5, 10 previous verticals that they worked in or different types of projects they’ve done and they're like “they're all great” or “they're all terrible” [chuckles]. You see how they’re – flipside of that coin. And so it makes things kind of difficult.
But I do find there's some patterns. One is that people start out this – so they come to the idea of narrowing their focus and going after a better market position, they like the idea, and then they're kind of in one or two buckets. One is they have a hypothesis about how they might deliver more value, and their hypothesis might be something like “I see this problem. It comes up over and over again” – I've got a good example.
A guy that I’m just starting to work with does Internet of Things related to software development. And there's not a lot of expertise out there about that despite this being a thing that’s happening on a very large scale. So that would be a hypothesis. “I believe that a specialist in developing software for IoT devices would deliver more value than a generalist or the alternative”. So if you have a hypothesis, you have something you can test. But if you don’t have a hypothesis, then you're in that other bucket, and you're like “I don’t know. I love the idea of narrowing down, but I don’t even know where to begin”.
And my prescription for both of those is basically the same. It makes a lot of people really uncomfortable, rightly so. It’s not easy, but I recommend that people do what I call customer development interviews. And you can do a certain amount of research online, I believe, to orient yourself. It’s pretty obvious from doing research online that some industries are growing, some industries have a lot of questions and need expertise, and the expertise is in a short supply. And that’s good as a start, but I think you don’t really find out what's a good low-risk way to specialize your business without talking to potential clients and just doing short little interviews with them.
So if you're in that “I don’t have a hypothesis” bucket, you're asking questions like “so tell me about what projects you're responsible for” and trying to understand a whole industry segment at a much better level than you probably do – and I would be a little bit provocative here and say that if you can’t draw your clients’ business model on the back of a napkin and come up with some pretty realistic numbers about stuff like profit margin and expense structure and that kind of thing, then you don’t understand their business well enough. And if you do understand your business well enough, a ton of stuff becomes obvious, right? You start to understand the levers that you as a freelancer, as a developer, can pull to manipulate their business and make it better.
JONATHAN: Before you go on, can you think of an example that could instantiate that for people?
PHILIP: Well yeah. I will use myself as an example. I don’t mind being a little vulnerable. I, sometime ago, decided that I was going to focus on custom software development shops because I have a technical background myself. They just sort of made sense, like it was – I don’t want to say convenient, but it was a kind of low-hanging fruit.
To be honest, I did not understand their business model well enough to understand where they spent money and what their margins are. I took it upon myself to start finding out and I’m using the exact methodology I prescribe for my motoring students doing just short 15, 20-minute interviews, talking to development shop owners. To whatever extent, they're comfortable sharing these details. I need to know what is the lead worth to them, what is the profit margin on a $2,000 development project. If you charge $100 an hour and you have 10 employees, what does that mean in terms of your payroll each month, and all of that.
Again, I don’t think that unless you know that level of detail about your client’s business, you know enough about them.
JONATHAN: Right. I got you. So can you give people a little bit of a taste of how you reach out to people who maybe you don’t know that many software developers? What are the approaches that you used to set those up and – I think you mentioned that you do it over the phone. Is that true?
PHILIP: Or Skype, yeah, some kind of voice conversation. Yeah, real time voice conversation, however you can do that. I guess you could use Snapchat.
Anyway, there's a couple of ways you can do it. Most people’s network is bigger than they realize, so I recommend starting there. Actually I recommend practicing with previous clients first or current clients even if you can frame it correctly. You need to get better than you probably are at asking questions, shutting up and listening for the answer, and looking for patterns across multiple interviews. Cold email is one way that you can set up interviews with people. You can ping your existing network. You can talk to current and previous clients. Those are the three common go-tos.
