DAVE: How much am I getting paid to be in this phone call? CHUCK: Nothing. Shut up. JT: [Chuckles] DAVE: Yeah, all right. So I’m no good at the whole “setting rate” thing. All right. [This podcast is sponsored by Harvest. I use them for tracking work and invoicing clients. You can get a 30-day trial at getharvest.com. Use the offer code “RR” after your 30-day trial to get 50% off your first month.] CHUCK: Hey everybody, and welcome to Episode 6 of the Ruby Freelancers Show. This week on our panel, we have a couple of guests because Evan is at Ruby on Ales. Our first guest is David Brady. DAVE: Hey this is David Brady. I’m the Chief Metaphor Officer at Slide Rule Labs, and I’m one half of the team trying to replace Evan. I’m filling his right shoe. CHUCK: We also have JT Zemp. JT: Hey, I’m JT. I’m also a Slide Rules Lab’s contracting software dev shop out here in the Rocky Mountains Utah area. And I guess I’m filling in. I’m in Evan’s left pocket. CHUCK: All right. We also have Eric Davis. ERIC: Hey. CHUCK: And Jeff Schoolcraft. JEFF: What’s up? CHUCK: And I’m Charles Max Wood from teachmetocode.com. And this week we are going to be talking about setting and negotiating rates or how much to charge. I’ve heard it both ways so… DAVE: How much am I getting paid to be on this phone call? CHUCK: Nothing. Shut up. DAVE: Oh, alright. So I’m no good at the whole ‘setting rate’ thing. CHUCK: Alright. So I think one thing that people do — this is something that I did when I was first getting started with freelancing — was I got laid off from my job, which is I guess is kind of a common story. So, I start going out and bidding for subcontracting work that I’d heard about. And I’d bid a job at $65/hour — and yeah, you can all start laughing — but I got the bid, and I figured out real fast mainly from the guys like Eric that I was charging way too little. So how do you avoid making that kind of a mistake? Or do you make that kind of mistake and learn from it from somebody who knows better? DAVID: That’s how I learned it. I was full time employed and in theory, was making more than my salary job but after my withheld taxes and you know, taking out money for groceries and all that stuff, there was just wasn’t enough money at the end of the month. This was ten years ago, when I was charging $55/hour. And I’m just like, “What am I going to do?” I literally doubled my price to make up for it. And I don’t wanna give away the obvious thing other people talk about, but I doubled my rate and within thirty days my clientele doubled as a result. So my first suggestion to anybody who is listening is if you are afraid of raising your rate, don’t be. If you raised your rate and you lose clients, then maybe you are at your saturation point. But if you are swamped with work, you need to raise your rates. JT: Definitely market forces play into effect — the supply and demand, but it’s also the supply and demand internally. I think experimentation works out great. As you are talking to people, you just say, yeah, “My rate is X,” and you can gauge by their response and also you have to can kind of mark the person that you are negotiating with. How good are they at sales, because we all know the sales, you know, “the gasp technique” to kind of set expectations in a negotiation because you need to know kind of where their head space is. But if somebody ever says to you, “That is a fair price,” you know you left money on the table. And really the whole idea — and I guess we can probably sum up my contribution in about one sentence you know — as freelancers, as providers of the service, we are exchanging something for something, its value exchange. And so the whole point of today’s conversation is to figure out what’s a fair exchange of value? So sometimes when you are first getting started, obviously the value that you can provide maybe technically very high, but business savvy-wise, not very high. So you are going to have credibility problem. If you show up at a client’s office, and you pitched them $150/hour, and maybe technically you’re pretty great but communication-wise you were terrible, the customer is going to say, “No, thanks.” And they are going to hire somebody else who might not have as great of technical skills, but has some better communication skills. So part of rate setting is obviously about perception on a purchasing side, on the client side. And part of it is the whole package, what we are able to deliver. So experimentation works really great in setting rates, but you got to have some people skills in order to kind of be able to figure out what your market can bear and what your internal market. How busy am I? Can I raise my rates? So I think that those are all relevant things, in trying to figure where your best price point is. CHUCK: Right. ERIC: That’s a big point. [unintelligible] on the first podcast; I mean I came into it with a couple of years’ of Rails experience, several sites and production, I knew my stuff and I was setting my rate at $35/hour. If you guys know rates that is like, that’s almost at outsourcing level in a third world country. But I had no sales confidence, like I wouldn’t know what to say. I was actually scanning old paper works and found a couple of invoices that I sent to people for like $200 total, for like a week’s worth of work. So yeah, it’s all about confidence. All about like, how do you feel like what you are going to build for this person is going to give them value, whether its business value or sometimes it’s even a value for like a political management structure if it’s like a bureaucracy or large organization. And that’s kind of the big thing is if you are talking to a client; you need to figure out what they value and what they put on that. If they value getting something done fast, if you can deliver faster you might be able to charge more than if you took your time on it. So that’s actually… a short story I’m not going to get into that now, but I have a client who needed a rush job and he needed it in like 48 hours, and I was able to turn it around and I got the highest rate I’ve ever charged. CHUCK: Yeah that’s definitely a feature or a feature of negotiating. Because yeah, it’s all about delivering right, giving the customer what they want, and making sure that they feel like they are reciprocating value that is worth to them. Their ROIs is high enough to where they can pay you and still remain profitable. So there are couple of tools out there that help people figure out rates. The one that comes to mind is the “Freelance Switch Rate Calculator”. Are those worth it to use? Does it kind of give you a benchmark to go by? Or do you just kind of experiment like JT was talking about and see where people are at? JEFF: I think it’s a useful tool. It covers a ton of stuff that you don’t think about when you are trying to set your rate. But for most people, it’s worth the exercise to go through, but I mean if you are going to go pie in the sky, and “I only wanna work 4 hours a week and I wanna profit $50,000/month and I wanna be able to save $50,000/month,” I mean your rate is going to be like, I don’t know, San Fran start-up lawyer or something. My advice for people coming from full-time going to hourly for me, is start at your annual salary and divide it by a thousand. So if you are making $110,000, then your hourly starts $110/hour, if you are making $110,000. That is basically 2,000 hours in a year workable, if you are doing 50 weeks, 2 weeks’ vacation, so 50 work weeks, 40 hours a work week is 2,000, cut it