Setting your rates II

Posted on June 11, 2009

I Meant to post this yesterday and just plain forgot, so I’ll try to get two out today to make up for it.

I got some feed back on my post the other day about setting rates. It’s an interesting topic to a lot of people. One of the questions it did bring up was how to deal with negotiating on rates, or specifically dealing with a customer that doesn’t want to pay what you’re asking.

I for one set out my rate at the start in a quote, explain that it’s competitive and that’s what it costs.

I’m open to negotiation if for example you’re offering me a couple of days a week for a month, few months or a year. It costs less to develop and maintain one relationship like that than the equivalent in smaller customers – even if it is putting more eggs than I may like into one basket.

If on the other hand it’s a couple of days then I’m going to be much more firm about my rates.

One strategy for getting paid what you should, and giving a customer a price they want is to determine the budget from the outset then structure a proposal around that. Once you’ve got a number, make sure you can deliver what they want, or negotiate on a cut down version, which you can deliver within their budget. If it’s design work, cut some of the revisions, base the design on a template of their choosing. For coding work cut some of the scope, remove one or two of the lest important requirements.

A lot of times you may just find “you’re too expensive” really means, “we can’t afford it” and there are a lot of great companies out there that aren’t just being cheap, even if that’s the way it may seem on the surface and they’d be more than willing to compromise on the scope to get it done properly within their budget. Then who knows, revisit the rest in a few months time.

Other times you just can’t meet in the middle, you can’t do the work in the time allowed by the budget but don’t give up – there might still be a deal you can both cut. Maybe they offer a service you’re currently paying for, or have staff that aren’t being fully utilised you can borrow. Trading your services for theirs isn’t a bad thing, you still get a client, word of mouth referrals, case studies, testimonials and add to your portfolio and you still get something in return for it. I’ve done this in the past and it’s always worked out well for me, in fact it’s probably lead to more work from and through that client than we could otherwise expect.

If all else fails, my advice is to walk away. It’s hard but the brutal truth is that you’re risking getting stuck in a working relationship where the other side doesn’t value your skills. In my experience that attitude extends right through into how they value your opinions and the result of your labours. To them what you produce is a commodity and they’re probably going for the cheapest quote they can find. Everyone has worked with people like this, it’s not fun and it’s almost never worth the money. In fact, my advice is run – don’t walk.

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What to charge

Posted on June 9, 2009

Lloyds TSB just announced they’re shutting down all C&G branches with loads of job losses. Though they said they were hoping to avoid compulsory redundancies with early retirement and by hiring less contractors.

So they’re not cutting jobs, except for contractors. Which is too bad for the contractors but brings up an important point if you are a contractor and you’re setting your rates.

You are responsible for your own job security and you have to charge for it. You don’t get holiday pay, you need to spend some of your time on the non billables that need to be done to operate, you won’t get a redundancy payment if through no fault of your own the company cuts your role in a cost savings exercise. You just don’t have a job.

There are various ways to mitigate the disaster and the best is probably to have as many customers as possible. The more you have the less the loss of one matters.

But you also need to be aware of the reality that you may lose customers when you set your rates. You need to bill for your desired salary + operating costs + expenses + some headroom for the time you aren’t doing billable work.

Here’s an example. Let’s say you want a £30,000 salary. You have operating costs for equipment, software, travel, expenses, taxes, accountants, rent, phones, internet etc; say £15,000/ year. Given 45 working weeks in a year, because you deserve holidays like everyone else and you’ll no doubt catch a cold or two at some point.

30,000 + 15,000 = £45,000/year MINIMUM turnover.
45,000/45 working weeks / 5 working days = £200/day

So if you want to earn a £30,000/year salary and you have enough work to keep you occupied every single day – you can afford to do it for about £200/day.

Let’s for a moment say you spend just one day a week on things you need to do, but you can’t bill a customer for directly - your accounts, taxes, your website, finding new customers, writing proposals, travelling to and from meetings, meetings, professional development.

That’s a rate £250/day and you still have absolutely no cushion. Lose a customer and even if it’s one day a month you’re not at capacity and you lose £3000 from your salary. If you lose a few or a big one and you’re idle a day a week – you’re out over £11,000!