And the one thing I just find myself saying over and over again is you'll be surprised how willing people are to help you. And most people who have some kind of difficult job, which pretty much everybody in management does, and that’s often the case that you're talking to people who are in a management role when you're trying to understand a business, their romantic partner, their spouse, whatever, has long ago gotten tired of hearing them talk about their work [chuckles]. So if they can talk to someone who they're convinced does not trying to sell them something who actually cares about it and might be able to help, they’ll talk your ear off. It’s amazing. They’ll tell you stuff you just can’t imagine that is not covered by some NDA, but they’ll tell you anyway. Not that I’m saying you should use that information; I’m just saying you'll be surprised by how willing people are to help.
And so to try to tie this back to the question – I’m loosely answering here – how do you specialize, that’s step one. You understand the business really well. And then – I know this sounds a little bit like draw two circles and then draw the rest of the [inaudible], but once you have that information, it’s obvious where the overlap is between your skills and how to make a difference for that business. And it turns out that most businesses are – there's a certain level of irrationality in any aspect of human endeavour, but most businesses are pretty rational about – rationable about where they spent their money. And that ties back into the value question, right? If they see value, they will invest; or if they see an opportunity to dramatically save, they will often invest. And if that’s where you can focus and specialize, a lot of things get easier.
JONATHAN: I feel like there's a sticking point, at least I know it comes up pretty regularly with my students, is that with new ones, they don’t even know which vertical – so there are a couple of different ways to specialize; horizontal, vertical, demographic, and others, platform, etcetera, etcetera. And I know from previous conversations that you [inaudible] people start with a vertical specialization because it’s – for many reasons, it’s the easiest.
PHILIP: Yeah. If you're coming from it like a total generalist position, that’s the easiest because you have – I don’t know – it’s like making a tortilla. You need flower and one other ingredient to make a tortilla; maybe three. But anyway, you’ve got the one ingredient, which is your expertise. You're adding the missing ingredient, which is some sort of focus. So yeah, that is why I recommend that.
JONATHAN: Ok. So my experience – I feel the same way. In my experience with asking someone to even pick one is that they don’t even know where to start with what to pick, never mind finding the problem once they – they can’t do interviews until they pick who they're going to interview. So do you have some help you could offer to people about how to pick one?
PHILIP: I’m afraid I do. Coffee would’ve been a better example. You have coffee beans, you don’t have coffee. You have water, you don’t have coffee. If coffee [inaudible] water, you can make coffee.
JONATHAN: There you go.
PHILIP: Anyway. Yeah, I do. The example – there's a couple of shortcuts. You need a couple of things to be successful at running a professional services business. Of course you need your expertise. You also need to access to clients. You need proof that you can deliver some kind of result. So you can get by without a lot of proof, but it definitely diminishes your ability to charge higher rates when you're lacking that proof.
So I advise people to inventory where they're at now. Where do you have access to potential clients? And by the way, that doesn’t have to be in your “professional network”, but access really helps. It’s a huge factor. And then proof; if you have some existing proofs that you can build on, like “ok, we did this 2 or 3 projects and the results were good”, and there's something about those that we can apply to some market vertical, that makes a sensible starting point. Because without those two things, access and proof, you're really kind of starting from scratch. And that makes it harder. That’s like playing it on a hard mode.
So those are my shortcuts. And sometimes, people say “yup, I just hate all of my previous clients. I don’t want anything to do with them, and I’m willing to start over”. If you have that, that’s fine; if you have that willingness to start over; but just know what you're getting into.
JONATHAN: Mm. I don’t know how long we want to talk on this particular one, but let’s – [crosstalk].
PHILIP: For the rest of the show forever.
JONATHAN: Yeah [chuckles].
PHILIP: I was kidding.
JONATHAN: This is foundational so it’s pretty important, but this will be my last follow up question on it. How do you validate that a vertical is big enough to support your business?
PHILIP: You don’t. You validate it as small enough to make an impact.
PHILIP: That’s some mistake I made in the first edition of The Positioning Manual. The second version is coming out really soon. I was coming at that question the same way you phrased it. Maybe phrasing was accidental – I don’t know, but that’s how I thought of it is “is it big enough? Can you find enough clients?”
