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The Freelancers’ Show 096 – Value-Based Pricing with Brennan Dunn


The panelists talk to Brennan Dunn about value-based pricing.

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[Hosting and bandwidth provided by the Blue Box Group. Check them out at BlueBox.net.]  [You’re fantastic at coding, but do you have an action plan to take it to the next level? The upcoming book, Next Level Freelance will help you optimize your freelance business for happiness. The book is packed with actionable steps to make more money, case studies, tips to find more clients and exercises for you to establish your desired lifestyle. Extras include nine interviews of freelancers who make great money while enjoying great work-life balance, videos on strategies to find quality subcontractors, and videos on making more free time by outsourcing your daily tasks. Check it out today, nextlevelfreelance.com.] [This episode is sponsored by Planscope. Planscope is a project management and collaboration app built for freelancers and the way they work with clients. It makes it easy to price up new estimates, and once you’re underway, helps answer the question, “Will this get done on time and under budget?” I’ve been using Planscope to do my estimates and manage my projects, and I really, really like it. It makes it really easy to keep things in order and understand when things will get done. You can go check it out at planscope.io. ] CHUCK: Hey everybody and welcome to episode 96 of the Freelancers Show. This week on our panel we have Reuven Lerner. REUVEN: Hi everyone. CHUCK: Eric Davis. ERIC: Hey. CHUCK: Curtis McHale. CURTIS: Good day. CHUCK: I’m Charles Max Wood from DevChat.tv and we have a special guest, and that is Brennan Dunn. BRENNAN: Howdy. CHUCK: So I’m not sure you’ve been on the show before, Brennan. Do you want to introduce yourself? BRENNAN: Yeah, actually I was. What episode was I on? CHUCK: Oh, yeah. BRENNAN: It was like 20 episodes ago or something; it was on recurring revenue. My name is Brennan Dunn and I’m kind of a freelancer, turned agency owner, turned product guy. Right now I’m kind of juggling a lot of different things. My primary business is a business called Planscope, which is a SAS business. I’ve also written two books, both on freelancing. I teach a bimonthly online workshop called The Consultancy Masterclass. I have a membership site called the Freelancers’ Guild and I run a newsletter which is called Freelancers Weekly. I guess that’s me in a nutshell. CHUCK: So you said you turned, and then you turned. So if you turn two more times you’re back to where you started? BRENNAN: [Laughs] Exactly. Next week I’ll be a freelancer again and I’ll shut it all down. [Chuckles] CHUCK: I’m still trying to round that first corner, I think. BRENNAN: I think the biggest milestone – and this is something I’m always trying to get people to push toward even if it’s a very simple undertaking – is get a random stranger to pay you something. I think if you can get to that point, whether it be through a WordPress plugin or a little e-book or something, not even invoice somebody to get paid. CHUCK: Yeah, that would be nice. REUVEN: That is a great way to describe it – the fundamental distinction between services and products. CURTIS: Of course I did some work for somebody and I invoiced them to not get paid. [Laughter] CHUCK: So there’s that too, you can do that too. Not as profitable that way. BRENNAN: Probably not, yeah. [Chuckles] CHUCK: We brought you out to talk about value-based pricing. What exactly do you mean by value-based pricing? BRENNAN: I guess value-based pricing, in my mind, is the opposite of commodity pricing. Commodity pricing is the idea that, “Hey, I’m a Ruby developer therefore I have a market rate, therefore my acceptable rate that I charge my clients is x.” Value-based pricing is really where you don’t put the focus on you and your industry or you and your craft; instead, you’re focusing on the client. You’re focusing on “What solution am I solving? What are the implications of the solution being delivered?” And how can I anchor that against a price that makes sense to me and my client. So it’s really just getting away from the idea, the kind of the race to the bottom of – well, I do x and x is worth y. CHUCK: I like that idea. I have people come to me all the time that have business that are gonna be worth millions. So you know, the value for them is real high and so I can definitely charge them that, right? REUVEN: You know, every time I talk to someone who says they’re going to have a business that’s going to be worth millions, they say, “So I’m happy to give you equity, because eventually you’ll be able to buy a house with that equity.” To which I say, “Ah, I have a slightly different business model than that.” BRENNAN: Yeah, they have everything to lose and everything to gain. I mean, you’re the service provider; you’re typically not on the upside or you don’t have the effect that they might end up having should they be successful – you don’t typically capture any of that. Conversely, if they go [inaudible] up, which tends to happen frequently –. CHUCK: You still get paid. BRENNAN: Yeah, you’re still getting paid, right. Equity deals are not something I would recommend to anyone. CHUCK: I know there are companies out there that make it work, but I think they’re pretty careful and fairly discerning about who they make those deals with and they also have ways of absorbing that risk. BRENNAN: Yeah. That’s a whole other show, I think, on its own. CHUCK: So anyway, let’s say that somebody comes to you and says, “I’ve got this terrific idea; I want to get it built.” How do you go about evaluating the actual value that you’re gonna be providing them so that you can give them a price that reflects that? BRENNAN: One of the, probablym best moves that I made for my career was the unfounded the decision to go to school to major in liberal arts. As a result, I did a lot of reading and I read a lot of Plato. And I came across the Socratic method, which is really, kind of an inquisitive system I guess, for peeling away what’s brought you or what’s at the surface and really getting to the root of, “Why?” In our case, “Why our project is on the table?” So the first thing I would do is I would look at the project being presented to me and try to figure out, “Why is this project really being presented to me? Do they really want a new site? Is that really what they need?” Chances are there is something behind the surface, some sort of business problem that needs to be solved that they’re really aiming to achieve. So what I would do and what I do is I really try to talk to the client and really work backwards and say, “Okay, so you need a new website. Well, why is your current website not good enough?” They would tell me, “Well, it’s ugly” or it’s – whatever, and then I would try to figure out from that, “So, why do you think it’s ugly? Why do you think making it pretty is gonna have any sort of meaningful