in a half and assume you that get through 20 hours billable as a freelancer. And so that’s 1,000 hours to work basically. And so take your annual, divide it by a thousand and factor in at some point the tax you have to pay and all the other junk to have to pay being solo. CHUCK: Right. That’s one other thing that I’ve heard is you figure out what your benefits are worth and what your hourly pay would be, if you are paid hourly on your salary, which isn’t too hard if you divide by 2,000 to get your hourly pay, but you have to keep in mind that you’re running a freelance business so like that rule of thumb of dividing by a thousand instead of 2,000. But yeah then you figure it out that way. I think it’s interesting though that there are other things that you wind up paying that you don’t think about like taxes and what have you. So you know, it is an interesting thing to keep in mind, and definitely an interesting rule of thumb. I also think that you are getting paid $100,000/year and you divide that by 1,000 to get that $100 rate, you are getting to the ballpark the you should be in if you are any good. ERIC: I was going to say with the Freelance Switch Rate Calculator, that’s probably one of the best ones for this type, but there are a lot of them that basically set your rates by your cost. And if you know retail works, they buy an item for $10; they add a mark up to it and sell it for $20. And that works good for products especially physical things because you are shipping items. But with services, it’s really kind of sketchy. Because realistically, to do like Ruby programming for a client, you really need a laptop and internet, like that’s the minimum requirements you are going to need. So you are not going to have as many costs as anyone else. So like Jeff said, it’s good to look at some on those and kind of get a baseline. It’s also good to look at Freelance Switch specifically, because they have a lot of expenses you might not have realized. But it’s a lot better to kind of look at it from the value side or if you just need a ballpark like just take your salary and compute that out. Another thing is my wife works in HR, so I can see a lot of the employer side costs. And I don’t know the exact numbers, but its somewhere like, if you get paid a $100,000 as an employee, the company is probably paying $50,000 to at least another $100,000 just to have you, in taxes and benefits and training and all that stuff. If you go freelance, you have to absorb that cost. And so that is why there is a huge difference in an hourly rate for an employee, versus an hourly rate for freelancer. JT: Yeah it’s the value to the potential customer that the person is going to hire us. They have value in not retaining full-time employee. So that value that they are saving actually translates to higher cost for us, because we have to take on the risk of making sure that our pipeline is full; making sure that our clients are not deadbeats on things like that. So that is another reason, typically. I’ve seen a lot of people, they’re working at some W2 job, working on software development, they are getting paid $40/hour which equates to $80,000/year and they’ll jump out and say, “I’m just going to make $40/hour.” And they caught blind side when taxes are due. And when they realize that I can’t actually make a career out of this. And I’ve seen a bunch of people get real gun shy. They could have been really, really great freelancers, but because they didn’t understand how to price themselves, they’re just like, “You know what I just need to match the same rate,” and not realizing that their employer is like you said, paying anywhere from 50%-75% more of their actual take home gross in out of overhead to kind of handle that. That seems a little high to me, but that might be a big company that has a lot of overhead. In the company that I was working for and managing, our overhead was typically around 35%-55% of what we pay the employee. So we pay an additional in benefits and in office management and then everything else. So I don’t know what kind of company your wife works for in their HR, but yeah it’s a lot. And if you don’t pay attention to that, you get screwed and you get gun-shy and then you don’t wanna do freelancing anymore. DAVE: For me, the biggest stumbling block was the discovery that as a W2 employee, I had 40 hours a week — okay let’s be honest — I had 70 hours a week of work every week for my salary. And I stepped out to be a freelancer, and I set my hourly rate, and then I was only able to book 15 hours to 25 hours a week. You get to the end of the year, and you are like, “Wait, I should have been making double what my salary was!” And it turns out I didn’t quite meet my salary. What happened? Well the answer is I only worked half the year, because I only worked half a week each week and that was a problem in sales. Over the years I’ve gotten a little bit better about learning how to fill that pipe. But when you first jump out into freelancing, if you don’t land a 40 hour/week gig, you need another gig. If you land 20 hour/week gig, you need another one — or you need to raise you rate again. CHUCK: So one other thing that I‘ve heard a couple of times — I think it was Obie Fernandez that said this — that anyone coding in Rails should be billing at least $100/hour. Does that number sound right to you guys? Is it too high? Is it too low? ERIC: I think it was $150. That’s his “Do the Hustle”. It was a talk he gave. JT: Yeah, so kind of on that note, here’s just an interesting psychologically, you kind of consider the source, right? He’s kind of indirectly benefiting by putting this out there and setting their expectation with customers. Which I think is really nice thing, because we can kind of ride on the coattails of that. I don’t think every freelance Rails programmer is worth $150/hour — just to be straight up. I’ve met plenty who are, I’ve met a lot who are not, who are maybe worth $40/hour, and they shouldn’t be freelancing. So I really think it depends. So it doesn’t depend on the technology, but what he might be saying is, “Hey the market can bear this because this is what we are charging.” But also I think it was very clever on his part, to kind of bracket, to set that expectation. Because it helps his company out, especially if he can say, “You know what, everybody else is charging $150 and we’re charging $175 but we produce this x number of increase in quality,” or something. It helps in the psychology of bracketing when you are setting up prices. It’s no accident that most companies charge three prices when they have three products, because they know that you are going to go buy the middle one. If you can say, “We are cheaper than ThoughtWorks but we are more expensive than these guys that are just running on a garage,” you’ve effectively created a marketing position. DAVE: Consider the source also that Obie just made the news recently by being cheaper than nobody. That there was a backlash in the community at how much he was charging. CHUCK: Right. So the other question then is, how do you figure out that your rate is too low? We did hear the metric; “Oh, I think that is a fair price.” or you don’t get any push back on your rate. Is there another way of measuring that? ERIC: If you talk to your peers like all of us here. We’ll talk or chat even in twitter and if you are curious if you’re charging too low, they are like, “Hey, were going to find a project to hire you.” That probably is a good idea that you are too low and they are going