Fixed Pricing: A Guide To Surviving Everyday Requests

We price all of our services based on a flat fee.

We have no hourly rates or lame estimates of “we think it will be xx to yy ” hours. We’ve not used hourly billing in well over two years. To that I say good riddance.

Hourly billing is a pain-in-the-ass.

Some consultants use hourly rates as a crutch when they don’t know what they’re doing or don’t want to stop to define a project. Rather  than stopping to understand a request – or determine if a request is feasible – some consultants dive in and “run the meter” as they learn and experiment (it transfers all the risk to the customer).

Some unscrupulous customers use hourly billing as a crutch when they don’t know what they want (it transfers risk to the consultant because those customers refuse to pay when – after-the-fact – they deem the hours ‘too high’ for such ‘easy’ work).

Customers pay consultants to solve problems

I believe those problems have four major steps

1. Define
2. Test
3. Implement (aka ‘The Work’)
4. Followup

Customers want to pay for only step #3 (‘The Work’)

The disconnect between hourly billing and fixed pricing is that most consultants transitioning to fixed pricing don’t consider steps 1,2,4 when they determine their price.

Consultants must take into consideration steps 1-4 when developing a price.

If the customer doesn’t want to pay for anything but step #3, how do you provide an overall quote for the project without meeting (for free) and providing consulting services in the form of opinions and recommendations about their project?

Even if your recommendation is not to undertake a project – or greatly modify the scope –  that recommendation is based on years of consulting experience, has value and should be priced.

One of  the most dangerous types of projects is where the customer has self-diagnosed and hires a consultant to “do the work”.

The most difficult part of fixed pricing is dealing with everyday requests

– Can you create a ‘simple’ report for us
– Can you come out on-site to meet with our group (this usually means 15 customer staff in a conference room, bright lights in your eyes and rapid fire technical questions)
– What’s an upgrade cost?

Usually ‘everyday’ requests are vague and it’s difficult to price them until there’s an understanding of what the customer is requesting.

After struggling with everyday requests for some time – here’s how I found pricing the ‘simple’ or everyday request works best for me:

Develop a Menu of Prices for Common Projects aka Price List

A good price list shows the everyday type of ‘projects’ ( see my example that I’ve previously posted) that a customer or prospect may request.

Examples:
-Create a report
-Come have an initial on-site meeting
-Assist with importing or exporting some data

This price list is only for the initial exploratory discussion (pre-qualifying). Once I’ve met with the customer then I’ll deliver a more complete and detailed pricing proposal.

For common requests my pricing list has two columns

A. Price for those on MY access agreement
B. Price for those NOT on MY access agreement (Usually 50-100% higher than (A)

* Access Agreement = support or knowledge transfer agreement that the customer has with ME (do not confuse with software publisher maintenance agreement)

The price for those not on our access agreement is higher than for customers who regularly use our consulting services. I feel this is easily justified because I am already familiar with the customers who I work with every day.

Those on ‘Plan B’ are often users who’ve found our web site via a Google search and are primarily looking for a third bid to compare to an existing quote from a preferred provider. They generally have only a fair idea of the scope of their issue which they’ve mis-diagnosed as something extremely a) simple b) quick and they don’t C) need a consultant.

Knowing what I’ve charged other customers for similar work – it makes sense I should be able to provide a customer an up-front idea of what the cost will typically ‘start at’ – without having to spend time in a meeting (that the customer does not want to pay for) unless they FIRST know the approximate cost of the project falls within their budget.

A price list gives me a very quick way to quote (pre-qualify really) the starts at cost for a project similar to what the customer has described.

At this point one of two things happen

1. The customer says no thanks
2. The customer says lets talk (at which point I break the pricing out to a separate fee for the cost to scope or define the project – for a Crystal Report I may charge $200 initially to talk about the structure and requirements)

TIP: The key here is that your price must include all four stages of solving the problem – not just the solution. Don’t make the mistake of fixed pricing only “THE WORK”. You must price in estimated meeting, testing, followup, project management.

TIP: ALWAYS quote the project in this way – “A similar project to create a Crystal Report typically WILL START AT $ x”

TIP: Always Always Always use the phrase ‘starts at’. Once you name a firm number there is a very high likelihood of ‘hidden requests’ to change the project.

And, yes, if you have a ‘starts at’ fee of $1,000 for a Crystal Report – you’re going to price many customers out of the range of your services. This is called self-qualifying and it saves both you and the customer the time of meeting only to decide that there’s no value assigned to solving the problem.

Until you have a specific project plan – you cannot give a specific price.

A vague project plan = vague (starts at) price.

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Comments

  1. I like this article. You hit the nail on the head. I stopped billing hourly for projects years ago, although we do still bill hourly for some things. It is on a case-by-case basis and it depends on what it is.

    I agree with your comments; remember to factor all the steps of the project lifecycle. However, we must use common sense and be flexible when it is warranted.

    We recently landed a project in which their old custom solution no longer worked. It was a total black box. In this case, the bid amount was fairly high, but it included the definition, the architecting, development and so on. We did not think we were going to get it, but if you do not factor these in, your per hour rate goes down dramatically.

  2. Great long weekend reading Wayne and all our consultants now read your blog religiously.

    You should write a book on this topic as we all seem to talk to the same prospects and if more of us used your techniques they might stop the “madness”, as we call it @cazoomi, each day we hear these crazy assumptions on the phone.

    ~Clint
    @cazoomi