impact in your business?” Eventually I try to get to the point where I can get them to vocalize to me that no, they really want a website because they want more customers, or they want more higher conversions, or they – in the case of working maybe with a startup – they wanna have some sort of big brand recognition or something, right? So there’s always some underlying business motivation behind projects; we’re not always [inaudible]; we’re not always given that as part of the requirements for our projects. So if I can figure out why a client really wants her project, then I can really tell her everything – my positioning, my proposal, and just about anything as it relates to me and the client to that end – versus thinking purely about technology. Because I think so many of us, we’re very – we’re proud of the fact that we’re good developers, we’re good designers. We know it took a while to get to where we are now so we can’t help but be proud of the work we do, but at the end of the day, what we end up doing for the client is really just the vehicle that gets them to that tomorrow. My method is really just figuring out, “What do they need tomorrow to look like and how can we put something together that gets them closer to that?” versus just reacting to technical requirements. REUVEN: What you’re describing sounds great, but for example, I met with a new potential client just last week. He’s [inaudible] for – basically a startup. He says, “I have this idea I want to happen.” His family’s quite wealthy, he says, “Between my family and a friend of ours, we’re gonna fund it, so the budget is more or less whatever it has to be. I’m not really interested in monetizing it.” And I was really interested in applying value-based pricing to this, but it wasn’t at all obvious where I start asking questions that would lead me to understand the value that’s involved, and it could be, as you mentioned [inaudible], it could be this is just  a bad example of a client to apply value-based pricing to. BRENNAN: I think value doesn’t need to mean money. It doesn’t need to mean profit or revenue. I think, in this case, if he’s not looking to monetize, I assume he wants to basically get acquired or sell or something, right? REUVEN: Yeah, he said basically, “We’ll give it two or three years and in that time we’ll figure something out. I’ve a lot of ideas for monetizing, but who knows?” BRENNAN: Okay. You might have an edge case in this example, but typically what I would say is look for somebody who wants to have a startup like they might want to be in a band. There’s a lot of startup founders who look at it as like being a rock star, right? It’s the 21st century equivalent of being in a rock band. If that’s their goal, how can you get them there? What do you need to build, what direction do you need to go in, in order to get to whatever outcome they’re looking to get to. Do you think you could have still peeled back a few layers to really figure out why this person was looking to get this built? REUVEN: I mean, my impression is, what he told me is he has this idea. He thinks it could be wildly popular; he thinks it could be, as you said, purchased by someone at some point in the future, but that’s basically as specific as he seemed to get. Basically, I think he has a bunch of business, he figures, “Hey, this would be fun to do and interesting” and as you say, I think there’s some ego involved in a sense that, “I, too, can be a high tech rock star, even if I’m just the CEO or the chairman and I’m just hiring people to do the implementation.” But I do think he has a pretty clear idea in his mind of what he wants the product to look like. BRENNAN: Yeah, if he’s coming to you, if the relationship that he’s looking for is strictly a vendor relationship where he’s looking for somebody, he knows what he needs done and he’s looking for somebody to swing the hammer on his behalf, it’s gonna be an uphill battle. I think a lot of it really just depends on the kind of client that you’re working with. A lot of the clients we work with – no on hired us because they were looking for a staff augmentation even if their current staff is zero. We didn’t go into a relationship of being – we’re code monkeys; tell us what to build and we’ll build it. That wasn’t the kind of client we wanted, and that wasn’t the kind of work that we really sought after. I think if you’re going after – we typically aim for businesses that we could come in as a multiplier where they already have something going on, and we can come in – and using our expertise – we can come in and multiply whatever key performance indicators matter to them. That made selling on value pretty easy for us, because we could say, “Hey, this is your current revenue and profit; we think if we we’re to do x, y and z we could get you here and the price would be somewhere in between.” And we just anchored that potential payday for the client with our cost. CHUCK: So can we get a little bit more concrete here and let’s say that there’s a business out there. Every customer that they sign up – most businesses know certain numbers about their business, so every customer they sign up is worth $50 every year. And so that key metric is, how many people do we get signed up? And so you go in, and you talk to him, and you say, “Look, we can make these enhancements to the marketing site of your website; we can add these features to the application so that it’ll appeal to more customers, and we really feel like we could, you’re adding a thousand customers every month – a hundred customers every month – and we feel like we could double that or triple that.” So what you’re basically saying is, “We could get you another hundred customers every month. A hundred customers a month times $50 a year, we can make you an extra $5000 per month over the next year, and so –.” BRENNAN: That’s actually exactly –. I do have a real-life story of that in action that is very close to that. CHUCK:Right, I just wanna finish this. So the end number is somewhere around $60,000 for the year, right? BRENNAN: Right. CHUCK: So that $60,000 for the year, you look at them and you say, “We can do this for $20,000.” And then they’re going, “Well, this is a no-brainer” provided all the numbers work out. BRENNAN: That’s exactly right. Actually, a good example along these lines is one of the early students of my master class, he does a lot of – his niche, I guess, is he does marketing websites for mental health clinics, which is about as niche as you can probably get. He was looking to get a lot of these clinics up on a retainer. At first he was just going to approach them and say, “Hey, for $1000, $2000 a month, I’ll work on your site. I’ll optimize it” and things like that. The problem is, if you just approach a client and say, “This is my cost,” there’s really nothing anchoring that down. If you’re saying “this is what I charge an hour” and multiply some estimate against that and spit out a number, what ends up happening is the client needs to think, “Is this worth it? Will I make an ROI