try to use your availability as much as possible. JT: If your friends can make a margin off your retail, you’re charging too low. DAVE: If your friends can make a margin off your retail, my email address is email@example.com. I may have work for you. CHUCK: But I do wanna point though that on the flipside, if you don’t wanna do the marketing work, if you don’t wanna do all of the business stuff, and you are happy just to sell your time to somebody else at sort of wholesale, maybe need to get a few more hours but not have to hustle with that, I mean it’s not really a terrible way to go if that fit your mind-set. JT: Oh, absolutely not. If you can reduce risk by handing off the marketing, and customer acquisition tasks to somebody else, you can really lower your rate. DAVE: You can cut $50 out of your rate. JT: Yeah. Seriously. That’s really not a bad way to go. DAVE: If I’ve got somebody who’s willing to project manage for me… and I mean actually “hustle” project management. I don’t mean just cash the checks, and you know check out for weeks at a time. If a project manager is actually willing to do the project management, I’m willing to work for less than three figures an hour. And I know the fact we’re all in this. We are talking about setting rate and nobody is actually putting numbers on the table — and we’ll get into that little bit on why that is too — but yeah absolutely, I’ve cut my rate, not quite in half, but I’ve cut $50-$60 off of the rate before, to have somebody else project manage for me. CHUCK: So one other question that I have then is, let’s say you set your rate — and I’m just going to put a pie in the sky number out there — let’s say you set your rate at $200/hour and I’m pretty sure that none of us is charging quite that much. DAVE: Gasp! CHUCK: But anyway, so you start talking to a client, and they are really not comfortable with that number. Do you lower your rate? And to what point do you usually do that? DAVE: It’s interesting. The only thing I ever hear among consultants and contractors is, “You need to be more courteous and you need to raise your rates.” I never, ever hear contractors telling each other, “You need to be smart and lower your rate.” I never hear that. And I think the reason why is because, say you are billing $100 and you pitch a client, and they say, “No, we just don’t pay that much for a contractors,” and they go away. That stings. And it’s really hard to keep a straight face, and sound confident the next time you bid that same rate. And two or three times of that, and you really start to sweat when you try to ask for rate that you want. I don’t know. I’ve never had a problem with billing too much. I had lost accounts because I was asking for too much. But there is a really good rule for negotiating that I like to use, and that is when you ask for a dollar figure, you need to ask for a number. Don’t ask for number that is so high, that if they walk away because that’s so high, that you’ll kick yourself for being greedy. If your number is low enough and they walk away, and you say, “Well, that was a fair number,” and they walked away, “I guess I don’t really want them as a client.” And the other side of it is don’t pick a number so low, that if they agreed then you’ll kick yourself for actually winning the business and now you have to do the work at that rate. ERIC: There’s one thing that bit me one time, because I got started at such a low rate, is I did a discount and had lower rate than my normal rate — and that was already way lower than market rate. And that client turned into a repeat client. And so because I price fixed to like, I said $50 of my rate, they had that perception of this is Eric’s value, and so overtime it was hard to kind of get them to realize that my value is actually say at $100 or $150. So it took a lot of time, lot of effort, lot of more renegotiations to get that back up, versus if I started at my normal rate and then did a different kind of perspective of like, “This is a one-time discount type thing,” or “I’m doing this because it’s February,” or some other different reason. So that’s one thing that bit me. And that’s why I think why a lot of consultants kind of do the knee jerk of, “Don’t give rate discounts,” because they don’t wanna get into all that kind of psychological background on it. DAVE: Because when you got the long term rate… say you are billing $50/hour which is huge discount off your regular rate, and then they say, “Well we are going to give you a 6-month contract and since we are giving you 6-months, we’d like you to give us a discount.” “Wait, wait, and wait! I’m *already* giving you a discount!” The only time I have fired a client, and sworn at them was because I did that. I gave them a discount, and they came back with a counter proposal of an even lower number, and I told them to go to hell to their face. And that was the moment that, I can’t say I coined this rule, but I will say I independently discovered it and that when I talk to clients, I tell them straight up, “I never give discounts. Not ever.” However, my rate is entirely negotiable. If you wanna give me something in return, if you want to lower my risk or if you want to increase my safety, or if you wanna buy hours in bulk, so I’m not worrying, if you wanna buy 6 months of my time, I will renegotiate my rate all kinds of ways for that much security of income. But there is going to be a line in the contract that says if you bail out after 3 months, you have to pay me the extra 3 months, right? Because I gave you a negotiated rate but I did not give you a discount and you keep fixed in their mind. It’s like an infomercial on TV, they never say, “And we’ll throw in a free pocket watch.” They say “We will also give you this $200 watch,” or “a $199 value — absolutely yours to keep.” And you never use the f word in there right? They never say “free”. And yeah you always keep the value set like… our hourly rate is x and we will negotiate. I had one client that absolutely not only didn’t want to negotiate, didn’t want to reduce risk, but actually want me to introduce even more risk to me. I said, “Not a problem, I’m willing to negotiate on that.” And I gave him a rate higher than my normal. You know it is kind of like, “For everybody else its $50/hour, for you $75.” And he wasn’t real happy with it but he saw the logic in it and he actually paid me. It was a short contract. CHUCK: My dad, when he got out of dental school, he actually had one of his cousins come to him and say “So you are a dentist now, are you going to give me a family discount?” And he said, “Sure, it’s a 150%”. And you know, it was the same kind of thing as look, if you are coming into my dental office and sitting down and getting work done, we’re related so you might think — and in this case with this particular cousin he was partially right — you might think you are getting free dental work because if you don’t pay me, we still get to see each other at family reunions, I’m not going to sue you or whatever. So he basically was saying, “You are more risky to me, than a stranger that’s non-pay.” DAVE: My regular walk-in customers don’t talk to me about work over thanksgiving dinner. CHUCK: Right. So it’s kind of an interesting thing. So yeah, you do trade off a risk. How much do you usually negotiate? And I don’t know if you are comfortable talking about this, and we can gloss over this if you are not. How much do you usually negotiate for a reduction in risk, maybe for a longer contract or something like that? JT: So I cannot