S07.EP11 - Pricing Creative Work with Jonathan Stark

0:00What is the last thing that everybody understands? It's the price. So if I can't tell the difference between these three branding agencies and one of them was like$5 million, one of them was$2 million, and one of them was$900 ,000, they'll probably pick the middle one, but they might pick the cheapest one, but they're almost definitely not going to pick the top one if they see no meaningful difference between the three agencies. So it is critical for that$5 million one to be meaningfully different from the other two. And I keep saying meaningfully because it has to mean something to the buyer.

0:29You need to be unique in a way that wipes all the other options off the table.

0:37Hello and welcome to Just Branding, the only podcast dedicated to helping designers and entrepreneurs grow brands. Here are your hosts, Jacob Kass and Matt Davies.

0:56before we jump in if you're serious about mastering branding and building a thriving creative business the brand builders alliance is for you inside you'll get live master classes mentorship from our eight resident coaches a stacked resource vault and a global network of brand builders who actually get it if you're done winging it alone and are ready to scale with structure, support, and serious momentum, head over to joinbba.com and get on the waitlist. That's joinbba.com.

1:30Hello and welcome to Just Branding. Today we're joined by Jonathan Stark, a pricing expert, author, and advisor who helps independent professionals stop trading time for money and start building businesses around expertise, outcomes, and authority. Jonathan is the author of Hourly Billing is Nuts, which we're going to talk about today. He's host of Ditching Hourly and co-host of The Business of Authority. So we're in good hands here. His work challenges one of the most common assumptions in creative services, that billing by the hour is fair, professional, even safe. And for designers, strategists, consultants, and folks listening in, this conversation gets right into the heart of the business model.

2:13So are you selling time or are you selling judgment? Are clients buying your hands or your thinking? And if your expertise helps you solve problems faster, why should your pricing punish you for getting better? Very good questions. So today we're unpacking why hourly billing is broken and how value pricing actually works and how to build a business of authority where clients pay for the outcomes, trust and expertise, and not just the hours on a timesheet. So welcome to the show, Jonathan. Okay. What's the time? Thanks for having me. Excellent intro. You really set the table there for us. We've got a lot to do here.

2:49Yes. Well, you've built like a whole body of work around this idea of like hourly billing is not. So like for all, you know, audience of designers, strategists, consultants listening in who've perhaps built hourly the whole career. Like what's the first thing they need to unlearn? First thing they need to unlearn is that price does not come from cost. price comes from value. Or if I was going to say that even more surgically, I would say that an acceptable price comes from value, not from cost. So that's the summary. We could talk about it for a half an hour, just this piece. But cost, if you're setting your prices based on your cost, you could be setting prices that are unacceptable to the client because the cost sort of insists that you mark up your time.

3:42And then let's say we get to just to throw it around, remember$10 ,000. Well, if it's not worth$10 ,000 to the client, it's not an acceptable price. They're going to say no. But if you work backwards and you find out what your assistance is likely worth to the client, maybe it's$5 ,000. It's only worth$5 ,000. It's like, okay, for 500 or a thousand or some, some fraction of$5 ,000. What could I do to help this client move the needle? Probably not the thing they asked me for in the first place. But this is a complete 180 degree mental shift from setting prices based on what it's worth to the client instead of how much it costs you to deliver.

4:24Well, let's get this quickly out of the way then. Like why is Ali building such a bad fit for expert based work? Well, because if you know what you're doing, you're probably really fast at delivering good outcomes. So like you're getting penalized for getting better at your job. And you probably, probably everyone listening has, has experienced if you've been doing it for a while, you've experienced someone much younger than you getting jobs that you really should have gotten because their hourly rate is lower. So it's, it's like when you put yourself out there with an hourly tag assigned to you, it's just begging the client to compare you apples to apples with everybody else, which completely ignores how fast you are and how good you are and the kind of results that you typically provide to your clients.

5:08It just ignores all the important parts and says, I'm an apple, I'm 50 cents, that apple's 25 cents. You're going to buy the 25 cent apple. Yep. All right. And on the opposite spectrum of that, like what, what are the, some of the, the big or hidden incentives that are created by, you know, going to the value base? Well, the joke is if you get paid by the hour and you want to raise, just work slower. Right. If you think about it, charging by the hour incentivizes the executioner, if you like, of the work to take longer. It's immoral in that sense. Why would you incentivize something that actually then decreases in value to one party, but then increases the value to the other?