on this expense?” [Inaudible] or actually, what this individual did was he called up a lot of these mental clinics and said, “So what is it worth to have a patient in a bed? What is the value of having one patient in one bed?” He got them to admit that it was about $30,000 – that’s how much they made per patient. So we worked backwards and said, “Okay. So how many leads does it typically take for you to get a patient?” It was something like 10 leads = 1 patient, so they have about a 10% conversion rate. That kind of allowed him to realize a lead was worth about $3000 and his entire proposal to them was, “Well, if I could get you at least one new lead a month, is that worth you spending $1000, $2000, whatever he ended up charging, to make that happen.” By saying it like that instead of, “Hey, just pay me two grand each month” and that being it, to work on stuff, like, what does that even mean? Why should they do that? But when he could say this, when he could say, “Look, I know where you wanna be. I know how important it is for you to get new patients ‘cause I know what that means for your business now. I will do everything in my power based on my technical expertise, to get more people to fill out that lead form. And I’m going to track conversions on that form; I’m gonna track the entire funnel from the front page to that contact form, and I going to optimize that on your behalf, so we get you more leads, which directly translates to more money.” I mean basically, that’s what he ended up doing. It sold like hotcakes, because he wasn’t just throwing out a number; he was able to anchor is cost against an upside that he realistically thought he could deliver. ERIC: It’s actually a lot like what I’m doing with my books right now, but I’d be the client – I make a certain amount of money for each book sale and I’ve tracked that. That means, each person who just looks at the page to buy my book makes a certain amount of value for me based on my conversion rate, and it’s the kind of thing if someone approaches me and will just say, it cost me a dollar to make a book sale. If someone approached me and said, “Hey we can do this one thing and you’ll end up getting a hundred customers but it’ll only cost you 20 bucks, I’d jump on that because that’s way below my cost and I’d end up paying that freelancer’s rates or their fees or whatever out of the extra profit I have. But I get to keep more profit and that’s going to be something that continues each month of my business. BRENNAN: Right. That’s exactly –. I mean, I was actually, I fell victim to this on the client side just last week. I was given a proposal from somebody who wanted to redesign my personal site and he just kinda tapped into my old blog post that kind of talked about where I opened up about numbers and said, “Well, what if I could get you x many new newsletter subscribers a day or a week, and here’s how I’ll do it and here’s my plan to do that” – he didn’t [inaudible] anything into page count, or framework, or any of that stuff. He didn’t focus on that at all, and it just so happens to be he’ll be doing it in WordPress and he’s doing a custom design and everything else, but the proposal to me was so focused on you pay me x and I will deliver you a multiple of x in return, which is so much different than typically what would most people do, which is I’ll build you an app, and this is what it’ll have, and these are the features, and blah, blah, blah. That doesn’t paint a picture for tomorrow at all for me and my business. REUVEN: So just earlier today I met with someone; they headed this big company in Israel and I actually thought to myself, “Hm, this guy might be a good candidate for value-based pricing, ‘cause he’s totally not on the high tech world and yet he is dependent on technology and I’m sure, I’m sure there are things that we could find in his business to improve and optimize.” And then of course, he asked me at the end of the meeting, “So what do you charge? What’s your hourly rate?” What’s my answer supposed to be in such a case? BRENNAN: I mean, the fact is if they’re asking for an hourly rate very early in the discussion, what they’re looking for is they wanna compete on price. They wanna say, “Okay well, Reuven’s saying this much an hour. I’m gonna go find other people and see –.” You know, do race to the bottom basically, right? Who’s going to come up with the lowest bid? But on the flip side, what I also found is that if somebody is about – let’s say they think that you have a 50% chance that you’re gonna flake out and fail on a project, right? They take that into consideration whether or not they consciously recognize that in their decision. So if somebody is, in their mind, a low risk for failure, maybe they came through a strong referral or they’ve worked with you in the past, or they’ve read about you, or something like that – if you’re low-risk to them, if you have a very low risk of failing to deliver what you promised, versus somebody who, in their mind, is high-risk, all things being equal, they’re more likely to be willing to deepen their pockets a bit with you because the likelihood that the budget they invest being put to good use can actually [inaudible] some return for them is substantially higher than the person with the higher risk. Is that going to make sense? REUVEN: Mm-hm. BRENNAN: One of the reasons we did so much when it came to education, by teaching free seminars and everything, was to really establish ourselves as experts in our field and to really prove to people that we know what we’re doing, which is a great way to mitigate risk. If people are confident that we are who we say we are because they’ve seen – we’ve taught them something already, we’re, in their mind, a lower-risk proposition than if all we’re doing is just putting something on paper and a .pdf proposal saying, “This is what we’ll do, take us at our work.” REUVEN: So all of that makes sense, but I’m still curious to know what’s a good way to answer the question ‘cause – I mean, I’m happy to, if I could suddenly pull a rabbit out of my hat and say when they say, “What do you charge” I could say, “Well, it depends on the project. Let’s talk about what you wanna do.” They’re expecting a number, and it’s not obvious to me how I answer it without giving them a number. BRENNAN: You could pull the whole, like you said, the slick sales guy-type thing and kind of defer that as long as you can. That is one option, I guess. But the fact is, if I ever felt at all that the client I’m working with is looking at us or looking at me as somebody who is providing a commodity service and all they wanna know is “What do I price my version of the commodity at?” Then that is a very strong signal, to me at least, that maybe this isn’t somebody I wanna work with. That’s the approach I took; I would have probably tried to back out of that. I mean, I’ve been there; I’ve worked with prospective clients who, the first question they ask, “what do you charge,” or “how much is it gonna cost me” before I even know anything about