Making Money: The Caveats of Different Project Pricing Models
In my previous article, I introduced you to 4 different pricing models: Flat Rate, Hourly Rate, Blocks of Hours, and Retainer. Each has its benefits and can help you to build your business, but each also has its potential drawbacks.
Flat Rate Projects
When you quote a flat rate project, you don't know anything about what you don't know. Seems obvious, right? If you think this issue doesn't apply to you, you are truly amazing, and you can stop reading. For everyone else:
- You don't know when the project starts. Does it start when you have your first meeting? First phone call? Should we be doing something next Tuesday to move this project forward? Oops... we are six weeks from the delivery date we put on the invoice. No code yet.
- You don't know how far along you are. Are you halfway done? 90%? The only done that matters to your customer is 100% done. When will THAT happen?
- You don't know when you're done. You deployed it. They haven't changed their DNS yet, but that's their IT problem, right? They haven't said it isn't done... are we done yet?
There's a solution to all these problems, and it's called Project Management. You need to have a process to keep both your team and your customer's team on track, and you need to have ** sign-off** on each step or milestone. There are software packages that help with this, both from a time-tracking and issue-tracking perspective. Jira is a top-rated tool, and I've read good things about Notion, too.
The more effective you can become with flat-rate projects, the more scalable your business can become. By improving your project management processes and tools, you can offer better timelines to your customers at better rates than your competitors.
Get the sign-off on a warranty period. When the period is over, inform your customer. Getting that sign-off solves many, many problems on down the road, and it forces you to be a better vendor.
Hourly Rate Projects
Hourly rate projects may seem like a solution to all your cash flow problems, but they come with a lot of very real caveats. If you are selling hourly rate work, you need to establish genuine trust with your clients. You need to be able to show them how you are spending that time to get their work done. Your invoices need to be ultra-clear, and they need to align with what the customer is expecting. The last thing you want to do is haggle with your customer after the fact for work you've already done.
Your customers will almost always expect you to have spent less time on the project than you did. That's a fact. You need to be ultra-accountable for time spent.
Also, some customers simply don't pay their vendors. Those customers are the ones you should stop doing work for right now. You aren't doing your business any favors by taking work that's too good to be true. Get a signed contract, and use the pre-project negotiations to judge if you are going to have a long-term, mutually beneficial relationship with this customer.
Block of Hours Projects
Block of Hours projects are really neat. They provide you with a reliable cash flow model and gives your team much flexibility to provide ongoing to support to your customers. Typically, if you are selling blocks of hours to your customers, you've already delivered one or more successful projects to them. Now don't screw it up!
Beware of unearned revenue! Depending on how you do your accounting, you have to book this revenue a little differently than usual, since you haven't done the work yet. That also means you really shouldn't spend this money, either. Not until you've done the work. It's an extra complication in your business.
In addition, blocks of hours are often sold by your Account Management team, or even your Project Management team - not just by Sales. They tend to be used as a way to get extra features into a project. This can lead to big problems.
- Projects can become bloated with features that were never intended to be included. Avoid this! Take a phased approach and roll-up features into a more substantial release, then use blocks of hours to fund the smaller Sprints required to get them done. The key here is to do the upfront planning with your architects.
- You can burn through the hours fixing issues the customer thought you should have done for free. See above regarding warranty sign-off. You need to balance your customer expectations correctly.
- You sold one block of hours at a deep discount and now they want that all the time. Here's an easy rule: never let present-day discounts exceed what you intend future discounts to be. If you screw up and need to do some work for free, do it for free. Fix the problems (externally, and then internally) and move on.
I don't like retainers. They seem like something a consulting firm should use, and I feel like we should be a vendor, not a consultant. Nor are we a law firm. We build things, and those things cost money. Figure out how much value to attach to what you build, then charge your customer that amount. Retainer agreements seem like a way to charge your customer a somewhat indiscriminate amount of money to make them feel like they are being served. Real customer service has evolved way past this.
You're still with me! Nice job!
We've reviewed some of the caveats for four different project pricing types. I'm sure you'll come up with more as you continue to find success in this industry.
Please let me know if you have anything to add, or if you want to share any fantastic tools or processes you've come up with to help grow your business.