speak for anybody else other than Slide Rule, so typically, are you okay talking about it? DAVE: Yeah. JT: So, our retail rate is $135/hour and we have two pricing if you want to do a retainer arrangement, where you pay upfront for a block of time each month, and depending on how many hours you want to prepay for, then we reduce the rate by $5-$10/hour depending on the length of the contract of how many hours you want upfront. Somebody wants 20-hours, 40 hours/month — I don’t have our rate sheet in front of me right now so I’m totally going from memory — if you wanna do like 40 hours a month then we reduce the rate by $20/hour. CHUCK: Right. So that makes sense. And since it’s prepaid, you are reducing your risk because you are not going to be doing work that you are not really paid for. JT: And that provides a huge value to the customer. DAVE: It’s a value to the customer, and it’s a value to us. It’s this huge weight off our mind of how do we fill the sales pipe? Oh we just 40 hours into the sales pipe or into the into our work pipe, month in month out. That’s absolutely worth… I can’t do that math — $800? JT: It’s worth dollars. DAVE: It’s about $100. At Slide Rule, I actually learned how to use it because I know somebody is going to walk up to me at conference and say, “Do you actually know how to use one of those?’ CHUCK: Do you also know how to field dress a buffalo? DAVE: No. Which is why we are not fielddressingbuffalolabs.com. [Laughter] We did consider it. The domain name was available. JT: “Was.” DAVE: Yeah, was. I’m doing some affiliate marketing test with it now. JT: So I am curious like in terms of negotiation, what do you guys do? Like when you walk into a situation, what are some of the actual actionable tactics that we can share with the listeners on ways that you negotiate, and build value in the minds of your potential customers? ERIC: My favorite one is the silent one. Where, you basically say your price or quote or whatever you’re going to say, and you shut up — you don’t say that anything. And there is a certain point where you hit that uncomfortable silence part, stay silent through that a little bit. Typically whoever is the stronger negotiator will be able to stay silent for a little bit. And someone who kind of gets uncomfortable with it will be able to just start talking. And that’s kind of… oh, you don’t say your rate. You talk about the project and when the rate comes up, you’d be kind of quiet about it. Because the first one who talks and sets the price, kind of sets the marker of this is the ballpark for playing in, and then the other person can kind of go above or below it. So if you speak up first because you are unconfident, you might set a price that is way below the amount that they are willing to pay, and so they realize, “Oh we can just take him with this amount.” And then that’s when they say, “Oh that’s a good price, we’ll take that right there.” But you let them talk first, they are going to tell you where their ballpark is and you can kind of play to that too. JT: So do you find that customers are… so here’s the deal, I’ve read that in a number of books, that you never wanna be the first person to say your price. DAVE: The first person to talks loses. JT: I don’t necessarily agree with that. For as many published works that I’ve read that in, don’t necessarily agree with that. Maybe its personality thing. I would much rather be upfront with pricing. DAVE: I actually have a commentary about there is no reason it works and no reason it doesn’t. And this is another hint guys, you need to raise your rates. If you are below market value, speaking first means you lose. If you are above market value, speaking first means you have set the price point. Maybe you are hoping they are going to say, “Well, we were kind of hoping we can maybe get you for $325/hour,” but that never happens. So if you know what your value is, you can give somebody a solid…. So, there is two sides to it right? I’m not trying to disagree with you Eric that… ERIC: No, this is a good point. DAVE: I’m not trying to disagree with you that keeping silence is a bad thing. It’s a very powerful technique. It works both ways; first of all if you are kind of in the market, then let them speak first if you can because they will generally offer something higher, or they will offer a number that you can negotiate up from. If you give a number, you are going to negotiate down from that number. So just remember that if you do speak first, put $20 on your number, because you are going to get negotiated. I doubt your client will never, ever, ever negotiate you up from the number you give. And remember that your client is going to cut $20 or $50 off of the rate when he picks a number. So if you accept his rate, it’s the same rule in reverse. If you say, that’s a fare rate; he just got away with murder. I guess where I’m going with this is if you have an additional technique, is if you have a solid sense of confident worth of what you are, what your worth is hourly, that you won’t kick yourself if you blow the deal, then you come out and you say, “Well, we charge this much.” And it’s like you never walk into a Wal-Mart and have to haggle over the price. You know it’s going to be $8.96. And so there’s two different mind-sets there and they are both valid. If you are a new freelancer and especially if you are a little bit below market rate, then yeah, hold back and let them say a number first. If you say the number first, ask for $20 more than you normally ask for, and then follow it with silence and just let that number hang over the table like a cloud, and just let that number kind of sink in as a negotiating point. Because will immediately start saying, “Can we cut a deal?” And what I have found is that they will say can we cut a deal? If you tell them it is “150/hour,” they’ll say, “Oh, can we cut a deal?” If you tell them, “Well, we charge $45/hour,” They will still flinch and say, “Oh, can we cut a deal?” So you might as well give them a bigger number. CHUCK: Well one other thing that occurs to me is in some cases, they’ve thought about what they are willing to pay — give or take. They have a ballpark. But in some cases, they really don’t and so if you put them on the spot and give your number, they may have no idea where to put that. JT: So here’s some additional thing about that Chuck, and I’ll be interested if you experience difference from this. In my experience, if the customer doesn’t know, you don’t want them as a customer because they are the customer that causes problems. If they don’t have budget, they probably don’t run a really good business and they probably doesn’t have a good understanding. That is a huge red flag to me, if you don’t have a budget. So I tell it upfront to people. And when I wanna ask them, you know, if we have somebody that calls in, and says, “Hey I’m interested. I saw or hear about you guys from a friend. I have this project. Do you wanna talk about it?” I say, “Sure, give me a ballpark idea of what your budget is.” And I say, “I’m not trying to price this up to your budget, I just wanna know how serious you are about doing this thing.” And the question, behind the question is, how good of a business person are you? How much experience do you have? Because I need to price according to your level of experience. If there is somebody who’s first time they’ve ever done a project and they are using their kid’s college fund, there’s a decent chance that I’m going to tell them no. I’m going to say, “You know