the project. My go-to kinda metaphor was “Well, how much is a house,” right? A house could be a few million dollars; it could be 20,000 in a mobile – mobile park or whatever. That’s not really a fair question. My goal is to capture as much about their project, what they think they need, what I think they need, and also, most importantly, what really is prompting this project. What can I learn about what brought them to the point of actually reaching out to somebody like me to get a proposal for a project? CURTIS: It sounds to me like the client acquisition portion is fairly long then or fairly involved. BRENNAN: How do you mean? You mean with the seminar purchase that I took or [inaudible]? CURTIS: I mean when you go talk to a client. I know you, and myself to a certain respect, but you talk to a client once, and then you talk to them for half an hour and then you’re like, “Here’s an estimate. Let’s get this ball rolling and get a deposit.” It sounds to me like when you’re going through it you’re taking a longer time to get to that point where you’re talking pricing and you have the product [inaudible] out. BRENNAN: The interesting thing is, I actually didn’t – we had a half-hour kidna introductory meeting also that was very time-boxed and very focused on their business. We weren’t even really focused on the project on the table – well, we were; we didn’t care about what they thought they needed built. We focused on why are they talking to us, right? And my goal wasn’t to sell a project; my goal is to sell an estimate. We charge for estimates – we call them roadmapping sessions. And my goal wasn’t to sell consoling, it was to sell a single-day, or sometimes two-day, estimating session. REUVEN: Yeah, that seems super smart, by the way. CHUCK: Well it’s interesting to me because one of the things I wind up spending time on billing hourly is they wanna know how much it’s going to cost from start to finish, or at least up to a certain milestone. So I wind up doing a lot of that anyway and that’s work that I’m not really getting paid for until we finalize a lot of that. And there is value in the estimate and value in documenting what they want and so I really do like that approach. BRENNAN: Yeah, I look at it as distilling vague ideas, which a lot of these ideas can be pretty vague, into an actionable roadmap. I mean that could involve user stories; that could involve the whole, agile, these are the roles, these are the actions, these are the user stories – that’s what we did. The goal in doing this was we wanted to sell something that was relatively cheap compared to hiring us for six months, right? And we wanted to do something where we could get in early and immediate. If we could deliver something to them that they got some really nice wire frames, that they really gotten value out of our day or two together, I mean the obvious next step was, “Okay, now hire us for the full project.” But outside that, we wanted to make it so they spend a little on us and receive a lot of value in exchange, and then our value prop was basically, “Hey, imagine spending a hundred times that on us – what that will mean for your business.” If we could make it so we had a lower-risk product – and that’s really what it was; it was a roadmapping product – and we could make it so the chump wasn’t “pay us nothing and have no relationship with us” to “paying us hundreds of thousands of dollars.” I mean, that’s a pretty big jump. So we wanted to have something in between, and that was typically the roadmapping session. CHUCK: So you kind of led up to the next part and that is actually providing the value. I guess there are two risks there, right? One is this that you wind up providing way more value than you got paid for, which is fine, because you got paid enough to cover your cost and things like that and they’re happy, so it’s a positive thing but maybe you could have charged more. The other risk I see is what if you don’t provide the value? What if they don’t feel like they got the value that they paid for? BRENNAN: In the actual engagement or in the estimating session? CHUCK: Yes, in the actual engagement. I think the estimating session is low enough risk to where it’s – unless they just don’t understand what you gave them, in which case, you failed to communicate. I think the risk there is pretty low, but in the actual engagement where it’s quite a bit of work and probably a reasonable amount of money –. BRENNAN: I look at that end-goal – the goal that we’re out to solve or achieve – as a constraint on the engagement. Any time the client would say, “Hey, I woke up with this great new idea. Let’s do it.” We would jump on a call and I would say, “How does this align with – does this get us closer to that milestone, or does it distract us from it?” When we had these constraints, when we had these kind of restrictions around our working engagement and we really made sure that with each status meeting and with each – we would communicate weekly with our clients officially, but we’d also communicate at all times, unofficially – we made sure that in each meeting we’d say, “Here’s what we’re doing, the right thing to get us to where we need to get.” I don’t care about the form fields, or the features, or the design, or any of that – we would discuss that, obviously. But the bigger question was always, are we getting closer to that target? And frankly, as long as there’s a healthy discussion at all times and –. I mean, if we make our best efforts, me and the client make our best effort, giving everything on the table to get to that outcome –. But the fact is, we fail, right? I mean, first off, that rarely happen. Failure, I think isn’t exactly a binary thing for a lot of what we’re doing. They might have projections that they don’t meet, or they don’t get as close to as they would have liked to get to, but I found that as long as –. I’ve seen so many projects that people build where they get so lost in the minution and the details that they completely lose track of why this is being commissioned in the first place. I think with us having these constraints, with me having these constraints with my clients, it was just a lot easier for me to make sure that the work I was doing was work that would yield a return on investment in the future, right? It wasn’t about, “Is this a good idea? Is this a cool feature? Is this nice?” whatever. Everything was anchored by “Is this getting us closer to that goal, that problem that we need solved that we had identified early on in the engagement?” Yeah, we could build the best product in the world and, whether it be environmental factors, or industry factors, or just the client not shipping it or not putting effort into it – I mean, we can only do our best, as long as the direction that you’re aiming in is always kinda centered by this constraint, by this outcome that needs to be accomplished. You’re gonna be much better off than the typical person who’s just kind of like, building stuff, without knowing why they’re building. CHUCK: Yeah, that makes