How to Make Your Money Before The Project Even Starts
Discovering value upfront is critical to aligning with customers
Most of us started the same way — selling our time for an hourly rate. Yet it created some ugly behaviors almost immediately, like:
- Our clients second-guessing our motives and scrutinizing our hours
- We started looking at every non-billed hour as a lost opportunity
- And, as our productivity improved, our rates couldn’t keep pace so we either made less money or inflated hours to maintain or grow revenue
I’m ashamed to say I inflated hours earlier in my career. It felt gross but I justified it given my results were “valuable”. That’s when I discovered selling time was a losing game and set out to find a better system.
Any system that incentivizes you to work against your clients, is broken. It breeds zero-sum thinking and everyone involved loses in the long run.
What should you do first to maximize your price?
With any negotiation, you have the most leverage before you commit to a specific outcome. Pricing should always be negotiated.
I’m not talking about hourly rates here — those are now dead to you. Instead, you’re pricing the project. You need to be focused on the outcome the project will produce when successful. The value your customer will receive.
- Will it lead to more revenue for your client?
- Or, will it lead to more profit, by reducing costs?
Pricing is not about your effort. Costing is about your effort and clients don’t care about that. That’s your issue, not theirs. Cost should only affect your price when you would lose money.
Any system that incentivizes you to work against your clients, is broken. It breeds zero-sum thinking and everyone involved loses in the long run.
A fake yet helpful example
If your customer stands to save $1,000,000 over the next 5 years as a result of the outcome you produce, would a price of $200k be out of line?
They would break-even after 1 year and see a net cost savings of $800k when all said and done. That sounds like a better outcome than time-and-material agreements or an arbitrary, fixed price. Everyone benefits.
Value-pricing is the most moral way to price.
Especially, if you consider the effort to produce the result would take a 2-person team roughly 3 weeks. At a rate of $200 per hour and assuming 40-hour workweeks, you’re looking at 240 hours or $48k in revenue.
What if you double that as a fixed price? Even at $96k, you’re still at less than half of what you could reasonably negotiate when you start by leveraging the perceived value to be created.
Notice how cost never entered my fictional pricing exercise? Looking at the $200 hourly rate, you can imply that the cost per hour is 2–3x less given the general rule of thumb around margin and utilization.
The only time you should consider cost is when the effort is massive and your margin is uncertain. Assuming the average hourly cost for each person is $100 (half the billable rate), you’d need to burn 2,000 hours before you’d lose money with a price of $200k.
Is this predatory pricing? Not at all. You started with value. Your customer knows what the successful outcome will achieve for them. And they know your price upfront, so they can see a clear return.
If anything, value-pricing is the most moral way to price.
But money is only one form of pricing
Your goal is equitable compensation. Your knowledge and skills are valuable. Whether your effort is 4 hours or 400, if the outcome produces the same impact for your client, the price should be the same. It should be based on the value perceived by your client. Period.
Where you have flexibility is in what you accept as equitable compensation. Money is just one form. There are many other ways for clients to benefit your business so always keep them in mind while negotiating.
I’ll get you started on thinking about money alternatives with 5 potential levers below. These are on my shortlist.
1) Who owns the intellectual property (IP)?
I’ve previously written about the dangers of “work made for hire”. When you don’t own what you create, you’ll have to reinvent the wheel on all future projects when a similar solution would have worked there as well.
As a baseline, I assume that ownership will be mine when negotiating. If the client insists on owning the IP, the value increases and so does my price.
2) Will the client sing your praises (e.g. testimonials)?
This is social proof. It tells other potential clients that you’re capable, credible, and can be trusted. When a client agrees to associate with you, they are offering a stamp of approval on your business. There can be a ton of value in that.
Testimonials can come in all shapes and sizes. The most common is a short 1–2 sentence statement exclaiming your virtues and the benefits of your business. You see these all the time on websites, marketing collateral, and far too many other places for me be to comprehensive here.
I also like video because it allows emotion to be seen as well as heard. When well-produced, these can be leveraged in a number of ways. Plus, you can pull soundbites from the videos and use them as short testimonials as I called about above.
There is a ton of potential here. You get the point.
3) Can you use your client’s name in marketing material?