5:51And vice versa. It's funny enough, I work with a few agencies and I had this situation recently where I was on this project. and there was a prickly conversation with the sales guys who had just sold this project. And they said, Matt, this kind of X amount of weeks that you wanted to do the strategy on, we've had to squeeze because the client's budgets are not where we needed them to be. And so I said, why did you squeeze them, right? Surely we should have expanded them, right? And dropped the price. In other words, like, why would you automatically go to squeezing a price because they assume the time that you're going to spend on it is less and therefore the cost is less.

6:30Well, no, that's not the case, actually. But anyway, it's such a difficult thing for people to get their heads around, isn't it? Why is that? Why did it start, Jonathan, in this? Why have we got ourselves in this pickle? Yeah. If I just look at myself as the test subject, this was not obvious to me until I was managing people at a dev shop. My background is in software development. and when I was an employee and then I started working at a firm I still had that sort of employee mentality like I put in the time you owe me the money it's sort of a salary kind of question you know back then this is like the early 2000s late late 99 2000 2001 the deal is butt in seat from nine to five fifty thousand dollars a year or whatever it is and inside of that you just make sure you don't do anything that's going to get you fired so if you keep up your end of the deal and they keep up their end of the deal then everybody's reasonably happy and if you want to overachieve that's up to you but it's may or may not increase the amount of money you get regardless okay and probably a lot of people worked for someone and had a salary or or something like that i think it might come from there because that's the piece that I find I have to sort of de-brainwash people out of like the ones that did have a job job because when you meet someone who who has been entrepreneurial all along and had a paper route and then uh you know mowed lawns and all that stuff hourly seems insane to them but there's just not that many there's just it's a smaller pool of people who's kind of been entrepreneurial from a young age so you come out of corporate or you come out of a employment situation.

8:11And I did it. Everybody does it. They say, oh, my salary was a hundred thousand or let's for easy numbers. My salary was$120 ,000 a year. So I need to make$10 ,000 a month. So I want to work this many hours per week and you know, per month. And if there's four weeks and then they just divide and like, here's my hourly rate, you know, 120 ,000 divided by 2000 hours. Boom. That's my rate. Okay. And so now they're, they're thinking like an employee, they show up, they put in the time. That's the deal. And the whole concept of outcomes is invisible to them. It's totally invisible to them. And as long as that's invisible, you don't know what else to price.

8:51You just don't know what to price. Everything seems... People who are listening to me right now that are like, what are you talking about? You're the person who needs to really listen. Because hopefully we'll unpack it and make the light bulb go on. But if you're like, nothing else to sell i i put in the hour and i do my job and and and that's what they're paying for it's like that is not what they're paying for you just can't see the thing that they're buying that is so true that is so true so i used to run an agency right and um we came across this massive problem where i was in this trap like you were talking about right so i had a team we had a team of 12 and we would you know to cost out the project we would kind of work out all the tasks and figure out how many hours we reckon they would take and then we had an i can't remember the the hourly rate at the time i don't even know how we came up with it it's just like finger in the air we think we're worth this we can get away with this this is our hourly rate yeah and then what would indefinitely will happen on some projects was for whatever reason particularly creative right like this is a challenge because sometimes clients don't like something that they see they might have described exactly what you produce but then they look at it and they go don't like it that's not it yeah right so then there's this argument because you say well i spent the time on it as per my quote and they say yeah but actually you didn't deliver what you said you deliver now who's right now what that showed me over years and it took me years as well and a near breakdown to figure out like there's such a mismatch here because the client is buying a result and I'm selling hours right particularly when you like you were saying the salaries and that kind of thing and then what happens is is that the agency doubles down and has to and then you you get the account managers having to have these really awkward conversations with clients so the whole thing is a mismatch and it often ended in tears in one way either the agency or for me as the agency owner i was crying right or the client was crying because we were enforcing the rules that they'd actually signed up for but didn't really understand until they entered the process so the whole thing is like for me um and i learned the hardware hard way is not healthy for client for agency or deliverer of the work it's bonkers so that that's nuts man it is it is nuts it is nuts i wonder if only we had someone to talk to us about how nuts it is uh jacob that would be so helpful that's basically what we thought and then we thought oh jonathan could come on and discuss this so i guess that the the the the question to segue into is like okay if that's not a good system and if let's assume we've some of the folks on this show have started to kind of kind of get their head around that yeah what's the better way what's the uh what's the promised land how do we shift out of this trap of selling time there are a bunch of ways but just i'm going to stick with the value pricing concept you guys brought that up first there are other ways to price that i also like hourly is just you just got to stop doing hourly but in the particular situation you're describing you did a bunch of work you did what you said you were going to do it ended up costing this amount of money the client sees it and they're like this is not what we wanted it and i've seen this i've seen people get fired over this i've seen lawsuits because they spent hundreds of thousands of dollars and then when the project is launched or whatever the outcome is when the deliverables are delivered and then you know the ceo shows up for the first time and it's like this is garbage like what what have you all been doing this is nothing how much that I pay for this?

