What Do You Say to Clients When They Tell You ‘It’s Expensive’?

Today we are meeting with Ivan Paramonau, CEO of Itteco, creator of Nowork FM (which is a really cool service, no bull!), and my good old friend. Ivan has been in software development business for 13 years and have seen it all. We’ve set down for a nice talk about pricing, advantages of time and material model over fixed bid, importance of sending your proposal as fast as possible and what to tell your client, when they claim your services are expensive.

Find great answers under the cut!

Sasha Kovaliov: Could you please introduce yourself and tell us what you do?

Ivan Paramonau: I am founder and CEO of Itteco, the headquarters of the dev teams network we started building 5 years ago. In the last couple years we also build our own software products based on the network’s infrastructure. Prio to Itteco, I was senior project manager and department coordinator with Itransition.

Sasha: How long have you been in software and web development?

Ivan: I am entrenched in software development for 13 years now. Started as developer, through project lead, to senior project manager and department executive. I also led the cross-functional team of 50 analysts who prepared proposals for prospective customers.
The last 5 years I manage my own business, bridging (and sometimes helping to them to start) smaller dev and design teams across Eastern Europe with Canadian and US customers. I also and investor and product lead for several of our own products.

This said, I’ve been on all sides of the estimation process exercise. I put all-nighters as developer due to unreasonably tight deadlines quoted, established the processes for better estimation flows in growing organization, lost some money as business owner and split my hair as investor half way into the project completion. I trust I should have gained a little wisdom about how to make it less painful for all the parties.

Sasha: Many small companies and freelancers don’t know how to price their services, what is your advice?

Ivan: Find what drives your margins and what drives the repeat business. In many cases, these are the same drivers.

And quote quickly. Don’t be afraid to put a price tag on something.

The earlier you size it up in dollar amount it, the faster you will help your customer to move through the decision making process. If you are in a bidding position, the other bidders will be merited against your baseline, if you are the first to draw the line in the sand. If you reason your estimate well and thus earn the trust, those that come above your quote will be deemed inexperienced, those who come below – as reckless.

So, always try to give the price as fast as you possibly can and substantiate it as well as you can, transparently showing all of your assumptions and whats-nots. Unless it’s a formal procurement process with a Fortune 500 company, price is perhaps the very question that bothers your client and keeps him anxious. Show your understanding of customer’s pain by quoting early. You’ll become pain reliever and it will double the chance of winning the business. Even if the estimate is a little off from the expectations, it’s a great conversation-starter, provided you suggested enough reasoning. From that point on, you’ll be discussing those reasons and assumptions and make trade-offs in scope and schedule, rather than whether the price tag is expensive or not.

While I led the RFP processing unit, we stumbled on the diminishing winning rates, as our response time was drowning under newly appeared corporate bureaucracy. Often times, we just could not get hold of a client after sending a quote. By that time, obviously, they were much further in conversations with someone else. Our sales people were starting informally giving me calls and stopping by my office for quick estimates. Which I happily provided in under a minute. “Ivan’s magic calculator” I believe is what they referred to the experience between themselves, as I literally would just reach to the cell phone, start a calculator and give them the amount and some background analysis. They started sending our “guestimates” right away, ahead of a formal quote, and it made the sales process much smoother. Our winning rate doubled.

“Magic calculator” show is the practice that I use a lot even these days in my own business, as nothing gives you more instant credibility than your guts to give the numbers right away.

Sasha: Do you work under Fixed Price model?

Ivan: We do start under fixed price with many clients and many of our new teams, yes. It’s a great way to reduce risks for all the parties initially and keep everyone more focused to make the entire relationship succeed on particular project. So, in a sense, it is usually a must for us on smaller projects while we get to know each other better. We transition away from this approach as our relationship matures.

Sasha: Are there any long-term advantages in this approach for the both parties: service provider and client?

Ivan: Yes, if the service provider is Foxcon and the client is Apple. Customer in their case is looking for insurance against defects, while service provider maintains high margins as they have unlimited access to cheap labor. Even in their case, $1.6bn hits can occur.

If you are no Foxcon or Apple, you should be looking to work as the united team in the long term, and fixed price approach will undermine one of these factors: either “united team” or “long term”. Or both.

Sasha: What to do when your client doesn’t want to switch to Time and Material?

Ivan: Wait. As the confidence grows and client sees less risks in working with you, the easier it will be to do the switch.

Meanwhile, you may want to try the hybrid approach: fixed price per iteration. As service provider you may do the iterations as small as one week, and you’ll be able to contain the risks into weekly batches, which will relief you from lots of headache and management overhead.

The process we found working particularly well is when we have the iterations’ end at the same day every week and we would have the entire team present the results to the client via screen sharing and Skype in the weekly demo call (client is in the driver’s seat). We discuss results, issues and also plan for the next week. This approach engaged the client into the process, manages their expectation well and mitigate the risks on both sides. In couple months, the client’s process will be the one of T&M nature already, you’ll just need to do a finishing touch with the change of the agreement.

Sasha: Is T&M model better to clients as well or is it just a more secure way to work for service providers?

Ivan: It depends on the experience of both the client and the service provider.

If the customer knows what she is doing, it is more beneficial to her to work on T&M as it gives more flexibility and control and actually much cheaper of an option.

If experienced provider works on fixed price, there are usually higher risk margins embedded into the price, plus significant management overhead is required and included too. And it makes the project so much more expensive.

Think of it as insurance premiums that you pay. If you can control the risks yourself, why would you be paying premiums?

Sasha: What do you say to clients when they tell you “It’s expensive”?

Ivan: I explain 80/20 Pareto principle, the 80% of the work gets done with 20% of the time, while remaining time is spent on only 20% of the work. Many estimations assume the dependency is more linear.

When I set people’s expectations with regards effort and time it takes, I assume that we would be able to elaborate that about 10% of the scope’s tale as not bringing significant business value and could be eliminated, while still allotting adequate time for other important little things, like growth hacks or user onboarding process.

It is better to decide against proceeding with the project before it commences, than dealing with unfinished underfinanced product at its 80% completion.

Sasha: What project are you working on right now?

Ivan: We recently released Nowork FM, the simple intranet solution for teams based on links sharing. And we continue working on semantic web solutions with Iframely.

Sasha: Random advice to our readers.

Ivan: Manage expectations. Relentlessly. If you are working on your own products, it very important to keep your entire team in the loop. If you’re working with clients, it is even more crucial for the health of your relationship. Nothing makes people happier than when their expectations are met.