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Leveraging Methodology to Improve Profit
Well-developed methodology sells!! And it can continuously increase your profit every time you perform a given project. There's only one person who can mess that up.... you.
What should happen every time you do a project?
Yes, you should get paid, no doubt about that. But that’s not what I’m getting at here.
In most cases, every time you do a project you should get better at doing that project. Right?
And if you get better at it, you’ll do it better next time. And faster!
And if you do it faster next time, what also happens?
Yes, you get paid again, but this time you should make a greater profit from what you get paid!
It All Depends on You
Let’s face it. Most of us base our project pricing on number of hours multiplied by rate for required skill sets. Right? Sure.
When we’ve developed a solid methodology and performed the project a few times, we’ve hopefully gotten better at it each time, and perhaps even improved upon the methodology. The result of all that is that performing that project should take us less time, because we’re better at it.
Here’s where we get a golden opportunity to shoot ourselves in the foot!!
Let’s say you have a project that you first estimated would take 100 hours, and you charged $10,000 for it. That means you expected it to cost $100 per hour. If that aligns with your established fee per hour for the skill sets required to perform that project, you did well. If your operating margin is 50% you netted $5,000 for that project. Bravo!!
Now you get another customer interested in that project and you perform it for them, too. What you learned the first time enables you to get this second run of the project done in 80 hours instead of 100. How much did you make this time?
That all depends upon you. Many of you multiply your $100 per hour by the 80 hours it took and charge $8,000 instead of $10,000. The second customer received the same value from your project as the first, but because you were able to do it faster the second customer paid less, and you made less.
When you think about it, the experience the first customer gave you made it possible for you to charge the second customer less. The first customer saved the second customer money!! Isn’t that GREAT????
No… it isn’t.
If the second customer received the same value from the project as the first customer, they should pay the same fee as the first customer. Just because it took less time for you to do it, why should they pay less? Because it took fewer hours?
Your customers are not paying you by the hour, and you should never be charging them by the hour unless you are doing work with no scope or objective. The second customer should pay exactly the same as the first, and you should be the only one to benefit from the time saved. The only thing that changed from one time to the next is that you spent less on staff for the project. You only paid for 80 hours of your people’s time, and the second customer paid the same $10,000 as the first.
You make more money simply because you got better at something, and your cost was reduced.
That is all good.
The only way this gets screwed up is if you insist upon sticking to per-hour pricing. What you really wanted to do was to price for the value of the project, not the hours it took to do it.
Now think about the third, fourth, fifth, and more times you perform that project for different customers. You still charge the same $10,000 but it takes you 70 hours, then 60, then even fewer. Your cost of personnel keeps reducing but your top-line revenue remains the same. That turns into increased profit. And more. And more.
Methodology and Value-Based Pricing
Stop talking hours with your customers. You’re not selling hours. You’re selling results. Charge for the value of those results. If that value changes, your methodology changes, and you charge differently.
But if the project value proposition remains the same but your team can perform it faster and faster, take the win.
Whenever you perform a project for any customer and it comes out successfully, document or update your methodology for it, create a value statement, then go out and find every customer who has similar needs to your first. Talk about your experience providing these services and how they can benefit from your experience. Discuss the results previous customers have enjoyed, and how you make those results available to them. The fact that you’ve performed any project repeatedly does not mean you should reduce your fee. If anything, it should stay the same. If previous customers are raving about it, perhaps you should consider increasing your fee.
Imagine that. Charging more for fewer hours of work.
Psst… that’s the way it’s supposed to work.