12:20Right. So what if you just, it's terrible. It's so bad. It's so painful. Probably anybody listening that's been in business longer than a few years has probably experienced this. It's brutal. And you don't want like, it's no matter what you do at that point, the customer is going to be mad. You're not getting a referral. You know, maybe they'll pay you. Maybe you'll split the difference. Maybe you don't get sued, but it's, it's not building your business. So let's unpack actually what's happening here in the scenario rolls into the room at the last minute and says, this is garbage. What is happening?

12:55What is happening is you're having the conversation that you should have had before you started, before you even decided to take the job, because ultimately it's got to go through the buyer, the economic buyer's filter. And if you don't not satisfy that person, you're just shooting free throws with a blindfold, on. Look, what are the odds of getting a basket? It's impossible. It's next to impossible. When it happens, it's by accident because you don't know what you're shooting for. So if you, if, if you move that conversation from the end of the project to the beginning of the project, then you can find out, first of all, if what the CEO wants is even realistic.

13:38If the project that they're asking you to do is you even believe will potentially lead to the outcome that they want. If there's any reason, there's some other questions. Let's stop there. So basically you just take that conversation that happens at the end of the project, you move it to the beginning, and you have the CEO convince you that this is a good idea. And through that conversation, I call it the why conversation, it's got some other components, you find out basically what the outcome is worth to them. And then based on what it's worth to them, whether it's$1 ,000 or$100 ,000, then you can set some acceptable, you can easily set some prices based on$100 ,000.

14:16Okay,$10 ,000, that's a price. If the outcome's worth$100 ,000 to the buyer, then$10 ,000 is definitely an acceptable price. But then you say, at a$10 ,000 price, what costs are justified on my end as the seller? So if I'm going to get$10 ,000 and that's it, no change orders, nothing nothing ten thousand dollars what can i do that i would be fist-pumpingly happy to do for ten thousand dollars that will move the needle closer to the desired outcome of the ceo and is a big win for me and is a tenth of what the outcome is worth to them am i going to get them all the way to the finish line no but branding people can't get someone all the way to the finish line anyway.

15:03They can only contribute to a desired outcome. And that level of contribution has to be discounted because you're not in control of everything along the way. If you could give them $100 ,000 for, you know, guarantee that they're going to get$100 ,000 a year over your benefit from your branding exercise, you could guarantee that. Well, yeah, you could probably charge$200 ,000, but you can't guarantee it. There's a lot of things that can happen. So you discount, as Blair and says, you discount it by uncertainty. And at the$10 ,000 price point, you're like, well, I could do a branding workshop, I could teach your internal people how to do this, it'll take a half day, 30 day follow up, we can review what your team put together.

15:43And I'd be fist bumpingly happy to do that for$10 ,000. So I guess the other question here is like fixed fee pricing. And how is it? You know, how do you separate them for someone that just like pulls a number out of the Yeah, versus value-based. So value-based pricing is a way to calculate a fixed price. So fixed pricing is sort of like a bigger level. It's a higher level category. You can set a fixed price by rolling some dice. You can base a fixed price on how many hours you think it's going to take. It's still a fixed price, but it's based on hours. Or you can base a fixed price on the value to the client.