what, you need to go and develop your idea and then come back to me.” “Or you need to pay me $5,000 and I will help you for one week develop this idea into an up or a down vote.” So that’s just me, personally. I don’t know if you guys have had experiences different to that, but I’m really, really hesitant to do any work for anybody who does not have a budget. It’s totally valid to not tell what that budget is than to have to do all the psychology on getting the budget out. If you don’t have the budget, then that’s scary to me. DAVE: The inverse of that is kind of what I was thinking when I said, knowing what your rate is going in and being willing to put out and say this is my price tag also helps. Because if you give the client the perception that you are trying to… if you charge the low, low price of whatever the market will bear, the client can pick up on that, and they are not happy. If they know that they can get you for $85 or $150, just based on just throwing the number out, you’ll lose the contract because you are not ethical and you should lose the contract. So if I ever do give… Well actually, we’ve always given the number first now that I think about it. When we do give a number, it’s because we’ve actually talked through with the client what the work is and what the value is. So when we negotiate rate with the client, it always come down to, “Okay, you want this much work of this calibre, of this kind of complexity in this language, you know what this product is worth to you and this is what this level of work is worth to us.” I charged $255 to do PHP work — and nobody will hire me at that rate — and that’s the point. ERIC: I kind of was thinking about it, recently by as far as six months ago, I actually published my rates on my website, published them as packages of like with 10 hours, you can expect to get this much of work. For 20 hours you can expect to get this. And I did that because I need a filter. I was getting six to a dozen requests a week, of like how much to do a project, please bid [unintelligible] like I’m so busy, I don’t have this. And I so I published my rates like that just as a filter for if someone will come in and say, “Hey we want Facebook and we only have $1,000 for it.” It will hopefully self-select themselves out of the group and wouldn’t wanna contact me. So I guess in that sense, I actually am speaking first and saying, “These are what my rates look like, if you are still interested then contact me.” DAVE: There was a shop back in the early naughties, late 90s, early naughties, that for $99 they would build you a website. And there was just a toolkit, and they would go through a control panel and they would click all the options that you wanted. And it took them five minutes to turn you around a really crappy-looking website. And I worked in a custom web development shop, and all of our clients were in the $5,000 to $50,000 price range, and the other client was over $2,000,000 by the time we were done with him. But the CEO of the company would just grumble, because he was filtering so many leads. And he is curse of the day, every single day, where he would just throw up his hands and he says, “Everybody wants a $99 website.” And yeah that’s one of the first things you have to do is if you are getting a lot of leads coming in that are fully qualified to you, putting your price out there can filter against the people that want that. Yeah just like you said, Facebook for $500 or a $99 website. JT: Another thing you can do, just an idea, Eric I really like your approach, but another thing you can do is set up an automated response system. So they fill up say, a web form saying, “I’m interested.” The system automatically emails them back a document then they need to fill up. Like a questionnaire that kind of gets them thinking, “Wow this is not a simple thing.” So if you are reluctant to put your price out there first, if you set up a system like that, then you can do it through AWebber or something like that, that will email them back an Excel spread sheet that they have to fill out. And it will kind of estimate things. Your project is likely going to take x number of thousands of dollars. And then they Number 1, you’ve already engaged them, you’ve created a sort of connection. You have their email address technically. And then number 2, if you wanted to follow people if you ever have another product or service to offer them. Maybe you do wanna come up with this $99 web builder, you wanna partner with square space or whatever the website builder company is going today to do that. So there are the ways to create this filter to reduce your workload, but still possibly maintain relationship with people. It might be too cheap for your services right now, but maybe in the future when they go off to oDesk and hire a developer and you ping them on three months, they say, “Hey, did you ever find somebody to do your project?” They’ll come back to you and say, “Please help me because I know you are qualified.” JEFF: Then you can put your budget on that questionnaire. JT: Yes you totally can. You can give a little more information. Once they kind of raised their hand and said, “Hey, I’m interested enough to contact you,” it’s not taking up your time on the phone, and your time in the email because the automated system is kind of helping these people. But then you still have the ability to contact them in the future. DAVE: I don’t know if this will be an official motto on our website somewhere, but our unofficial motto at Slide Rule is “We Fix $5 Haircuts.” That goes back to the old joke of the sign in the barber shop that says, “Haircuts: $5”. And across the street there’s another barber shop that says “Haircuts: $25” and then there’s another sign below that says “We Fix $5 Haircuts”. And which is a brilliant marketing scheme. But what we are finding is, we are doing what we call “Rails Rescue Work,” which is where we come in after your economical developer, fresh off the PHP developer has built your website. And we come in, and we fix it and we clean it and we fix the $5 haircut. It has not been our goal or intention to make our customers angry at these economical developers because they really do serve a purpose. They help launch the site, they help get it out there. But every single customer we’ve worked with has ended up almost shaking with rage at their $5 haircut. JT: And shaking with pleasure in dealing with developers that actually know what they are doing. I’m sure you guys have all experienced that too. This isn’t unique to us. DAVE: That’s kind of disturbing visual but yeah, shaking with pleasure. And that can help back, ultimately, if you put a price out on the table, some people are going to be driven away by it. But some people, it’s going to be kind of at the top of end of their range, and those are the people you wanna put out. You don’t wanna just negotiate price, you wanna negotiate value, and explain to this people, this is what you are going to get for $135. And you know, we’d be happy to give you a list of people who hired economical developers and then hired us. JT: And we are happy to give you a list of economical developers. DAVE: Yeah we’re happy to recommend a number of $5 barbers that were used to their coding style and we like cleaning up after them. JT: We would even recommend people who are decent. Not everybody has a budget you know, legitimately for business purposes you know. When we ask what the budget is, if they say $5,000 legitimately, I received an inquiry. I want Twitter