sense. Did you ever run into a situation where you wished you had, instead of value-based pricing, you would have gone with the commodity pricing? BRENNAN: Kind of. There is a company in town that came to us and, at the end of the day, we realized all they really needed was Wufoo. We set it up for them, which doesn’t kind of boggles the mind, but I mean, I think a lot of us are Rails developers or Ruby developers. And how any of us wanted to build some CMS from the ground up when all they really needed was WordPress, right? If that’s what you mean, I guess I could have said, “Well, you know, this is our weekly rate and it’s going to take up four weeks to build a blogging engine,” where the right proposal would have been, “Well, this off-the-shelf piece of software will give you exactly what you need to solve that end.” I don’t know if that answers the question, but yeah. REUVEN: But it seems to me, and maybe this is misreading it, that it’s in many ways easier to sell value-based pricing to successful, non-technical businesses, than to technical businesses. Is that just a misperception based on the stories you’ve told and written about? Or is there something like magic there that basically would say, “Oh, you can use technology to fix my business; that’s worth a lot to me, and because I don’t know how to do it, it’s worth more.” BRENNAN: It depends. People like Patrick Mackenzie, I mean, he worked with software companies and he was charging $30,000 a week. I mean, that’s definitely not market rate for the kind of Ruby code and copy he was writing. But he came in there saying, “I’m a marriage counselor between your marketing department and IT.” And that’s literally how he proposed his projects, and that made a lot of sense to a lot of CEOs who know that IT never wants to implement the marketing stuff because it’s “boring,” even though a really smart [inaudible] campaign could [inaudible] millions of dollars for the company. So he came in with that angle. He worked with technical companies and granted he had a name behind him, but I think if he came in there and said, “I’m a Ruby developer, I want $30,000 a week,” I don’t think he would have gotten really far. But I mean, if by working with technical companies, if you’re talking about, “Hey, we’ve got a team of developers, we can’t find more developers, we’d temporarily join the team,” that you’re always gonna be positioned against what are the salary costs of the other people in the team. Unless you come in as some mentor or some big hitter or something, it’s going to be really hard. So for staff augmentation-type things where you’re joining an existing team temporarily, I think it’s very hard to pull something like this. CHUCK: Yeah, makes sense. So we kind of walked through an example of identifying value, but you said that sometimes value isn’t just dollars, so you’d look at it and it’s not just so many users, so much pre-users, so many dollars – how do you quantify some of this other value that’s given back and how do you translate that into money? BRENNAN: Bigger companies in particular, I think, when you’re working with a division – let’s say you’re working with a division of a big company – they might be far removed from any revenue. They might not have much exposure to the profit and loss side of the business they work in. And to them, what they might be aiming for is maybe, as dumb as it sounds, that they might want better recognition internally. Like the manager, or your client, might want to look good for their boss – that could be what they value; that could be what the client values. It’s kind of a – not exactly stuff that you need to be, I guess, prideful of, but –. I mean, I’ve worked for companies like – we’ve worked non-profits who they cared about how they looked when it comes to –. We worked for [inaudible] and most of their donors are big celebrity donors, right? We ended up doing an iOS and Android app for them that was very – they weren’t making money off of it; it wasn’t being sold. I guess, it was kind of indirectly affecting the donations they got, but it wasn’t front and center. We got to the root of utilizing that while these big-name celebrity donations really matter, so the elegance of the app really matters to them because they want, like, Christina Aguilera to take out her iPhone and have this sexy [inaudible] app running on it that she can show her friends. That’s the kind of value that mattered to them. If things were all equal and we were just given a list of requirements for an iPhone app to build, we probably wouldn’t have realized how important that was to them; how important the elegance factor was to them, right? I mean, that’s what matter to them, but I guess at the end of the day, it still boils down to money for them. They want people like Christina Aguilera to donate more money, I guess. Right? I mean, we also worked with the Mitt Romney campaign; they were looking for people to join his newsletter, I guess, and make donations. Ultimately, that still boiled down to money. But I think – I mean, the majority of clients we worked with, if they’re paying money to solve a problem typically money-matters to some degree to them, and that was easy for us because we would come in and really try to make ourselves an investment versus an expense. We would always push the ROI factor and – but say you’re working with a startup, I mean, you’re starting with zero. They’ve got nothing; you are building everything. So you just need to figure out like what is their end game? Is their end game to be acquired? If it is, then your whole proposal will be: here’s how we’re gonna get the best app up as quickly as possible to gain new traction and gain new users so that you make a big splash. If they’re focused on revenue, your proposal is probably much different. It just depends on really understanding what’s really behind the scenes and acting on that. CHUCK: Yeah, that makes sense. So in the case where it’s not just a clear-cut, they have the numbers and you can just crunch them, and you know, “We’ll make you $30,000 more for 15 or 10 or whatever.” Do you just ask them, “Would it be worth it to you to get this kind of result for this amount of money?” Is it that simple or is there more to it than that? BRENNAN: We all hate getting NDAs, right? Like when your client says, “Hey, sign my non-disclosure before I talk to you about the project.” We all hate that. I hate it. But what I would do is I often was the one presenting the NDA. And here’s what I would do: I would talk to them and get to the point in our initial meeting where I would tell them, “Hey, if I wanna put together the best project proposal for your business, I need to know a little more than what might be publicly available. I have this non-disclosure; I wanna ask you some poignant questions, but I want you to sign this first so that you know that I can’t do anything legally bad with this information. So I kinda used non-disclosures to my own advantage, which worked very well, by really showing the client that first off, I’m