16:22and like you said earlier your hourly rate you basically picked it out of the blue it's not based on anything client specific it's not based on any particular project it's mostly like an ego thing like i think i'm this good compared to you know that person charges 100 right right exactly i'm way better than this person who charges 100 an hour but i'm nowhere near as good as this person who charges$200 an hour. So my hourly rate is reasonable. It's reasonable for me to charge$150 an hour. This is pulled out of thin air. And then you multiply it by another number that you pulled out of thin air, which is how many hours you think the project is going to take.

17:04And if you only did an hour or two hours, or maybe even, I don't know, any unpaid amount of discovery, you have not uncovered all of the scope of what they're trying to ask you to do, at least not in software. And software was like impossible to uncover enough scope in a couple of meetings yeah that's where that's where my sort of i transitioned a while ago a lot of listeners will know into consultancy and so completely changed my model and the way i think about it and and a lot of times now clients come to me for the very reason that you've just said which is that we don't know the how the next three months are going to pan out right we're going to start this together in a partnership scenario with an objective to aim towards, like you were saying, which is usually a new rebrand positioning, whatever it might be.

17:47But on the journey, how many customer focus groups do you want? It's like, well, how does that map out? We don't know precisely at the start if we might need one in six weeks time to sense check something that we've come up with in the workshops or whatever it might be. So that kind of ambiguity, as you say, it's better to just price in because Because what then happens is, if you don't, and if you're kind of on this line-by-line scenario, then every time there's a change order, someone has to go, well, Mr. Client, Mrs. Client, unfortunately, that's extra work. And now you have to pay a bit of extra money.

18:24And you get this kind of impression that the relationship with the client comes down to, oh, here you go, they're going to charge us again for this. And again, that's where the relationship starts to sour. Whereas if they're paying you an equitable amount for the outcome that they're looking for, and as you say, it's well within the realms of what you find worth doing, then you don't get those issues because you're getting paid so much, quite frankly, to add an extra workshop in on something. It's not a big deal. In fact, you want to do it because you want the clients to be happy. So it's a completely different setup, this methodology that we're talking about now.

18:59And having gone through both, like you have, Jonathan, and obviously not to your extent, like in the way that you've documented and articulated it. Everything you're saying now, from a practitioner's perspective, myself, I can verify, folks. So definitely listen to this. And I could probably learn from it. I've got a few questions as well, because I find that question at the start around the value to the client. Probably, and I totally agree, you need to bring it early, but it's still kind of quite hard, right? Like, get them to pin down, you know, to even pin clients down on a number, like they may not really even know.

19:36So I just wondered if you've got any tips, like how do you, let's get practical, right? Let's give us a practice. Let's imagine we're in a sales conversation. what sort of questions do you recommend people ask to kind of try and unearth that value to the customer to the buyer so yeah it's super important and it is difficult to learn how to do this it's sort of a performance art there's some science to it but it's it's very much performance art and you need a fair amount at bats to kind of get good at it but the alternative is so much worse. It's that CEO at the end saying, this is garbage, start over, and we're not paying you another dime.

20:14And then now you got a tough decision to make. So the beauty of this is that it dramatically, I didn't realize this, I didn't expect this, but when I first started doing this, an unexpected but welcome side effect was my clients all chilled out because there was no micromanaging, there were no timesheets, there were no questioning anything. And the deadlines, A lot of deadlines disappeared because to them, the deadline was a cost control. But now all of a sudden, when they don't have to worry about a cost control, they're like, well, you know, it's done when it's done. We don't want you to cut corners.

20:47We want it to be good. So they really calmed down. There was a lot. It was just much more comfortable. It's a much better working environment. So that was huge. But it is difficult to uncover value. And there are a number of people, Alan Weiss, Blair Enns. there's a bunch of them who talk about how to do this in a sales interview. So the way that it worked in software with me, and it's the same structure for any professional service, is you want to talk them out of hiring you, which is polar opposite of what you're used to doing probably. Probably you're used to spending all weekend to put together a great pitch deck and come in and do the beauty contest against three other agencies that are waiting in the waiting room.