clone for $5,000. And of course they weren’t aware of all the Twitter clone scripts you can just buy in PHP online. But you know they said, yeah we can’t afford, when I told them how much it’s going to cost to get a mobile app, and a website and the service infrastructure, they were just like, “Wow, that is at least 200 times our budget.” And we say, “Great, go here and talk to this guy. Maybe he will go help you out.” It’s not to sabotage the relationship with them, you know, maybe just for business purposes, they need to do that. And honestly, part of the reason I did that was for education. This is their first time doing a technology project, and sometimes the school hard knocks the best one to teach you how to work with freelancers. ERIC: Yeah, I mean I was actually on the other side of that. Couple of years back when I was looking for an accountant, I was calling up the local CPAs, going into the high rise offices, meeting guys in suits — all that stuff. And they were talking $5,000 – $10,000 to do my tax return. And one guy basically said, “Look you work at home, you basically make like a high salary for a person. Most people you probably have been talking to, are way out of your league. Here’s the list of other CPAs that are just as qualified, but actually work with one or two people companies.” He gave me the list. I contacted one person off that, I contacted her through email then I talked to her on the phone and she’s been like my accountant for 4-5 years now. She serves the market that I need. I just need someone to do the tax stuff and give me some advice every now and then. I don’t need to track inventory, and to do lots of tax things that enterprises do. So it’s kind of the same with development, you have different services and people fill different services based on what needs to be done. DAVE: That’s awesome because I’m in the same boat with my accountant — only from another direction. Everyone I talk to that’s a one person shop, they go out and they buy Quicken, if they can’t afford QuickBooks, and then buy TurboTax because they can’t afford the H&R block. And I go back to them. I wrangled Chuck into going to my account. And everyone I talk to, I say, “You need to hire my accountant and he charges at $300.” “$300 to do your taxes? Oh my gosh! My total tax only costs $49.95.” And I’m like yeah but TurboTax is going to lose you $8,000 in tax returns that this $300 accountant will get you. And yeah it’s where JT and I were two person shop, we don’t need a $10,000 accountant. We need a $300 accountant. CHUCK: Yeah I have three words for that: Worth. Every. Penny. ERIC: And I mean the other way of looking at it is, I think I pay another thousand a year for my accountant, because she does quarterly stuff for me. Like even if I bill $100,000/hour, if she saves me ten hours, it’s a good business decision. If you’ve ever looked at taxes, you know you are going to save $10/hour per page with your file. DAVE: Oh yeah. We –not JT and I — but my wife and I recently had to create an S Corps so that we could get health insurance because LLCs can’t [unintelligible] in Utah, maybe we are oversimplifying it, but we couldn’t get one. S Corps have so much more paperwork. You have to file employee with Utah work force services that you are an equal opportunity employer, and you have to file monthly reports and quarterly report. I mean there’s so much paperwork. And this $300/year accountant said, you know, for $100 a month, I will file all those reports. And we’re like, “Yes, please!” And yeah. Like Chuck said, worth every penny. CHUCK: Yeah so one other thing that I wanna get into with setting your rate, we kind of went off on a tangent there. I think it’s a good advice but I kind of wanna get back to the topic. How do you go about setting a rate for a fixed-bid project? We’ve talked about whether or not to take them, but how do you set the rate for that? DAVE: Actually Chuck, before we jump into that, I just realized there is a nice closing seg to that negotiating rate. I just realized that we have one client that’s paying us a retainer base and he has not said the words “worth every penny,” but he’s expressed amazement and astonishment at the quality of the quality of work that he’s getting for the money that he’s paying. So that should be your guiding role; whatever you negotiate, you just want your clients to squeal of joy and say, “This guy is worth every penny,” whatever your rate. If you are charging $35/hour, if you are charging $235, you want your client to say, “Worth every penny.” And if you are, then you are able to get repeat business and you are going to get referral business and you will do very, very well. Okay, fixed bid. We’re not letting Jeff talk. Is he still connected? JEFF: I am still connected. DAVE: Okay, we’re just talking over you. JEFF: Yeah no. I’m heavily setting back and absorbing it all. There are so many points that I want to comment on, but they are like 40 minutes ago, so. We’ll just keep going. [Laughter] DAVE: Chuck should warned you. On the Ruby Rouges Podcast, there are episodes… in fact if you listen to the episode going up tomorrow, there is a spot where I jump in for about the 15th time, and one of the other panelists just goes [sighs] because I jumped in over him for like the 15th time. JEFF: That’s cool. CHUCK: Yeah, so fixed bids. How do you determine the price for those? JEFF: Guess and multiply by a big number. [Laughter] ERIC: I kind of talk about how I did it when we did the episode on fixed bids but, you estimate the work, and you add some padding, and I just times it with my normal rate. And then whatever it ends up at, I kind of make it more rounder. So if it’s like $4875, I might round that to $5000 or so. Nothing really complex to it, I mean you don’t wanna over analyse this. If you spend 10 hours writing proposal to get the perfect price, and they decline it, that’s a waste of time. DAVE: If I have to spend 10 hours estimating for a fixed bid, then the very first thing that I give my client is a proposal that says, for $1,350, I will spend 10 hours giving you a fixed estimate. You will pay me to guestimate. If you want a fixed bid, then here’s the first fixed bid. It’s going to cost you this much money for me to give me you an estimate. That tends to weed out a lot of people, there’s… I already talked too much in this episode, but find out why people want a fixed bid. It’s usually because they’ve been burned or they have a lot of fear about the project completing. If you don’t address the underlying issues then why they have that fear, that fear will actually grow and magnify as the project goes along, and it will represent itself in like scope creep and they’ll say, “Well, I want a fixed bid.” And then you get into it and you deliver exactly what you bid, but the project doesn’t work because they overlooked something. And I said I was going to shut up, so I’m going to shut up. JT: One of the things that I’ve done in the past with fixed bids specifically is pretty much what you guys have talked about. You estimate the project. I like to use the PERT methodology, where you do essentially this three estimates, where if it goes, everything goes according to the plan. If everything goes way, way wonky on the plan, and then just kind of just middle the road. I actually have adapted the PERT methodology to be a little bit more weighted towards my experience, but then if the client wants fixed bid, I pad it with anywhere from 30-60% extra,. And that coefficient comes from their experience