a professional. I get that this is sensitive data and you don’t want this being publicly exposed, but I wanna know this because I can’t diagnose the problem if you’re not willing to take off your top, right? It’s like a doctor who needs to get to a cut, but a patient refuses to disrobe. It’s the same sort of thing, I think. So that’s kind of how I treated it, where if I wanna understand the problem and I wanna use my expertise to prescribe a solution, I need to know more. And almost always, I was able to get at least ball park revenue figures, or at least ball park money or numbers or something, right? A lot of people with value-based pricing, I think, incorrectly assume that the goal is, “Okay. So you’re gonna make them 100,000, subtract a few dollars and price that.” I don’t use it; I don’t think that you should be always choosing a price that’s a little lower or somewhere in between what the potential payoff is for them. The way I look at it is, “This is my anchor.” Like if they stand to gain 100K, and it’s going to take semi-weekly minus 10k and it’s going to take me two weeks, then we’re looking at a $20,000 project, probably. I would anchor my cost or my budget proposal with that upside. Now, I’ve seen projects where I didn’t feel confident that we would really come out on top. I didn’t feel confident that what they needed, or the amount of effort they needed would make sense given the potential payoff. Then the question becomes, “Well, can we do something different to make the payoff greater?” Or, “How do we build something maybe, give them something that still has a ROI,” and if not, then I’d rather tell the client – and I’ve done this before – that for me as a professional who does this for a living, I don’t see how this current model that you’re proposing will make any sense to spend any money on. I’ve done that where I’ve kind of been the one who – I guess you’re can’t really say that you’re firing the client since they’re not really a client yet – but where you basically tell the prospective client that, “I just don’t see how this is working; how this could work out. However, please feel free to persuade me otherwise.” And then it’s more equal footing. It’s not them interviewing you to try to drive you into the well of the race to the bottom commodity pricing to get the cheapest thing they need for the lowest price they can pay. I think so much has to do with setting yourself apart by really taking an invested interest and the direction that you’ll take versus what I think frankly most consultants and most freelancers do which is, “okay, what colors do you want” or “how many pages do you need” or “do you want the logo here or there?” All that stuff is typically what most clients are used to hearing. If we come in with something totally different but that’s very focused on them and very focused on the success of their business, that immediately gives us a few extra karma points when it comes to our relationship with them. CHUCK: So I think you kind of answered this question but I’m going to ask it anyway, and that is, when you were talking about projects where it’s not worth putting any money into, but what if they bring you a proposal where the value that you would provide, it’s just not enough to actually pay you to do the work and make it worth it to you. Do you help them find another solution? Do you just tell them that there’s just no way? BRENNAN: It’s kind of like, I would occasionally get in a phone call to our office where they want a Youtube clone for 500 bucks. [Chuckles] Not going to happen. REUVEN: At least, 600. BRENNAN: Truthfully, the easiest way that I’ve gotten around recreating Facebook for a lot of clients is by letting the client know how many developers or engineers Facebook-employed and what the going rate of a developer in San Francisco is. That was kind of an easy way to get people to realize it’s not about one-click clone Facebook type of stuff. But yeah, I mean, I always found it’s valuable. If you’re like us, our minimum budget was – at one time it was 30k then it went up to 50k. I don’t wanna leave people out in the cold, so we partnered with kind of these – I don’t wanna say low-end, but people who would take theme force templates and throw it into WordPress for you and do kind of these marketing brochure sites. We partnered with a lot of them for projects that weren’t really for us, but the client came to us first and we realized they’re probably –. We don’t need to build the blog from scratch; here’s a competent local designer, they can build a nice little WordPress site for you. We did that pretty often. I would much rather do that than just say, “Hey, sorry we can’t help you.” CHUCK: Did you ever take or give a value-based pricing deal to somebody and then wished that you charged more or saw you could’ve gotten maybe a little more margin than –? BRENNAN: We had a rate; we had a weekly rate. I mean, it’s too hard – when we had 11 people, we would have a lot of projects going on at once. If I had to remember the weekly rate of each project and it was different on each project, it would be – I would stumble way too easy and that’s kind of like, I guess, ethical grey area, to me at least. So we did have a weekly rate, and the goal was just using – if we’re looking at a 10-week project and our weekly rate was 10k, that meant our budget’s 100,000. If the potential payoff, if we don’t think that they stand to make more than that, then maybe we figure out how can we do maybe less work but still achieve that upside, or how do we make that upside bigger; that was always my goal. It was simple math: we had a weekly rate and we think it’ll be this much time will be required to get to this end goal. Instead of just saying, “Hey, we’re 10,000 a week and it’s going to take 10 weeks. Give us a hundred grand.” We would instead anchor that by – the typical, like, how do you make a –. What is that saying like? How do you make a $700 watch appear cheap? Put it next to a $7000 watch, right? So it’s standard psychology: price anchoring. You’d say, “This is what you stand to gain,” put that into perspective and now come in with a lower figure for the budget that’ll be required to get you there. The positioning is basically spend 100k and get 500k back, or whatever that upside could be. CHUCK: Right. One other question. REUVEN: I’m sorry. CHUCK: No, go ahead. REUVEN: That’s a very interesting point, ‘cause I guess, my impression of value-based pricing has often been sort of what you described before [inaudible] wrote in the last week or two in your newsletter as “Don’t look at what they’re gonna make and then sort of charge them a fraction of that.” So it sounds like it’s almost like a two-part thing. Obviously there are multiple parts to it, but the value-based is really for them – for them to be able to justify to themselves spending this amount. At the end of the day, you still have a weekly rate and you’re going to do the estimate, and you’re going to estimate based on time – it’s almost like a kind of material sort of