Meet Jonathan Stark
In episode 160, consultant Jonathan Stark tells us why hourly billing is nuts. Jonathan Stark built a six figure solo consultancy by ditching hourly billing for value-based fees. He has a decade of real-world experience successfully applying value-based theories to software development projects. With his coaching program, he teaches freelancers, solo consultants, and boutique firm owners how to do the same.
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Jonathan Stark Makes the Case for Value Pricing
One of the biggest debates in the world of web development is whether to bill hourly or using value based pricing. While most agencies use an hourly model, Jonathan advocates for value based pricing for project work. There’s a multitude of reasons why hourly billing puts clients and service providers at cross purposes.
Jonathan Stark’s belief is that hourly billing encourages aimlessness, because the service provider is penalized for efficiency in an hourly model. In hourly billing, the thing that is being purchased is time, not a business outcome.
John brought up that many people misunderstand value pricing as trying to charge as much as you possibly can. Jonathan says that people feel guilt if they are profitable, and that hourly projects are not centered around business outcomes, but effort.
An important thing to understand is that the value of a project is going to be different for every client. You cannot charge the same amount to a small business as you would for a multi-million dollar business. This is the thing that people misconstrue — value pricing cuts both ways.
Leading up to a Value Based Project
One intriguing thing that Jonathan brings up is that in the initial conversation, you actually try to talk to client out of doing work with you by using investigative questioning. By digging deep into what their needs are, you actually discover what the value of the project is to them.
Value pricing is the opposite of pulling an estimate of cost and hours from thin air. Software projects are notoriously inaccurate with estimating hours. Most web development projects go over the initial estimate of hours. Jonathan states that value based pricing is the only way to guarantee 100% customer satisfaction.
When an hourly project goes over the original estimate, the client tries to micromanage the project to get it back on track, so they can save money, making everyone unhappy. John also adds that doing Socratic questioning and discovery in an hourly model becomes a source of resentment from the client. The client will question every minute you spend diagnosing their problem, and wonder why you aren’t simply doing what they tell you to do.
Jonathan adds in a hourly project, many clients see you as a voice-controlled mouse, and if you cannot have a value conversation at the onset of a project, then that is a client you should not take on.
Why Hourly Billing Remains Popular
John asks Jonathan why do so many agencies and freelancers default to hourly billing?
Jonathan says many people don’t realize there are options besides an hourly rate. Most us take clues from what everyone else is doing. He says skills do not necessarily have a correlation to business outcomes. The majority of agencies and consultants use a fixed bid in a cost-pus model. This means they start with estimating hours, plus time and materials, plus a little padding. If their estimate is wrong, then their margin disappears. This is why most people do not do fixed bids or value pricing. They get burned once and don’t try again.
One question that Jonathan gets asked a lot is how to remain profitable using value pricing? He says you look for high-value projects where you can add a lot of value to a client, and you throw the rest away. Essentially, he is saying to not bother with low-quality prospects (because the value price for those projects will be extremely low).
Transitioning into Value Pricing
John asks what is the best way to transition into value pricing from hourly billing?
Jonathan says you have to change a lot of systems, so it is a gradual process. He says the first step is to stop trading time for money, but not jump straight to value pricing.
One way to start the transition is to do everything the way you normally would, and make one change to your proposal. Whatever your estimate is, multiply that by 85%, and offer the 1.85x option as a fixed cost option.
The first price is an estimate, meaning it can go over. Let the client know your level of confidence with this number. Add the option to select the guaranteed 1.85x price as a fixed price.
He says many clients will choose the 1.85x options, because they have the relief that the number will not go up later. Jonathan says many agencies will worry that the 185x number will still leave them underwater. He says if you don’t have confidence in your 1.85x of your original estimate, then maybe your original estimate is inaccurate.
The risk is put on the service provider, not the client, so making your price something you would be comfortable with as a fixed price will improve your estimates.
Paid Discovery and Retainers
WP-Tonic’s Jonathan asked about productized consulting and retainers.
Jonathan Stark said paid discovery is a good way to try out productized consulting, but it would be better to call it roadmapping.
There is a great value in diagnosing a problem. If the client wants to take the diagnosis and have someone else implement the prescription, that is okay.
If you present paid discovery to the right client, they will jump at the chance to have it. If a business is not mature, they will not see the value in it, because they do not have a solid revenue stream. The more roadmapping you do, the more efficient you can make the process. Efficiency is something you never think about when charging hourly.
Jonathan Stark said retainers were a loaded word. Many people think of retainers as different things. Some people think they are prepaid hours, but he says it should be for access to your knowledge, not your hands. Retainers can be more of an impartial advisory role, instead of a workmanship role. The reason is, if you make a retainer about work, you will be pawned off to working with junior developers and interns. That is low value work that anyone can do. Leveraging your knowledge is important.
If you are selling your hands, and not your brain, you will never break $100k to $150k annually, even for the most in-demand developers. Typing semicolons all day, every day should not be your end goal if you want to be a high-value consultant.
Specialization and Marketing
Positioning yourself as an expert is where the money is. Don’t sell your hands, sell your intellect. It is infinitely more valuable to be a recognized expert among your buyers than to be an expert among your peers. It is also much easier.
You have to find at least one thing you are good at. Not something you are BS-ing people about — you ahve to be genuinely good. But if you are in a roomful of marketing people, if you are the only WordPress person, you become the expert in that room. Expertise is relative to the crowd you are in.
John asked how you should choose a specialty. Jonathan said there will always be resistance from your lizard brain to focusing down on a vertical or skill. Your brain will tell you that you will lose clients, but specialization is the true key to being picked out of the crowd of service providers. Jonathan said choosing a vertical is better than picking a skill, but you have to be able to state your value proposition.
What do you offer your target market? How are you different from everyone else you are competing against? Most people don’t know who their competition is, because they are not tightly defined.
There was a lot to learn in this hour, especially if you are a consultant or agency owner trying to position yourself. What do you think about hourly billing versus value based pricing? Let us know in the comments below.
Transcript of the Show[faq p=9026]