Doing the Calculus

November 9, 2010 — Leave a comment

How do you  compute a fixed cost that is sure to be profitable?  I should start by admitting that everyone takes a loss at some point, but this is true for all types of pricing models, even straight time & materials.   However, the norm should be higher profit margins, not loss.  So how do you do it?  This topic deserves a book, which I may write one day, but for now, a few pointers (I am also contemplating a short video on the subject in the near future).

1. Complete the discovery process.  This means taking time to analyze the situation, talk with the appropriate people, really understand what they have in place, and what needs to be done.  You can short cut this process, thinking it’s too expensive, but you throw away two things by doing this.  First, you won’t have as much of an opportunity to sell your value across all key influencers and decision makers. Second, you won’t have the inside scoop on what the project entails, which later becomes your basis for building justification.

2. Based on your understanding of their need, the perceived value to the client, and market rate, come up with a price.  Let’s say this project is central to protecting their billion dollar secret process…what’s it worth to secure it if the likelihood is high?  This takes practice and guts.  I start with perceived value, consider pricing, then compare to market rates.  I don’t mind being the most expensive as long as I can justify my price through experience and testimonies.  Most of the time, value far exceeds T&M pricing.  Don’t be surprised if your project earns you $10,000 in one day vs. your $150/hr rate.

3. Once I have a price, I figure out how much time it will take.  Notice I did not compute my price based on hours. This is the big deception – the idea that a fixed price is your best guess at T&M, presented as a fixed price.  Now, if the cost of doing the job is way more than my price, I may have a problem.  Either I don’t understand what it’s worth, I don’t have an effective way of doing the job (like someone building a house without power tools today), or, what the client wants is not possible within a reasonable number.  Usually it’s number one.  I’ve been beaten down by discount shoppers more than once, but these are not my target clients, and they probably aren’t yours either.  Send them to Dell or CDW where they can cut out the middle man and do most of the engineering and support themselves.

4. Finally, I figure out other options.  I price out the best option, the least option with phases, and a middle option.  Options help the client visualize what they are getting, what lower cost options cut out, and they head off requests for discounts.  Example; If option 1 is 100,000 and option 2 is 75,000, I have already told them what they get for 75000, so there is not reason to select 1 and ask for a 25% discount.  It’s not an option.

© 2010, David Stelzl

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