charge. BRENNAN: I realized – yeah, yeah. REUVEN: But basically, you’re not coming to them saying, “I’m charging you this per week.” You’re saying, “I’m going to improve your business so much, you’re gonna beg me to be able to pay me this much per week.” BRENNAN: Right. I wanna be an investment [inaudible] for the business, which is – I know for a fact they’re not gonna talk to any other vendor whose gonna, or back then, would at least put up like that. What it meant for us was we had more conversions. A lot of us might spend a lot of time cultivating lead: you might meet them at a networking event, and then you get into a phone call, and then you set up an appointment or meeting and you meet with them for half an hour to an hour – I mean this is all time, and if we can bump our [inaudible] rate and our closing rate, why wouldn’t you do that? It’s a way to kind of, like I keep on saying, anchor the budget you come up with, which is the time x rate equation that most of us use, and just anchor it with something that to them, makes it so they can’t just say, “Oh well, you’re saying 10 weeks at 10k, let’s go find somebody who will say, ‘I can do it 10 weeks at 5k,’” right? Because -. REUVEN: Right. So that seems to be the key. Basically, you are still price anchoring, but you’re anchoring it to their value as opposed to your competitors. BRENNAN: Exactly. REUVEN: And so, it’s looking totally different to them. BRENNAN: That’s exactly right, yup. CHUCK: So one thing that I’m kinda curious about with the weekly rate is – how do I say it? So the value-based marketing is, here’s the overall increase in value that you get, and then – so it’s gonna take 10 weeks at 10k, as what we kept saying, but what do they get for that 10k in a week? Is it a developer with a general – they’re going to work on it at least this much, or get this much done, or meet these milestones – how do you quantify that for them, or is it just you’re going to have it done in 10 weeks? BRENNAN: I think the initial risk is well, are they working 5 hours or 50 hours for that week, right? That’s why I think, in general, we tend up lead, and clients do too, that our lead is better. Because if you’re paying by the hour, if I’m being billed for an hour, they’re probably sitting at a keyboard on my behalf for that hour. We did two things: the first I think is by delivering that early when through that roadmapping session that we became a cash machine already for the client. So they realize, they put cash in, they get value that to them is worth than what they put in out of that. Our value prop is simple – this is what we charge for a week. What these includes to them, we made it so they can’t reverse engineer. And this, for freelancers, this isn’t always doable. But for an agency it was, and what we did was we included QA and PM oversight into that figure, so it wasn’t just – we couldn’t just divide some number into that to come up with an hourly rate. But on top of that, no one likes being billed for meetings, or for phone calls, or project management. But a savvy consultant is going to charge for them because you’re providing value in a meeting. The benefit of weekly for us was you’re basically buying commitment and we said that if you think that – like we’re gonna try to output an equivalent amount of value each week. If you think that we’re not providing more value than you’re paying, then fire us. There are no long-term contracts – just fire us. We would say that very plainly. That’s the equivalent, I guess – or not the equivalent – that’s kind of tapping into that same part of the brain that responds well to money-back guarantees, because again, you’re saying, “We’re low-risk. We’re low-risk and that you’re not going to get stuck working with us long-term if you think we’re not worth it.” So we do that, but the goal here was really just to prove to them that we’re disposable if they don’t think that we deliver more value than what we cost. Their risk is always just a week, and that what they’re getting in this is the ability to call us up without worrying about a meter running in the background, or without worrying that they’re on the clock or whatever, that they have our attention for a week. So I mean, yeah, for some weeks maybe I’m talking to them a little more than I was the week before, and that makes my effective rate or hourly rate, internal rate, lower than it was for the week before. But I mean, all things being equal, I think my clients have responded well to it and if you think about it, if you’re hiring a salaried employee, you’re paying them a set amount each week and for budgeting, the client doesn’t need to worry that this week you’re gonna charge them 10 grand and the next week 15 grand. They can expect a consistent burn rate, I guess, for their project. REUVEN: Right. Two sort of related questions: one is, we know that in software, especially let’s say, web projects, there might be weeks when you’re delivering value but it’s not obvious to them – they’re not going to see anything. So I’m wondering how you’ve dealt with that. And the other thing is what did you do when, in the inevitable case – I assume an inevitable case – when things took longer than you expected than what you really estimated? BRENNAN: That happens, and I found that the best solution to that is just to communicate constantly. It becomes a big issue where either you or the client puts their head in the sand, you get to work, then you need to come back at the eleventh hour and say, “Oh, by the way, this is gonna take a lot longer than we thought.” I found that most problems I’ve ever had really had nothing to do with technology or code or writing the wrong stuff. It was usually due to miscommunication or assumptions being made that were incorrect assumptions where I’m thinking Camry, and they’re thinking BMW. I’ve just found that communication about – communication’s another milestone, right? If we’re always focused on that milestone and that end goal, and we’re always talking about that, we’re always seeing how do we stand now this week in relation to that goal, and how does that differ from last week – that’s the best remedy, I think. The worst thing you can do is just kind of build, build, build and then have this eleventh hour epiphany for both you and the client, or “holy crap, we are so far off base.” That’s usually what makes things go down, I guess. REUVEN: Right. BRENNAN: I forgot the first question you asked. REUVEN: I was wondering what happens if you delivered value but it’s not obviously visible to them? BRENNAN: Oh yeah. So you’re talking about, maybe the first week where you’re doing mainly back end work and there’s nothing visual to display, right? REUVEN: Yeah, yeah. BRENNAN: Again, communication. I think we made a policy to have daily kind of status emails that go out to the client that specify what technically I’ve done, but more importantly, what that means to them. So like, if we wrote tests, we didn’t say – I mean, we would say we wrote tests, but the big take away was, “This will help