Now if you are a 5000-person head development shop, yes, that is the right question to ask. And yes, you should probably be looking to dominate the start-ups base from the enterprise phase. But if you're like a lot of people I help, which are very much on the smaller end, 10 clients could be a fantastic year for you; 10 could be an overwhelming number of clients.
JONATHAN: Yeah, that’s me, and I’m not – I have maybe 4 or 5 a year.
PHILIP: There's a lot of people like that. So if that is your scale that you're operating at, the question is more often “is the market small enough that you can be everywhere on their radar, there being the people who would make decisions about hiring you or recommend you? Is it small enough that you can become a dominant player in a year or 2 or 3?” To me, that’s the question people should be asking. And that tends to be a shockingly small market [chuckles].
Jonathan, you’ve brought up before privately the bulldozer or – sorry, the forklift repair company invoice checking company.
JONATHAN: [Chuckles] Yes.
PHILIP: I love that example.
JONATHAN: It’s so weird. It’s been a long time, but they had a number of employees and they were doing over a million a year for sure, probably 10 times that. They had huge clients so they did this one weird little thing and they were wildly successful.
PHILIP: Which was what? Assessing forklift’s repair invoices for accuracy? Is that the –?
JONATHAN: They're actually called fork trucks, Philip.
PHILIP: Oh, ok. I won’t make that mistake again. [Chuckles]
JONATHAN: Yes. Everyone knows [inaudible] calls it forklifts; these little electric [inaudible] trucks you drive around the warehouse – UPS or whatever. And they break down a lot and they're heavy – very heavy. So you don’t want to transport them very far so you have to take them to the nearest repair place, or you have the nearest repair place come and service them. And the nearest repair place knows that they’ve got UPS over a barrel because they’ve got a fleet of 300 fork trucks and they're the only fork truck repair place in the Kentucky area – or whatever.
So this client that I worked for, they would get hired by UPS, for example, who – somebody who has a big fleet of 4 trucks, and they would send the invoices to my client to review to call BS on absurd charges. And so it was a clear cost savings, and it was very common for them to get a 50% reduction of an invoice. And these are not small invoices, and there are a quite a few of them. This is going back a decade or more. This is more than a decade, so I don’t even know if they're still in business, but I suspect that they are.
PHILIP: It’s a great example of a market that’s small enough that one or two companies can become the dominant players.
Anyway, I wanted you to tell that story because it’s such a great vivid example. So I’m not trying to simplify – oversimplify this. I’m not saying there's not a risk in going for a small market, but if you do your research and you do a couple other things right, I think that’s the mindset that people should adopt is “is it small enough?”
JONATHAN: That’s awesome.
PHILIP: Ok. Let me see what's your next question is. How about we stick with money here? I’m going to go out of order, if you don’t mind.
PHILIP: How do you get paid 100% upfront especially when you're charging amounts for a project that are bigger than you’ve ever charged before because you're now pricing things differently?
JONATHAN: Right. Great question. [Chuckles]. This should be the title of the episode.
People are often shocked to hear that I send out – every proposal I send out, the payment terms virtually always have three options of incremental price. So it would be like option 1, option 2, option 3; small, medium, large, or bronze, silver, gold, whatever you want, and then I go on to say that “in order to put this project in my schedule, I need a hundred percent payment upfront, and this is a “not an estimate”, and the proposal expires in 14 days” or whatever.
So people, when I tell this to developers, their eyes pop out of their heads because – I think for a few reasons. One is that anybody who’s billing by the hour, it’s almost – other than the rare case where someone is selling blocks of hours in advance, which is rare, they are used to checking their hours and then billing arrears on a weekly by weekly or monthly basis.
So the whole concept of billing in advance is actually impossible in that model, really, because you haven’t given a price; you’ve only given an estimate. So it’s basically impossible to say “send the check here and I’ll get started”.
PHILIP: All you could do is what attorneys sometimes do, which is the attorney version of a retainer. Basically, make a deposit against future hours billed.