and my level of trust that they will stick to no scope creep, etc. and how good their specs are coming into the project. Because you have clients –and I’m sure you guys have all experienced this– where you have a client that gives you the spec, and it’s just this list of stuff in base camp, like, “I want these and these features.” But in their mind, they expect something to work. They don’t wanna have to outline every little feature. So I take that into a coefficient. I take that into effect. I account for that with some sort of coefficient. How likely is this project to go over? And then I multiply it by that. And so coming up with that number I think is, kind like shower revelation of yeah, I think I should probably do it about this, about this level but that is typically how I charge for fixed price project. CHUCK: Alright. We’re almost out of time. I do wanna ask one more question, and that is about retainer rates. Because you know, JT mentioned retainer rates. So how do you set a rate say it’s a monthly retainer for say x amount of hours, or x amount of work every month? How do you structure that? DAVE: It’s just a straight up negotiation. I mean the retainer basically represents reduction in risk, and for us, which we’re willing to put money back on the table, you know, give money back to the client as a result. The more risk you wanna take off the table for me, the more the discount I’m willing to give you. JT: We do have a price sheet. We can produce that, so you can put it up on the show notes if you are interested. CHUCK: Yeah, just send me a link if that is something people can look at or download. JT: Sure. CHUCK: Alright. We are out of time. I actually had to get off this call within the next, like, ten minutes. So we’ll do the picks and then we’ll wrap this up. Let’s start with Eric. Eric what are your picks? ERIC: Okay so, my picks today is actually going to be this before I even knew the topic, Shane Perlman who is actually one of my clients, I’ve worked with him for.., I can try and remember the day at least 3 or 4 years straight. He has a post on his company’s blog that is actually called “What Should I Charge?” He basically hires freelancers, and use them as subcontractors for bigger clients. And so during I guess International Freelancers Day this last 2011, he did a presentation about how you should pick your price and what to look at and all that, really useful. He has a couple of links to some of those other stuff he’s written on the blog about setting prices, and what you need to account for in rate and business expenses. So I really recommend if you are still trying to figure out your rate and you don’t know industry stuff, watch his video, go through some of that stuff. And you could probably email and ask him too. He has pretty good pulse on the market, because they go through a lot of projects, a lot of contractors, a lot of different things. CHUCK: Alright. Sounds good. Jeff, what are your picks? JEFF: Well that was one of mine. That was in Freelancing Weekly. I’m hoping that’s where you got it from. The other one is “500 Words Before 8am”. It’s a comment on Reddit and then an article by Clay Johnson And basically he’s saying you shape your day by how you start it. So if you start consuming email or in a consumption mode, then you spend the rest of your day in consumption mode, and you don’t get a lot done. But if you start the day off as a producer — in this context, I try to write 500 words before 8AM — then you will be amazed by how much stuff you’ve accomplished at the end of the day, because you start out as producing instead of the consumer. It’s a really interesting read. CHUCK: Yeah, I like that idea. How many of you guys are actually awake before 8am? JEFF: I am. Well before 8:00. ERIC: Define ‘awake’. DAVE: Charles had a great summary of that article and basically said, “This sound suspiciously like take a dump before you eat breakfast.” CHUCK: Oh geez. JT: I didn’t see that. DAVE: It’s my job to report things like this to your listeners. I take my job seriously. CHUCK: Yeah Dave is our resident poop joke expert. Speaking of which, Dave what are your picks? DAVE: My picks are about negotiating. The first one is how to make a $1000/minute. It’s called “Negotiating Your Salary: How to Make a $1000 a Minute” by Jack Chapman. It’s very, very true for anybody that’s working at a W2 job listening to this podcast, because they want to go freelance and they just don’t dare to. This is a fantastic book for how to negotiate a raise, or how to negotiate salary with your next employee or employer. But as a contractor, it’s absolutely essential because you are negotiating your salary every time you meet with a new client. It’s a fantastic book. Go to YouTube and Google for “Jack Chapman” and you’ll find a whole bunch of like video tips from him. He gives a video demonstration of how to do the flinch, which is when the customer says, “We were thinking about paying you $125/hour.” And what you do is you look away, and kind of flinch, and you don’t say anything. And it establishes I’m about to negotiate you upward and gives you emotional leverage to do it. The second book, — I’ll dig up the author for the show links — but the book is titled “How to Out Negotiate Anyone — Even a Used Car Salesman”. And it’s a brilliant breakdown for the lay person of high thinking, negotiation strategy, which basically boils down to knowing when to walk away, having a best alternative to negotiated agreement. And especially, that’s where I got that concept of number low enough that you won’t kick yourself, and number high enough that you won’t kick yourself. The last pick is just a tip that came out of one of either of those two books or out of neither of those two books. And that is, “Never negotiate with yourself.” It’s not a book, it’s just the last little tip that I’ll give about negotiating. If you go in and you wanna ask for $135/hour, and you sit down and the guy sitting across from you is ex-military and has a butch haircut, and is really aggressive and he says, “So what’s your rate, kid?” You do not offer $115. You do not take $20 off your price because you’re afraid to ask for… never negotiate with yourself. Ask for what you want and let them negotiate. Let them do their negotiating for themselves. CHUCK: Yeah some of those ex-military guys are kind of intimidating, aren’t they Jeff? DAVE: They are intimidating. CHUCK: Alright JT, what are your picks? JT: So I’ve got two quick picks. One, it’s an oldie but goodie, it’s “How to Make Friends and Influence People”. And it sounds really cheesy title if you haven’t read it yet. It’s from Dale Carnegie and he wrote it in kind of the 20’s. DAVE: HOW to Win Friends? JT: How to Win Friends. Yeah. But essentially, the take away I believe for setting you rate specifically is talk about the value and put yourself in the shoes of the person that you are negotiating with, and how can you present your value to them in ways that makes them not want to flinch. And the other book is severely tactical. It’s “Power Sales Negotiation” I forget the author, we’ll give it to you on the show notes. DAVE: Probably Roger Dawson, given the title of that. JT: Possibly. Essentially what it is, it’s the most jerky slimy list of sales tactics and how to counter them. DAVE: Definitely Roger Dawson. JT: Not that you would use them, but so that you can be aware of them. So you know like, I swore after reading that book, that I would never use them because they are so slimy. DAVE: Can you give me an