Now if you want to build yourself in a cushion so that if you lose some work you’ve got money to eat while you spend time trying to get more customers, you need to up the rate. For the sake of argument let’s say you want to be able to eat working at 75% capacity if the times get lean and stay that way for a while. That means you need to be able to survive billing for 3 working days every week, so with the numbers above we get.

£45,000 / 45 working weeks / 3 working days = £333.33/day

Now in theory, working at capacity that would give you enough to pay yourself almost £45,000/year – but if you were smart and like the C&G contractors a major client suddenly pulled the rug out from under your feet, you’ve saved that and now have a good cushion going forward to find new customers. If they were 100% of your work, it could take sometime to build up that client base from scratch so the £15,000 really isn’t that much when you start to eat through it – literally.

Toying with ideas: geotagged podcast

Posted on June 8, 2009

Came up with a good distraction tonight and thought briefly about being an iPhone developer. Was chatting with @Simon_Chapman (not sure I’d bother clicking there – nothing but tumble weed) about the various services out there and was trying to come up with a unique way to use some of the new features offered by the iPhone 3.0 software.

Specifically we were talking about how to use the new support for in app purchases and location to build a compelling service. The first thing that came to mind was pretty obvious and no doubt you’d just end up a small fish in a big pond with some monsters, create a service to search for and buy tickets for events near you.

The next idea that came to mind is to create a map based podcasting application. Allow any geotagged podcasts to be places on a map. Browse the map and get some audio or video about things around you. Revenue could be either generated through advertising or through access to premium content.

There you go, that one’s free, unless I find the spare time to develop it myself.

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Local business advertising

Posted on January 15, 2009

A large part of the assumptions we’re making with goroam are based around the idea that local business wants to capitalise on the Internet to bring in business. But it’s not easy. How do promote a book store, toy shop, cafe or plumber in your local area online, now imagine you have a books and toys to sell, coffees and tea to make or houses without hot water to help – in short, a full time job that doesn’t leave much time for SEO, SEM, analytics and tweaking a website and search advertising strategy.   

We’re not just pulling the assumption out of thin air though- helping local business market online is big business, Yodle’s 700% growth last year and $10M C round is a great example of this trend and from the techcrunch article, they’re not the only ones in the game. 

Yodle competes against a number of similar, venture-backed companies such as ReachLocal(which raised a substantial $65 million in funding to date), MerchantCircle (which raised its $10 million in Series B funding round in November 2007), Ingenio (acquired by AT&T, also in November 2007), WebVisible (total funding: $17 million) and a plethora of smaller companies trying to get their piece of the pie.

So we’ve got the social proof, now we just have to capitalise on it and bring something to market that makes it easy for small businesses to target their services at the people in their area who are interested. 

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almost profitable

Posted on December 3, 2008

I had an interesting chat with a friend today about what it means to be almost profitable and businesses that are perpetually stuck, with profitability just out of reach. It seems to be a problem that some companies never manage to get away from.

The problem is I’ve seen a lot of companies where almost profitable is the status quo, sometimes for years. I’ve seen these companies increase staff, sales and turn over but still profitability is just out of reach because costs also go up. For them the only way out is to change something fundamental.

In times like these the first reaction is to restructure the business and let staff go, but this can backfire – lower the number of sales staff and you’ll likely cut your turnover, cut support staff and your customers might suffer directly, cut technical staff and can you keep up with the risk takers?

Unfortunately some of the businesses, and the ones I’m talking about need a more radical change. And something that fundamental can be difficult to swallow because it often involves someone admitting they were wrong. A very difficult conversation when you’ve been selling everyone jam tomorrow.

Hopefully some of the people in this position realise that, as other commenters are pointing out, now is possibly one of the best times to take risks. if you could change anything about your company, what would it be?

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a crossroads

Posted on December 1, 2008

In case you haven’t heard, didn’t know or are just joining me –

I used to work 2 1/2 days a week as an employee writing code for another company and the rest working for goroam. The problem was always that I had to put my job first and goroam second- obviously, since one paid and the other didn’t. That was up until this weekend, when I got a letter telling me I had don’t have a job anymore.