JONATHAN: Right, which to me is just [inaudible] just making the risk even worse for the client, which is the thing that value billing does is it decreases the risk for the client, but it increases the risk for you. But then you're paid handsomely for shouldering that risk. And I think it makes sense if we’re selling ourselves as experts for the experts. Just shoulder the risk and not – the doctor should shoulder some risk over his diagnosis, which is the case in the medical profession. How come it’s not that way in the consulting profession? So that’s a separate story.
But if you did provide a fixed bid, whatever you base the price on whether it’s value or time and materials or cost plus, you can ask for 100% upfront because you're giving them an actual price. “This is how much it’s going to cost full stop, so I want it all first”. And what you're doing there is you're giving yourself something to negotiate other than your fees.
So when you send that out to someone, first of all, if you’ve done a good job in the steps that lead up to this moment, which are being well-known as an authority in the space, you're the go-to person for the thing that you do – so you’ve done your marketing, you’ve picked a focus, you’ve done your marketing, you're out there. You're attracting clients, you are pushing back on the clients, making them convince you to work with them instead of the other way around. By the time you get to the proposal, they're basically sold. They just want to see how much it’s going to cost.
So they get down to the very end of the proposal and it says “option 1 is $10,000. Option 2 is $22,000. Option 3 is $50,000. And it’s 200% in advance”. If you’ve done a good job up to this point, one of those prices will seem reasonable. And in my experience, 75-85% of the people will just send you a check for the full amount. Sometimes people will say “whoa whoa whoa whoa, we don’t pay 100% upfront that. We've never done that”. You can imagine the pushback that you might get. I want to emphasize a surprising number of people do not do that because you're committing to an amount, and that is so refreshing and different compared to the abject fear that they experience when they are basically making a huge purchasing decision without knowing the final price.
So since you are giving them and committing to a final price for a project that they are much more relaxed than you might think or than they would normally would be. So they're open to this concept of like “that’s cool. We've talked about the value. This is a fraction of what we’re going to get out of it. So even if it doesn’t go perfectly, we’ll still be making 5 bucks for every dollar we give to a stark. So ok, great, here’s your check”.
Now if they don’t, they usually come back with this. They’ll say “how about 50% upfront and 50% on delivery?” And my response to that is – now this is for software projects, so website build or some sort of you creating an API for somebody; so a collaborative enterprise that you're going to go back and forth with the customer. My response to them is always similar. It’s like “I don’t think sign off is good for you. If we say 50% is due on sign off, on delivery, whatever the delivery is, then it’s going to put pressure on everyone to sign off on the project. And after sign off, the project is over financially. And anything that happens after sign off is going to be a new project or some maintenance or whatever it is, but it would be more money. And I don’t want to do that because that leaves the [inaudible] we’re hanging dry. And as the expert, I know that there's no such thing as a software project that’s perfect at sign off. It never happens. There's always some kind of weird [inaudible] or some quarterly reporting bug that only happens on odd number of years or whatever, but there's something that’s not working and we didn’t find it in QA”, or maybe the customer did a terrible job at QA as everybody knows they tend to do. So I say to the customer “what I would rather do is 50% upfront and then 50% in date [inaudible] 30 days or 45 days or 90 days depending on how big the project is.
And then they’ll usually say “ok, that seems fair” because they're like “ok, 50% upfront and then 50% in 90 days”, and in their minds they're thinking “ah, the project will probably be done in 90 days anyway”. But they feel like “well, we’ll know if things aren’t going well or something”. I don’t know what the logic is that they do in their heads because it’s kind of irrational, but they’d feel like you’ve made a concession and that usually works.
In the sliver of cases where that doesn’t work and there's still pushback and they say “no no no no, we want it to be on sign off”, and I’ll say “I cannot. I cannot impose a sign off on you guys. I’m going to keep working on this until you're a hundred percent happy with it. So you pick the date. I don’t care what the date is. You pick any date you want. Anything you think is reasonable, that’s fine with me. And you can send the 50% check here and we can get started on Tuesday or whatever”.