lower the total cost of ownership with this product, long term. By taking a step now, you’re gonna have lower maintenance cost, but more importantly, you’ll have fewer production bugs. More production bugs directly affect your cost or your revenue, right? If users keep running into issues, they’re not gonna pay you.” So we would spell it out in kind of those terms and say, “We made sure that your billing code is airtight and we set up a double ledger system on the back end that would track any money being moved internally within the system, and just kind of spelled out what that means for them. We wouldn’t focus on the elegance of the code, or how sophisticated things were; we would basically translate that into -. One project in particular that I’m thinking of, we spent weeks on back end billing code that really had no visible effect, right? But we just really communicated how they are pushing a lot of money through their system and what we’re doing now is gonna make sure that it’s airtight and most importantly that there’s no office space issue where fractions of pennies are collecting over here and somebody is getting screwed over or whatever, right? Again, I think both of these questions really boil down to really good communication. REUVEN: Makes sense. CHUCK: Alright, well then let’s go ahead and do the picks. Curtis, do you wanna start us off this week? CURTIS: Sure. I have two picks this week. The first one is a new book called The Price is Right, and it’s all about pricing theory, price anchoring, by Chris Lema. It’s actually a reasonably short read; I’m on 88% of my way through it and I got it on Friday night or something, and it’s quite good. [Chuckles] My second pick is a blog post today by a buddy of mine, Mike Schinkel, called Stop Blogging. It says, basically, “why would you blog every day” and I also struggle with this blogging everyday, and I’m wondering if I’m providing as much quality as I could if I blog less because I put my time into posts. CHUCK: Awesome. Eric, what are your picks? ERIC: I got two today. One is very good ‘cause of the new year; it’s Forget About Setting Goals, Focus on This Instead. I’m not going to spoil it but it’s basically a different way of looking at goal setting, instead of the idea if I’m gonna go to the gym every day and lose all this weight and you end up stopping like January 5th or something. So it’s pretty interesting and it’s something I’m gonna try this year. The second is a book I read over the holidays called Write. Publish. Repeat. It’s The No-Luck-Required Guide to Self-Publishing Success. It’s a really great book; mostly it’s centered around fiction, but you can still use it for non-fiction. It’s kind of the business of writing. If you write, or have books, or think about doing books, this is a nice way to look at it where it kind of elevates the writing to a business standpoint, like how do you do pricing, how do you get customers – all that. And that’s it. CHUCK: Alright. Reuven, what are your picks? REUVEN: Okay, I’ve got three picks for today. Two of them are podcasts. There’s a podcast that’s been going on I think for a while, but I just discovered it from the BBC called More or Less, which is all about statistics and numbers. So for the nerds in the audience, and there might be a few, it’s a fun one. And there’s another one that Slate Magazine just started. I’m not sure how much I like the name, but I really like the podcast. It’s called Mom and Dad are Fighting, [chuckles] and it’s for parents; it’s all about parenting. They’ve only had two episodes so far, but I really like them. One of the things that I really like actually is that each week they come on and they start the show with “What was your parenting win or fail of the week?” One of the nice things about hearing this sort of thing is, no, you’re not as bad a parent as you thought. And my third pick is, and I’m not just trying to suck up here – I’ve actually joined Brennan’s Freelancers Guild, and I’m super, super enjoying it. So anyway, I definitely recommend it. I think it’s just been an incredible experience having a form of other freelancers and being able to talk to them and especially, I would say that the biggest value has been from the Mastermind that were set up. For that alone, just every Friday morning, I talk to a bunch of other people, freelancers from roughly my time zone and it’s, as far as I’m concerned, one of the high points of my week. So anyway, those are my picks. CHUCK: Terrific. Alright we got some picks. So last week, I spent most of the week in Disneyland and it was a lot of fun; got to spend time with the kids, with my wife, with my wife’s family, which was less fun, and it was just terrific. So I’m definitely gonna pick Disneyland – that’s the one in California. And then also last week up through yesterday, so I guess it was just last weekend, I went to New Media Expo, which is the conference for bloggers, podcasters, Web TV personalities, Youtubers, people like that. I really enjoyed it; I had a great time; I met a lot of people. I met some people that we had on the show; Pat Flynn was there, Dan Miller, just a bunch of people I met, Grammar Girl – yeah it was a lot of fun so I really enjoyed it. If you’re into blogging or podcasting or anything like that or you want to learn or start, then look into going next year; it’s really a terrific conference. And those are my picks this week. Brennan, do you have some picks for us this week? BRENNAN: I do, I have two picks. The first is, speaking of blogging, I don’t like WordPress’s little tiny MCE Editor at all; I don’t like writing in that. And I found an app called Byword, which is a Mac app, and it lets me write Markdown and I click a button and it publishes it to the WordPress or my WordPress blog, which is really, really convenient. So that’s definitely my first pick. My second pick is also a podcast; it’s called Hardcore History by Dan Carlin, which if you’re into five-hour episodes on why World War I happened, it’s a really, really good podcast. The guy is almost – I mean, he kind of has this sound and tone of Rush Limbaugh but without the conservativeness, so it’s kind of like –. Imagine listening to some deep dive into history for four or five hours narrated by a guy who sounds like he belongs on talk radio. So it’s interesting and I’ve learned a lot, so I highly recommend it. CHUCK: Awesome. Alright, well thanks for coming Brennan. It’s been an interesting discussion and there are definitely some things in here that I need to consider and think about. If people wanna ask you some questions about this, or learn more about you or anything, where do they go? BRENNAN: The best place would be brennandunn.com, and that has a link to Contact, which has my email and my Twitter handle. It also has a listing of everything I do, so that’s probably – or just shoutout on Twitter @brennandunn, that works too. CHUCK: Awesome. Alright well, thanks for coming. We’ll wrap this up and we’ll catch you all next week.

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