Here is another golden opportunity. Most clients, by default, explicitly deny using their brand associated with your business. This can be a huge value when the client has a strong brand and signals to potential clients that if you can meet the needs of a similar company, you are likely a great fit for them as well. It at least triggers awareness and curiosity.
This can go hand-in-hand with testimonials as well. Co-branded marketing where you place their logo in close proximity to yours or case studies where you can explicitly name the client rather than being restricted to merely describing the industry they represent, make for some value evergreen content.
4) Does the project establish more credibility for your business?
Not unlike the last two examples, a potential client that stretches your team to new heights can be hugely valuable as well. There can be long-term value in accepting a lower price for winning an initial project in an area where you have not yet established credibility.
Your team gets the exposure they need to become more valuable for future client projects and your client may also receive a larger monetary reward in future revenues or reduced expenses.
5) Will the project pave the way for larger follow-on business?
There is value in strategically lowering your price when successfully achieving the first outcome will open the door for much more future work with that same client.
I’ve done this with high-value assessment and analysis engagements. Based on what is discovered and clarified, more work often follows to capitalize on those initial discoveries.
What if you don’t know what you’re creating?
Houston, we have a problem. And this is where most software services firms fall down early on. They don’t explicitly define the outcome. The scope is fuzzy and requirements are often sidestepped.
Or, more aptly, they don’t get specific about what is included and necessary to create the valuable, future outcome for their client. Or, even more likely, no one is sure what the goal is or should be. Everyone just started running before a destination was defined.
You likely got away with this by billing hourly. As long as the emphasis was on the effort, both you and the client lost focus on the outcome. You can’t chase both at the same time.
Time-and-materials (T&M) is an inherently broken system. Your client is trained to scrutinize hours, while you strive to maximize them. That creates a massive misalignment and incentivizes the wrong behavior. No wonder there is so much frustration in the typical “client services” relationship.
If upside-down, inside-out incentives weren’t enough, T&M is cost-based. This means your revenue is anchored, instead of elevated like value-pricing. You’ll always be trading time for revenue. That feels like a hamster wheel to me.
You can’t run from tough conversations
For value pricing to work, the scope must be defined. That means getting on the same page right from the start. This is where you must lead.
Clients come to you for expertise — you do this every day, they do not.
When you set expectations early on, it allows everyone to make clear choices and discover trade-offs that will impact the outcome. This directly influences the perceived value for your client.
You can’t define value without first understanding the goal. And the value will lead you towards your price. Without this step, you’re running blind and no one will be truly happy at the end of the day.
Clients that can’t or won’t share business impact — financial or operational — are ones that should make you nervous. The relationship you’re building with a client should be viewed as a partnership. You win when they win and vice versa — you’re incentivized to produce a valuable outcome.
If they see you as an interchangeable “pair of hands”, you need to ask yourself some tough questions:
- Was it your fault for that perception issue? Did you not lead with value and demonstrate expertise and competency right out of the gate?
- Or, are they just a bad fit?
If you caused the issue, you may be able to fix it, but you’re now facing an uphill battle. Changing their perception will be incredibly hard. You’ll have to decide if the reward is sweet enough or just cut your losses and strive never to repeat the same mistakes for your next potential client.
However, if the potential client is just a big bully, walk away. They will be a bad fit long-term and you’ll always be trading time for money or fighting scope creep and a group of people never quite happy with whatever you manage to produce.
Let someone else fall on that sword. Life is too short.
What does this all mean?
When you focus on the outcome first, everything else will align. Value can be defined, scope negotiated, and pricing can be devised based on a percentage of the value to be created.
Value is either additional revenue or cost savings for your client. If they are unwilling to share the financial impact, you’re likely dealing with a business that won’t value your results. Life is too short for that — find clients that get excited about the upside and want to incentive you accordingly.
Pricing based on value is the most moral way to price. Everyone is aligned on what should be achieved and equitable compensation is a function of that valuable outcome. You either win together or fail together.
Once you separate your revenue from your effort, you begin to elevate your potential instead of anchoring it to your costs. This allows you to discover a path towards decoupling revenue from headcount. That’s the first step towards scaling your software services business.
Casey is the founder of Fullstride, an advisory firm for mid-sized businesses pursuing their first Warehouse Management System (WMS).
