We are in the midst of a multi-part discussion about how service firms bill for their services. We’ve looked at hourly billing, retainers, and project fees and some pay for performance structures. Today I want to look at another way of getting paid, reusable content.

How much money could you make by selling the same idea over and over to different clients? Instead of selling your expertise as a service, you would turn it into an information product. If you decide to sell your ideas as information, then profit is straightforward. How many people can you sell the same information to?

What do I mean by an information product? Books, tapes, videos, membership websites, TV or Radio shows, group coaching programs, tele-seminars, the list goes on and on. Anytime you can deliver value in a medium that is one (you) to many, you are leveraging your time and ideas and have an opportunity to extract more value.

Is there one idea that you seem to use over and over with clients? Could you write a workbook or do a seminar on that topic? Is there a part of your process that clients do pretty well on their own if they have some coaching or guidance from you? Could you turn that into a group coaching class? The guys over at 37signals call it Selling your By-Products.  They wrote a book as a way to communicate thier philosophy to their team and the many people that came asking them and it has “made over $1,000,000 directly and way more than $,000,000 indirectly for the company…”

Maybe you don’t want to write a book, maybe group coaching isn’t interesting to you; it’s not likely that I’m going to list the perfect idea for you in this post, but it’s important that you start brainstorming and experimenting with where you can get a one-to-many relationship and figure out how to price that to expand your margins.

One important benefit to information products is that they tend to generate interest in and leads for your service offering as well. It’s the gift that keeps on giving.

How have you experimented with offering your service as a product? What’s working and what’s still difficult?

We are in the midst of a multi-part discussion about how service firms bill for their services. Between hourly, retainer and project fees, there are a lot of ways that service firms bill for their work. We are looking at each method, its strengths and weaknesses, and also some alternatives.

There are three methods that I’ve seen clients use and each has their advantages and disadvantages: Charging for time (e.g. the “billable hour”), charging for production (project fees or monthly retainers) and pay for performance. Today we’ll look in detail at pay for performance.

Charging for results
Clients love pay-for-performance, and if you can implement it it will make your sales process so much easier. You get to tell the customer that they only have to pay when they have made money, how easy is that? But in most professional-service businesses, there is still a HUGE gap between idea and execution. Where the client can turn your valuable idea into clay and you both end up with nothing. For this reason, it’s been difficult to adopt pure pay-for-performance mechanisms in most industries. But there are a few ways it’s being used that are worth a look.

1. Fixed project fee, with guaranteed results. In this case, the service firm will continue working until results are achieved. This provides certainty for the client, and upside if the results area achieved quickly.
2. Fixed fee (or monthly retainer) with a bonus or increased rate depending on achieving certain goals. One firm that has tried this gets paid a “bonus” on about 25% of their jobs; not bad.
3. A “tip” system, where you and the client agree to a price, but you add a “tip” to the invoice that they can pay or not pay according to their perception of the value they received. (Skeptical? Check out this restaurant that works on a similar premise)

When there are very tangible outcomes to achieve, pay-for-performance works well. Investment bankers charge huge success fees when they sell a client’s business. Recruiters often are paid only upon a successful hire. So there are places where this payment mechanism can really work.

Maybe your work doesn’t have such a tangible outcome, how can you tie results to fees? Are there baby steps you could take?

1. Ask for a “bonus” payment if a project is completed by a certain date. Or extra payments if work extends beyond the budgeted timeframe (due to delays on the client side, of course).
2. Think like an athlete. Sometimes athletes get bonuses if their work wins an award, or they have a record-breaking year. Could you ask clients for bonuses in those circumstances?
3. Could you measure client “satisfaction” or the end user’s perception of the value of your work and get some kind of escalated fees based on the results?

Some of these may seem far-fetched, but the only way to know if your client would accept them is to try them out. Brainstorm with your team to see how you might capture a little more value and then experiment with some of those ideas. You might be surprised at the results.

Have you tried any alternative mechanisms for capturing value? What’s worked, and what hasn’t?

Fixed Price, No Haggle

We are in the midst of a multi-part discussion about how service firms bill for their services. Between hourly, retainer and project fees, there are a lot of ways that service firms bill for their work. We are looking at each method, its strengths and weaknesses, and also some alternatives.

There are three methods that I’ve seen clients use and each has their advantages and disadvantages: Charging for time (e.g. the “billable hour”), charging for production (project fees or monthly retainers) and pay for performance. Today we’ll look in detail at charging for production.