21:33This is the polar opposite of that. You go in and you, you, first, they're going to brain dump for a few minutes about what they, you know, maybe up to 20 minutes. They're going to say, oh, this is what we want to do. We're all excited. This is new thing. And that's great. And then they might get very specific about, and we're going to want a logo and we're going to want, I don't know, you tell me, all this list of deliverables and so on and so forth. And so you write all that down diligently taking notes. It's like, okay, this is great. This is great. Yep. We can do all of these things, but you're, you're really just not saying much.

22:05And then once it seems like they've got everything off of their chest and they've kind of cleared the decks, then you say, okay, this is great. Can we back up for a second? Because I would like to know more about the environment this is going to launch into. And good clients will say, yes, let's talk about that. They'll be like, ooh, this is interesting. Bad clients will be like, no, we told you what to do. That's what we want. Just give us a price. and like that's not a good fit for value-based pricing. So if they are willing to go up a level with you and talk business or strategy and allow you or help, really you're helping them uncover why they should do this at all.

22:43This is going to be expensive. It's going to be time consuming. It's going to irritate your employees. It's going to, you know, all of these things. So why would you do this? You know, like what's, why not do it some other way? couldn't you just spend a bunch of money on ads or couldn't you whatever couldn't you hire an internal person to do branding for you like you told me you have a bunch of designers why don't you just have one of them do it you know and you just keep presenting cheaper alternatives and they will bat them away or they wouldn't be talking to you in the first place and they'll say no we can't do that because of this reason we can't do that because this other reason and if we do that it would actually look really bad for us if we spent all that money on ads or for some strategic reason, we're not going to be giving money to meta, whatever.

23:28And you're writing all of this down as close to verbatim as you can. And you're like, okay, why do this now? Why did something change? You've been probably talking about a rebrand for 18 months. Why are you pulling the trigger now? Couldn't you study the market for 18 months and do it later? AI, can't you just do it with AI now? It should be so easy for you since you know what you want when you see it. Why don't you just do it with AI? or just wait for AI to get better for 18 months and then do it later. And they'll tell you why they can't. There's some reason why either it's the board or the market or some competitor has done something that they're afraid of.

24:04Almost certainly there'll be some reason why this is urgent. And then you're like, why would you hire me to do it? There's probably, you know, you could probably choose from 100 people like me. Why are you talking to me? And why not, you know, like I said, outsources to your cousin Vinny or some internal employee or offshore it somewhere. And then that's where you learn how good your positioning is. So with the answers to those things, you've now got a really good idea of where the target is. Where's the bullseye? What are we shooting for here? And unless I was convinced at that point that their expectations were realistic, that the timeframe was reasonably realistic, and that I really was the best person for the job in their mind, then I'm going to write a proposal because now I have a lot of pricing leverage.

24:53Not necessarily, which isn't to say that I can set the price astronomically high. I just know that I just have an idea of what some acceptable prices would be. And then I can reverse engineer scope based on those prices and present them with three options. So it's a process of uncovering. They, like you said, they couldn't blurt out a number. if I said oh how much is this worth to you they'd be like I don't know what I don't know how to process that so you have to go through this process of Socratic questioning and kind of like they know in their gut that this is the right thing to do you and they need to pull all of that out of the junk drawer and put it on the table and basically inspect the decision at the components of the decision and find out why this why now and why me so that you've got some it's the only way to convince you to take the job.

25:46If you don't know those things, you don't know what the desired business outcome is or how realistic it is. So without doing that, if I didn't do that, I wouldn't be able to write a proposal. Like I don't even know what I would put in it. But if you do do that, the proposal writes itself because they've given you all the reasons why they have to work with you. That's brilliant. Folks, that was a masterclass. I hope everyone's been taking notes. If you're serious about mastering branding and building a thriving creative business, the Brand Builders Alliance is for you. Inside, you'll get live masterclasses, mentorship from our eight resident coaches, a stacked resource vault, and a global network of brand builders who actually get it.