example? JT: The flinching is a great one. I’ve never flinched in negotiation, but I recognize when people do. And I call them on the flinch and I say “Great flinch.” And it really puts people off guard. If you know that they have a system that they are trying to manipulate you with, and you’re in that system but you refuse to do so, it gives you incredible leveraging power. DAVE: Yeah, it is Roger Dawson. He is one manipulative s.o.b. JT: Yeah so I would encourage people not to use it, but to be aware of it. Understand the strength of the dark side of the force, but stay on the light side. CHUCK: Yup. Alright so I have a couple of picks. The first one is Evernote. And this is something that I hadn’t used for a while, and I actually used it this morning. I have a work out sheet from my trainer because I’m doing a weight loss contest, so they have assigned me a trainer. Anyway, I didn’t wanna take the paper to the gym because I have these overhead fans that blow the paper away, and so I actually use Evernote. And since I was taking my iPod with me anyway, because I was going to wear it as I lifted weights, basically I just put it into Evernote and installed the Evernote app on my iPod, and then connected to the Wi-Fi at the gym. And lo and behold, it worked terrific. So I could actually just follow the work out off of my iPod. And so I just pull it up and look at it. I don’t have great picks for negotiating rate, but one other thing that I wanna pick is just collaborating with peers, talking to people who have experience. And the reason is because like I said when I first got into this, I had talked to a few people at… it was at Ruby Web Conference a couple of year ago. I started asking about it, and then I got laid off a month later and actually we needed to use it. I was asking about freelancing, but… DAVE: Chuck, you got laid off 3 days after you were at the Ruby Web Conference. CHUCK: Was it three days? DAVE: Yeah. I was there. CHUCK: [Chuckles] You were there. DAVE: Yeah, I got laid off in the same place at the same time. CHUCK: Yeah. Well you got laid off the day later because you were like not at work that day. DAVE: That’s true. I got an extra day of employment, because I missed the meeting where I got fired. CHUCK: Yeah. They called us in and they were like, “Yeah, so we are letting you guys go. And we are letting Dave go whenever he gets here.” [Laughter] DAVE: I still don’t know why they fired me. CHUCK: Because they didn’t have money to pay you. DAVE: Some crap about attendance. I don’t know. CHUCK: Yeah, we won’t get into that. Suffice it to say that somebody was spending more money than the company had, and they decided to let the more expensive people go instead of the least experienced people go. DAVE: And/or the person who was spending all the money. CHUCK: Yeah. But anyway, the talk at Ruby Web Conference kind of opened the door with Evan, so that he’s willing to introduce me around with Eric and Jeff and some other guys that I tend to ask advice of every so often. And it really paid off for me; it really prompted me to do some things differently — including raising my rate. It’s something that came up during the show, but it really is true. Be talking to people; find out what’s going on, find out what people are thinking about. And you can usually get a pretty good idea of what people are charging or what you should be charging even if people aren’t coming up and saying, “I’m billing this amount or that amount.” One other thing that came out of that group that I really wanna bring up was that at the beginning of the year or at the end of last year, I was thinking about raising my rates because I have a ton of work coming in, I couldn’t figure out which ones to keep and which ones not to. And it seemed like raising my rates was probably a good idea just so that some people would just self-select, and not spend my time trying to figure out what they needed if I wasn’t going to be able to take the work. And so I think it was Eric that recommended it. But he basically said, “With your clients, including your current clients, just let them know, on this date, I’m raising my rate to this amount.” It’s funny because most people don’t think about, “Oh, this is just one freelancer who obviously can raise his rates or not raise his rates when you want, so I can actually negotiate,” well can you not raise it for a few weeks so that I can get the lower rate? or things like that. Most people aren’t thinking about that. So when you tell them, “This is the price starting this date, most people, they kind of just go with it.” And that was some terrific advice that I got there. And it actually worked out well because I had one client that I went to and said that, and he kind of said, “Well, we don’t wanna pay more but we will.” And you know, that was about it, because they are happy to keep paying me. They want me to keep working on their application. They are thrilled with what I get done and the speed of which I get it done. But you know obviously, they don’t wanna pay more if they don’t have to. And so that was really the only response that I got. And everybody else was like, “Okay.” And so, it really is having this mind share that really pays off in a lot of ways. So, with that I am over my time and I have to get off. So we’ll wrap this up really quickly. Thanks to Dave and JT for filling in for Evan. DAVE: Happy to be here. I’m confident we did not fill his shoes adequately, but we are happy to be here. CHUCK: Yeah. And a few other things, we are in iTunes. So go to iTunes. You can just do a search on Ruby Freelancers, we will come up. And leave us a review, leave us a rating. Five star ratings are appreciated, but rate us where you think we’re at. And one other thing that I just wanna let folks know is that I have been working on a membership site where you can actually can collaborate with other freelancers, get feedback. I’m going to put some videos up on different tools and things that you can use and stuff like that. And I wanna let you know that I’m going to be launching that by the end of the month. So if you want to get information on that, go to the website, there is a place to sign up. Just put your email address in, and I’ll be putting out announcements as I get this going. It’s really something that I was wishing I had before I linked up with Eric and these guys — Eric and Jeff and Evan. But you know, I wanna make it easy for people to find so. Anyway, go ahead and go to rubyfreelancers.com, and set that up. Also, I wanna give a quick second to Dave and JT to let folks know where to find them at Slide Rule Labs. JT: dot com. DAVE: Sliderulelabs.com CHUCK: Alright and Eric if people wanna hire you, where do they find you? ERIC: Littlestreamsoftware.com CHUCK: Alright, and Jeff? JEFF: Aissaclabs.com. There’s a lot of confusion about how to pronounce it. DAVE: You need a new domain name? JEFF: I know. I changed it already. DAVE: I’ll talk with you offline. JEFF: Field dressing a buffalo? [Laughter] DAVE: My first business name is Shellane Software and nobody could spell it if they heard it. JEFF: My first was The Q. DAVE: Oh that’s worse. JEFF: Yes. I’m going to change it to AgileItem. But that’s even worse. Naming sucks. And Chuck’s got to go. DAVE: Yes, you need to have a name that if they see it, they can pronounce it. And more importantly, if they hear it, they can type it into a web browser. JEFF: Yeah. I know. CHUCK: All right. Well, let’s wrap this up. Thanks everyone for listening. We’ll catch you next week.