Not charging for time

At some point, most service firms decide they need to find another way to charge their clients besides hourly billing. They can do this by defining the beginning, middle and end of a project, or by using some type of retainer/fixed-monthly-fee arrangement.

The idea here is that a client has an easier time determining the value they will receive from a project. So, instead of working out what it will cost you to complete a project, you can calculate what value the client will receive and see if we want to do this work for that price. Project pricing then provides incentive for the service firm to complete the work at a value that ensures the client will earn a return.

In order to do a good job of creating the project plan (which is critical to determining whether we can deliver the project at a price that represents a good value to the client) we need to have a very good understanding of the state that the prospective client is in. If we agree to a project fee, and then find out that the client doesn’t have much of the basic information available that we need, then the cost for the project can skyrocket; but the compensation is fixed (bad deal). So whenever you are planning a fixed fee project it’s imperative to have an “assessment phase” on the front end, where all the inputs to the project can be gathered and you, and the client, can clearly determine what needs to be done, by whom and with what result.  This process is usually too extensive for the service firm to do for free, but can be done for a reasonable (fixed) cost.

When we charge a project fee we preserve the upside (if we finish quickly we earn more money) but accept some downside risk.  Of course negotiating change orders as the project progresses can mitigate that. One of the biggest advantages of project billing is that it requires the advisor to constantly be communicating with the client about how the project is going, warning them when it could be getting off track, and identifying risks and mitigation strategies. This is also the major downside to this payment mechanism. It requires a skilled account manager/project manager to stay on top of changes in scope and negotiate associated changes in payment.

If you charge a retainer (e.g. a fixed monthly fee that represents the expected value that the client receives) you may not get paid for every hour although not every hour you spend on a project creates value. So, sometimes you will have to over-deliver in order to deliver value, and other times you will deliver TONS of value in a few minutes and therefore be able to push more work out into the future and make more money per hour. In most of the firms that bill this way, they schedule a list of deliverables to be completed this month, and have some forecast for what might be completed in the coming months, but it retains flexibility to use the brain of the advisor in any way that is needed. This works best for smaller firms or where the client is “renting” the advisor’s brain. The advisor remains in control of the “effort” they are delivering (you can always set deadlines in the next month) the client determines if that “effort” produces a good value. Again you need to be in constant conversation with the client about what value they receive to ensure that you are meeting their expectations.

Have you tried project or retainer billing? What has worked or not worked for you?

We are in the midst of a multi-part discussion about how service firms bill for their services. Between hourly, retainer and project fees, there are a lot of ways that service firms bill for their work. We are looking at each method, its strengths and weaknesses, and also some alternatives.

Each method of billing for services has  advantages and disadvantages: Charging for time (e.g. the “billable hour”), charging for production (project fees or monthly retainers) and pay for performance. Today we’ll look in detail at charging for time.

Many firms start out by charging for their time because it’s easy to track, it ensures that you make at least some money for the work you do, and few clients will argue with time-based billing (as long as the rate isn’t too high). Hourly billing is ideal in a situation where neither you, nor the client, have a good way to predict what needs to be done to accomplish what they need. And lets face it, when we were getting started that’s exactly the situation we were in!

After working this way for a few months (or years) you may discover a few problems with time-based billing.

1. If things take too long, you can’t usually charge all the time (some of it gets “written off,” effectively lowering your hourly rate). But if things go really well, and you brilliantly get something done in half the time, you can’t charge more. This is the “heads they win, tails you lose” element to hourly billing. Some clients go further by mandating that you bill hourly against a cap or maximum project fee. This is the ultimate set-up for they win (if you are fast and efficient), you lose (if you run into a roadblock or things don’t go as planned).
2. Sometimes you work extremely hard all day on a project, and for whatever reason the client doesn’t see the value in it. Other times you are daydreaming while waiting for a stoplight and you have a breakthrough idea that is worth a mint to your client. How do you bill for either of those events? Hourly billing does a poor job of aligning payment with value.
3. When you bill for time, clients avoid spending time with you. This is not a good thing. If you want to be a trusted advisor for your client, you want them to call you with challenges and opportunities as they come up. That way, you can have more influence and discover additional projects and ways that we can help them.
4. The better you get at things the less you earn, so you have to raise your rate. This is okay if you are able to hire cheaper resources to do the more mundane work. But it often results in pushback from the clients about your rate. “Why am I paying $350 an hour for you to do that?” Again, more time gets written off.

