Kay, how do I do output-based pricing? (Pricing 101: Part 2)

Pricing “Outputs” means pricing on the things you produce, that is, pricing based on deliverables.

Fixed fee bids basically provide “price certainty” to the client.

Unlike hourly-based pricing here the vendor assumes the risk (barring client-mandated changes that fall out of the scope, a.k.a. the dreaded scope creep)

There are a lot of knowns in this one: the start/end date is clear, clearly defined scope/deliverables, and a price bracket.

This one defeats cost consultants, you know the people who look places to cut costs on the bill saying “Do we really need this…” “Maybe we can remove this from the scope” “Can’t you just do it with one dev”. You get who I am talking about right? The people who come to you for what you do, and they tell you what to do, and then they also start telling you how to do it. These are the ones who go to the doctor's office tell the docs what their problem is, and then start telling how the doctor should treat it too. Here they just have the final price and the deliverables to look at.

How tf do you do this?

Now there are two ways to do cost-plus pricing:

1. The rookie way: Which is just the classic cost-plus method. Where they figure out what it is gonna take them to do the work or what’s their monthly bill and just add a profit margin/buffer to it. (In short: Calculate inputs, padded to account for uncertainty. ((30-85%) buffer)
2. The more advanced way: Where you figure out what the client might spend and charge according to it. A bit difficult but worth it. There are three ways to figure out the clients budget:
   
   a)  Just ask them you sunboiled egg. Don’t get all weird and sensetive when it comes to the money convo. You can’t talk money, you can’t do business. (that line was partly directed towards me too). One way to ask them is in order of magnitudes: “What are you comfortable with spending? $1m,  $100k, $10k?”
   
   b)  Learn to google: Typically a company’s marketing budget is anywhere from 10-20% of their annual revenue (you can use Hubspot to look for it).
   
   Or if you can’t find it, open the LinkedIn account (which you originally created to check/stalk your friends) (and once you actually saw what big things they were doing, you got depressed and never opened it again), yeah so open THAT LinkedIn (it’d be funny if LinkedIn was called LinkedIng right...?) (don’t ask me why) (ImSoWeird) Look-up company on LinkedIn. Check out the number of employees listed in the company profile (Low estimate since not all employees are listed)
   Revenue = (No. of Emp) x $250k (Eg.- 100 employees x $250k= $25m revenue). Sketchy right? But it works like half the time. Some voodoo formula it is.

Pro tips:

1. Address any buyer resistance before proceeding with a bid. (otherwise suffer from undefined scope creep)
2. Never produce a bid without knowing what the budget tolerance is from the client.
3. Once the project is awarded, allocate x% of the budget to be spent producing the work (15–40% is the maximum that should be spent) (if this sound’s low to you, learn business 101. After working 2 yrs you to would soon arrive at that exact same number)

The cons

1. My CPA likes to say that even his eight-year-old knows to charge more for her lemonade than the total cost of supplies.
2. This cost-plus way of pricing has a big drawback—it’s all about one thing: you. Pricing is like the tango; it takes two. Now unless you’re a narcissist this should be a drawback for you, a big one.
3. It’s goddam boring, like a routine robotic 9 to 5. No skin in the game. No bonus/incentive for showcasing your creativity, or coming up with novel ways to tackle a problem. You just got this job, you do that job and you get paid (just) for that job. Whether you help your client to generate $1m in profit or $10 mill it’s no difference to you, you get paid the same amount.

Enter: Value-Based Pricing

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* Checkout this course to learn some business

** There's a bit of narcissism inside everybody and I am no exception. I still price   some (very very some) projects this way. It's like a mutual fund structure, you   need some that just give some fixed returns right?