26:22If you're done winging it alone and are ready to scale with structure, support, and serious momentum, head over to joinbba.com and get on the waitlist. That's joinbba.com. I'll just throw another thing in there and see what you think about this. The other thing I find in that early conversation is when they make statements is to challenge that obviously positively you don't want to be a jerk but like to be like so how do you know that like what have you what have you done to uh to verify that and oftentimes i find clients will expose the fact that it's a hunch or it's like a guess that they've done and then then if you want to add a value-based question in there it's like well what would it mean to you if like maybe i came in as an outsider or some you know and and we started to verify some of this before we actually start taking an action you get a sense of them like leaning in being like oh would you do that that'd be amazing because because because i always think particularly from a consultant's perspective you you're acting like a doctor right like you don't go to the doctor and go doctor i've got a broken leg and the doctor immediately just whips out a cast and just like puts it on your leg the doctor says let me just check that first we'll go get an x-ray and then we'll have a diagnosis so i often find people come with a pre pre-baked diagnosis this sometimes they've done you know some verification themselves most of the time though they haven't really done it it's just the gut that that's what they think's happening and they're hiring you to solve that so you can add even more value if you verify the problem is as bad or as worse as they think it is in the first place so i don't know what your thoughts are on that jonathan is that do you think oh yeah yeah i mean like if anybody who's listened to me on my show will hear all the time me say like it you know it's like someone running into a doctor and saying exact same thing.

28:05It's like running into a doctor saying, doc, I need a triple bypass. And the doctor's not going to say, jump up on the table. I'll go get my knife, right? That would be malpractice. And I don't want to put too fine a point on it, but I think it's malpractice in all the professions to prescribe before you diagnose. I mean, like they are not the expert. That is why they called you. So for them to be, you know, not to mix my metaphors, but well, I'll stick with this one. for them to tell the surgeon how to do the surgery or if the surgery is even required is insane it doesn't make any sense but i know that people like there's people who are more junior and people who are just people pleasers and people who are used to being an employee and doing what they're told this is another big mindset shift is like no you are the expert about branding or design they're the expert about selling tires or manufacturing tires or whatever so you're not going to tell them anything about how to do that and they might even be an expert about what their customers want but you're the expert about design you're not going to tell them how to make tires and they're not going to tell you how to do a brand guideline or something like that so it's like you need to own that piece and if they're going to boss you around at the thing that they're supposedly bringing you in to do it's almost guaranteed to fail because the wrong person's driving the taxi they're like backseat driving the whole project so of course it It goes off the rails.

29:29Of course it goes over time. But the incentives, back to the financial incentives, if you get paid more and more and more as that backseat driver, you get the meter running, backseat driver's like, maybe take a left up here, maybe take a right. They haven't even told you where they want to go, by the way. They're just bossing you around. You're driving around. And then eventually the meter gets to a point where they're angry. So we're not where I wanted to go yet. It's like, well, you didn't tell me where you wanted to go. It's like, well, you didn't ask me. It's like, ah. Ah, yeah, for sure. That's crazy.

30:00Just one other quick thing on just on this sort of the sales question, if you don't mind, Jacob, because I just want to ask this question. Do you find that there's different layers of value that you can uncover? And what I mean by that is so if I tell you where I'm going with this, like, I often think that there's, there's value to the buyer as an individual. And then there's, there's, there's value to the business, right? And sometimes those two things have different nuances. like imagine like a ceo would be like you know telling you all that like you know the the problem from my from my perspective like the growth opportunity and that we're not aligned around the growth plan and the brand and way it's positioned and blah blah blah so that's the like the business challenge and then i would say to them but what does that look like for you and they might say oh every board meeting i go into every every leadership meeting everyone's fighting each other and there's no you know i'm just spending all my time dealing with squabbling people and lack of priorities and all this stuff now i've uncovered what i would call like a soft value like a value for them which is misalignment and the stress of having to handle the leadership team on top of the hard value which is to the business itself which has got hard numbers and growth opportunities and total addressable markets and all this good stuff so what what are your thoughts on that do you do you see different grades of value and and and do you have any thoughts on how to uncover that and and what's worth more you know i don't know if you've got any thoughts on that yeah there's a couple things probably first thing i would say is there can be a difference between the person who's going to decide to hire you and the person who approves the decision.

31:34And it feels a little bit like it's in the territory you're talking about. So where you're talking, you know, in a bigger organization, you're talking to, I don't know, you tell me, SVP of finance or something, and they are at a credit union and they want to redo all of their member onboarding. And it's not like an overall rebrand of the entire business. It's specifically to their business unit and they're responsible for it. And maybe they have budgetary discretion over it to say like, no, I don't have to take this to anyone. I can run with this. So in effect, that person is kind of like the CEO.