So, the upside to hourly billing is that you make “something” for all the work you do, but as you can see, write-offs erode that value and in trade you have clients who don’t want to talk to you. Further you lose the potential upside of those brilliant ideas you have that don’t take any time. In order to make money you have to give time.

My main objection to hourly billing is that it shifts the cost risk from the service provider to the client, and in most situations the service provider is the expert! You should have a good idea of how long it will take you to complete the work and what value the client will get from the project. You are in the best position to decide what you need to earn and what they should be willing to pay. If your not, you need to be (maybe an assessment phase could help?). If you are the expert and you know (approximately) what it is going to cost and (about) the value the client will realize for your work, then hourly billing really does a poor job of aligning the client’s needs with the provider’s needs.  In fact, it puts you at odds with your client. Your client wants work done quickly, and expertly. You want to take more time, and explore every option.

How has hourly billing worked for you? How has it worked against you?

Photo courtesy Dave Dehetre via Flickr

This is Part Two in a series of posts about how service firms bill for their services following yesterday’s introductory post. From hourly billing, retainers and project fees to alternate billing methods, We will be looking at each method and its strengths and weaknesses, and also some alternatives.

But before we get into comparing these method, let’s first review one billing method that every service firm should use; the assessment phase. For most service firm engagements, the beginning is usually the toughest. You have a pretty clear idea of the services you offer and the value the client should receive, but at the beginning it’s a little fuzzy to understand the totality of the client’s situation, their capacity, and how much value they will likely gain from your services.

Your clients have a similar issue. They know their problem intimately, but they don’t always understand your services, how you work, what you will require from them, and the results they might achieve. Further, neither of you knows what it will be like to work with the other. This gap in understanding prevents a lot of service work from being sold. The solution is an assessment.

In an assessment, the service provider agrees to provide a small amount of value (usually in compiling the data and framing the work to be done). This should be something that provides real value for the client, but not something that “solves” their problem. The service provider spends substantial time and effort in this stage to learn the business and situation that the client is in. During this phase, I like to say the client and service provider are “dating.” At the end of assessment, the service provider knows in much greater detail what the client needs, what assets they have to work with, what obstacles there are to overcome and what results are achievable. The client knows better what their situation is, how trustworthy and reliable the service provider is, and they may gain a more realistic view of the outcome of a longer engagement.

This assessment works best when it’s short in duration and scope, and priced low enough that it’s a “no brainer” for the client. This sets the stage for a more in-depth and credible proposal for the longer project, and increases the likelihood that the client and service provider will agree on the value of the work to be accomplished.

An Assessment phase lowers the risk for both the client and the service provider by helping each to more clearly uncover and understand the strengths, weaknesses and capabilities of the other. They also mitigate many of the risks and weaknesses of the pricing structures we will address in the next several posts.

Do you use an assessment phase in your work? What are the benefits? What are the risks?

Pricing is a hot topic among my professional-service clients and prospects and around the blogosphere as well (Gini Deitrich started a conversation about it, Versage talks a lot about it, even David Maister has weighed in) . It can be challenging to align the value created by your work with any tangible measure. Think about it: Aren’t there times when you come up with a good idea, the client thinks you’re brilliant and you wish you charged five times more than what you quoted? And then there are other times when you feel like nothing you come up with makes the client happy, even though you know it’s more their fault than yours (and sometimes, the other way around). How do you charge for that?

Ideally, clients and professional-service firms would both like to have some kind of system that ties fees to the results delivered. The client takes your advice, the advice works, the client makes lots of money – and they, in turn, are happy to pay you a lot of money. I mean, wow, it works for everyone! Unfortunately, this isn’t as easy as it sounds. More often, the client waters down your great idea, their team modifies it (or, in many cases, they just ruin it), and the market affects the result. In the end, you can’t tell exactly what effect you had on the business or the project’s results. So, if you charged for end results, you wouldn’t get paid for the work you did … and that’s a problem!

But, the concept of clients valuing your work, and you getting paid for that value, is every professional-service firm’s goal. So, how do you do that?

If you know me you know that I have a lot of ideas on this issue. I started writing a blog post on it and it turned out to be enough material for 4 posts (or maybe 5, we’ll see). That’s OK, because there’s a lot of ground to cover here, I’ve written one post on each of the three most common billing structures (hourly billing, project or retainer billing, and alternative billing), their advantages and disadvantages, and where each might have a place. I’m putting up one per day this week so stay tuned.

In the meantime, what challenges do you face in how you charge your clients? What methods have worked best for you?