So I’ve got a stark choice the wrong side of this close to Christmas, work hard to turn out the product we’ve been building for the last couple of months, get investment and make something truly great of it. Or get a job.

You hear plenty of confident statements about downturns being the right time to start great companies, all the successful ones that began when it was logically wrong. To actually have to make the choice is a difficult position.

I wonder how it will work out, anyone with a comment either way – leave a comment!

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While they’re all standing still…

Posted on October 13, 2008

I’ve been a bit lax with the posting again, but I’m trying. Continuing with the theme where I left off last time, starting companies in the downturn (likely to be a recession), the last time we talked the worlds markets were in turmoil, the banks had stopped lending money to us and to each other. Things have continued and are even worse two weeks on.

Now some would say is the time to tighten belts and budgets, for prudence sake. At least that’s what everyone else is doing, and what we’re doing at home to be fair. It’s cheaper shopping, soups and casseroles for the winter. Many businesses are reacting the same, I’ve heard it from them and so have you. Even businesses that have nothing to do with the finacial or property markets are tightening their budgets, and feeling or causing the pinch to be felt.

Is that good news for the nimble small business? Like every other news, yes. Small businesses face unique challenges their larger competitors don’t but they have one major advantage – they can move and react faster.

Don’t get me wrong, I’m not suggesting anyone should go on a spending spree. But neither am I suggesting that now is a time to be completely miserly either. What I am suggesting is that while your larger competitors, or even competitors of similar sizes are worrying about the future and cutting back their development efforts; or cutting back their staff, salaries and benefits. It’s a great time for you to make the leap to the next level, and come out ahead when this is all over- because it will eventually end, one way or another.

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Saying no some more

Posted on July 16, 2008

Re-reading my post about saying no got me thinking about the other reasons we’ve turned down work. It’s hard getting work in the first place and doubly hard turning it down, but sometimes you just have to say no.

One big one that comes to mind is we quoted to do some work for a company we’ve had a long term working relationship with. A small company, they were unfortunately facing the loss of a key member of staff in the final few months of development of a key project already well overdue. A update to a project we’d worked with before, so we were familiar with the architecture, team and almost every aspect of the project.

We made quoted a day rate at the low end of the scale and offered to agree fixed times for each bit of development, insulating them from any estimate errors by delivering that iteration for the quoted price before undertaking the next. We agreed to put the work we were quoting on first, push our own development schedule back, not take on other work and offer any time the needed to get their project released.

I got the very distinct impression they wanted the work done cheap from a discussion with the technical lead for the project. I tried to mitigate any problems by sending an email detailing our costs and how they break down from developers salaries, equipment costs and the meagre profit margins. I also made it clear that we were uniquely qualified for the work, due to our extensive working history directly with the project.

The response was disappointing, they were willing to pay about half the rate we quoted. I had a brief discussion with the technical lead, who was as disappointed as us with the reaction, but it was clear there was going to be no middle ground. The offer was never even going to come up enough.

We gave up in the end – a shame really, like any small business we could have used the money. It was an issue of value. Despite all the positives, the experience, the fact that there was nobody else who could have hit the ground running like us and our prior working relationships they weren’t willing to pay what we consider a very reasonable price. They effectively wanted work done for less cost to them than it would have cost to hire a member of staff, with none of the security or benefits. A short term contract under terms worse that a job I’d been offered months prior.

In the end they had to give the member of staff who had planned to leave a significant pay rise to entice them to stay, hired another, less experienced developer who needed more managing and training and still haven’t delivered the project, months later.

For us, and for anyone else considering taking work at less than a market rate, it’s a tough choice. Though we could afford to survive without the work, it would have been nice to have the money in the bank. There is also always the potential that work can lead to more work, however do you want cut rate work leading to more of the same? It’s all too easy for it to set the tone of a working relationship and an expectation that you will continue to work for the low rate. Also the whole time you’re servicing the contract you’re not getting new clients or doing other more lucrative work. As a consultant if you’re not saving for a raining day you’re taking a huge risk, especially if things get a bit lean for a few weeks or months.