So there's three layers and they're drastically decreasing – sort of reverse bell curve. Most people will just give you a hundred percent upfront. A fraction of that will do it in two payments. And a fraction of that second fraction will demand to pick their own date. And I have never had anybody not agree to one of those three options. So the key thing there though is they're not debating the price [chuckles] at any point, and you can negotiate. You can have some give and take. You can compromise without compromising your price. And if everybody feels like they're getting a good deal and everyone’s being reasonable and you can get started. And once you do get started, you can basically forget about finances. There's no issue of milestones; none of that. Finances are disconnected from the project itself.
PHILIP: Yeah. I can see how that’s really really good because that can just be used as a club otherwise, either by vendor or client. I wish we had Reuven here because he deals with the world’s toughest negotiators. The purchasing departments of Israeli companies are the toughest and most feared negotiators in the world according to Reuven. I think he’s probably right.
Do you ever get that, though, that “well, this is policy. We can’t do that. We’re going to pay you on 30 days or whatever”?
JONATHAN: I have to tell you a story. Ok, so I was dealing with a banking institution that everybody listening to this has heard of; like big. And they want me to come in and do something for them, and I said “ok, the price is going to be” – I don’t remember the price, but let’s say it was $10,000 for a presentation. So I said “ok, I’ll do – we’ll prepare. We’ll do all that, put it on the calendar, and it’ll be $10,000”. And they said “ok”, and I said “and it’ll be – it’s due in advance”, and they said “no, no way. This institution does not do that:”
I got forwarded up the chain to someone higher up to intimidate me or something. And so I said “look” – I went through the explanation. I was like “look, the reason why I’m doing this is because [inaudible] surprising number of times, these things get cancelled last minute. And all of my work happens before delivery. All of my work happens before the day. So they have not taken that risk, so I can either not do it or you can pay me 100% upfront. It’s up to you”.
It’s probably worth mentioning that negotiations have been – not negotiations, but conversations have been going on for a long time and this was leading up to an event that was approaching. So there was this deadline pressure on their side too. And so I said – they were really standing firm. They were like “nope, 50% upfront and 50% on delivery”.
PHILIP: And a quick clarification; is this an email conversation or the phone or both?
JONATHAN: It started over email and then it was over the phone. So this New York – it wasn’t a New York lawyer, but you can imagine like I could see the three-piece suit over the phone. It was just like – it was a little bit of an intimidation tactic for sure.
But I just didn’t care because I was going to do it. It was just wasn’t worth it to me because I know what happens. Because these big organizations, they get you on the hook, and then you do the thing, and now you're chasing some department that doesn’t even care, and the pressure’s completely off of the original buyer, and it’s like the last thing on their To Do list. I’m just not doing it.
So he said “look, I’ll do you a favor. I’ll do 50% upfront, 50% on the day”, and I said “well, if we do it like that, I’m going to increase my fee. Is that ok?” and he said “sure”. And so I said “ok, my fee is $20,000. So you pay me $10,000 upfront and $10,000 more on the day”, which was of course ridiculous because that’s 100% of the original payment. And he was setting policies like “oh, our system can’t do 100% upfront payment”, so I said “ok, just double my fee and pay me 50% upfront and 50% day off”. And [inaudible] and we ended in a huff. And they sent me 100% upfront of the original fee.
PHILIP: How long did it take that to happen? [Crosstalk] Ok, so since somebody talked to somebody, there is no policy.
JONATHAN: No. It was complete BS.
PHILIP: Yeah. Nice.
JONATHAN: I knew I was talking to people at a level who could make things happen even if it was policy. So it was like it was pure BS. And that is easily by far the most – I’m not into doing stuff like that, but I just didn’t care about the gig. So yeah, I’m not like a chicken player grand standing or anything like that. I've got a streak of diva in me, but that’s about it.
But that’s the only situation I can think of where something like that has happened. And they caved.
PHILIP: Yup. You were willing to walk away, it sounds like.
JONATHAN: Yeah, that’s huge. I did not need the money, which is – that’s a key factor to a lot of this stuff actually.
PHILIP: Yeah. That’s the thing. It’s like that’s the trick to money is not needing it. [Chuckles]
PHILIP: Well, we are – I think we’re out of time, and I want to let folks know that we had 5 really good questions we did not get to. So maybe the next time the A-team is not here [chuckles], we’ll come [inaudible] return to this.
JONATHAN: Keep this in our back pocket.
PHILIP: So picks, I guess.
PHILIP: How about you? Why don’t you start?
JONATHAN: I've got two. First is going to be Philip Morgan’s podcast on how to interview people since that came up today earlier in one of your answers. I guess you only got to one answer. But did you call it business job or a customer development?
PHILIP: Yeah. Customer development interviews.
JONATHAN: Yeah. So your episode on how to interview people and the one thing that you’ve never heard any – one piece of interview [inaudible] never heard anyone else give is my go-to link that I send to people who are doing this customer development because it’s really good. So folks, you're obviously podcast listeners, so you should check out The Consulting Pipeline Podcast episode 18, I think.
PHILIP: Sounds about right.
JONATHAN: So, but you'll – the title – we’ll put it in the show notes. The title is a little bit unusual and I don’t have it in front of me. So that’s my first pick.
My other pick is a physical object, which is a – I think it’s called a cord wrap or a cord bundle from Levenger, which is like an office supply notebook company, and it’s this – it’s like a leather – it looks like my wife’s purse, kind of; or wallet, rather. But it’s this leather roll that has these snaps inside that you put all of your cables for your junks, like your charging cables for your phone and my VGA dongle for the laptop, and all that stuff that usually – I used to carry it on in a Ziploc bag, which was really embarrassing. But I really needed them in something and I never found anything that was like professional.
So I’d go up to a speaking gig and pull my Ziploc – my gravelly old Ziploc bag out of my messenger bag and pull up my wires. But this thing is really cool. I think it was relatively inexpensive and it does a great job holding – mine has spots for 5 charging cables and a zipper thing where you could keep a pen or something, but I keep my VGA dongles. So it’s surprisingly nice, and I get comments out of it all the time.
PHILIP: So it rolls up like a burrito?
JONATHAN: Yup. Exactly like a burrito and it’s got like a snap. It’s great. Seriously, I get comments on it all the time. People are like “ooh, where did you get that?”
JONATHAN: Philip, picks.
PHILIP: I have a pick. So context – I had this so-so external RAID array which had two mirrored hard drives. I use it to store photos and music and stuff like that; media, basically. And the enclosure – by the way, I guess it’s an anti-pick in a way. Every RAID enclosure I've ever gotten from OWC has had about a 2-year lifespan and then it just decides to start not working. And this was no exception to that unfortunately.
So I needed to slim down and decided it was time to move some stuff that I rarely if ever – not rarely. I don’t think I’ll ever need it, but I don’t want to let go of it. Decided to move it to Amazon Glacier and I found an app called the Freeze app. And it’s an uploader so it specifically runs on Mac OS, uploads files and synchronizes folders if you want to an Amazon Glacier vault. And the thing was flawless. It was amazing. I uploaded a 500 gigabytes of photos and other stuff, just sat there on the background uploading it. It’s easy to pause and resume. It uploads in small chunks so if there's some kind of failure, you don’t lose 2 days’ worth of trying to upload that 100 gigabyte file. And it was really solid. I was impressed. Very affordable one-time purchase. So that’s my pick for this week is the Freeze app.
And I guess that’s the show, huh?
PHILIP: We’ll see if they actually publish this one. I think they will. [Chuckles]
JONATHAN: Yeah. If not, we just started our own podcast. We've got the recording.
PHILIP: Boom. Got the pilot episode.
So that’s it for this episode of the Freelancers’ Show. Thanks for tuning in. See you next week.
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