The beginning of this month marked my sixth anniversary of becoming a solo consultant. I don’t regret my decision and cannot imagine ever giving up solo consulting. I was essential in the implementation of some really interesting projects like infotainment systems for cars and driver terminals for sugar beet and forage harvesters. The income from these projects gives me the financial freedom to enjoy life more than ever before.

I took my anniversary as the cause for reflecting about what I should have done differently. I learned three main lessons.

Hourly billing runs against the best interest of your customers. As a solo consultant, you have no interest in becoming more productive. The longer hours you work the higher your income. You can only change this, if you Don’t Bill by the Hour but charge a value-based fee.

Charging customers for the value you provide becomes much simpler if you have a strong brand. A strong brand will Make Potential Customers Call You. You don’t have to search for projects any more, but projects will find you.

Productised Services are part product and part service. The product part is the same for all customers, whereas the service part is specific to each customer. You maximise your profit by minimising the time you spend on the service part.

I will heed the conclusions drawn from these lessons and implement them step by step. How about you?

Don’t Bill by the Hour

In a recent project, I had a revealing argument with my customer and another company X involved in the project. I was billing by the hour. X provided a fairly unfinished software “product” for a fixed price. My software and X’s software had an interface.

The argument was whether X or I should do a change. The change would have cost X one week and me ten weeks. Obviously, X didn’t want to spend one week for free. Their managing director told me – in the presence of the customer: “What is your problem? You get paid by the hour, don’t you? So, just do it and take the money.”

I couldn’t believe my ears. After regaining my composure, I answered: “I regard such behaviour as unethical, because our customer would suffer a substantial and unnecessary loss.” All the customer’s managers including the CEO sided with X, as they concluded that bending the company X to their will was more trouble than an individual. And anyway, I would be paid for the extra work.

I gave up at that time and did the extra work. In hindsight, I should have terminated the project at that point, as similar arguments predictably happened over and over again. I had to bear the extra work most of the time. These arguments didn’t help the mood and motivation of the project team.

The example shows how ingrained hourly billing is. Customers accept it as God given, although they know that they are ripped off. The consultant’s and the customer’s incentives are clearly misaligned. Consultants try to maximise the hours billed, whereas customers try to minimise the hours billed. Consultants are punished for being more productive and for delivering higher value to the customer.

This misalignment leads to fruitless negotiations over hourly rates and makes it hard to increase rates even modestly. Moreover, hourly rates limit your yearly income to roughly € 240,000 – assuming very optimistically that you work for 160 hours per month all 12 months of the year and that you charge € 125 per hour.

Roughly one year ago, I understood that hourly billing is broken. I had never considered fixed-price projects, because the risk of loosing money is far too high. I started looking for advice on billing for consultants. I eventually stumbled over Alan Weiss’s book Value-Based Fees: How to Charge – and Get – What You’re Worth (2nd edition).

My aha moment about value-based fees came when I found a reference to Jonathan Stark’s work in Philipp Johnston’s project proposal template. Jonathan Stark’s book Hourly Billing is Nuts gives a lot of practical advice how to calculate value-based fees. As Jonathan is a software developer himself, I found his advice more applicable to my own situation than Alan Weiss’s.

So, what are value-based fees? Value-based fees are “fixed bids on steroids”, as Jonathan puts it. The value is the maximum amount of money a buyer is willing to pay for your customer’s product that you help build or improve.

Customers pay you a certain price P for your services. The value V is the return customers get from investing P into you. Your cost C is your hourly rate times the number of hours that you need to produce the required results. Your profit as a consultant is the price minus cost (P – C). Your customer’s profit is the value minus price (V – P).

As the price P is fixed, consultants have every incentive to reduce their time spent and to be more productive. This is also very much in your customer’s interest. The misalignment of the consultant’s and the customer’s incentives is gone.

The next step is to find a price P, the value-based fee, that gives a fair and healthy profit to both the customer and the consultant. Jonathan Stark gives the following formula as a rule of thumb:

P = max(1.85 * C, V / 10)

Multiplying your cost by 1.85 gives you a reasonable buffer against too low effort estimates. This sets the lower bound for your fee, whereas the value divided by 10 sets the upper bound for your fee. The closer the value is to the price, the smaller the profit is for the customer and the less likely the customer is to pay your fee.

Let me give you an example of how to calculate the value V. I made a conclusive argument to a home appliance maker that they could save 8 Euros per appliance for the system-on-chip, if they chose Qt instead of AngularJS to build their HMI. They plan to produce one million appliances with this new HMI per year over the next 5 years.

I would peg my contribution at 1 Euro per appliance or 1 million Euros for 1 million appliances per year. I would estimate 80 hours for the project at a rate of 105 Euros. So, my value-based fee would have been max(1.85 * 80 * 105, 1,000,000 / 10) = 100,000 Euros.

Stupid me billed 72 hours at a rate of 105 Euros, which amounted to 7,560 Euros. I felt quite cheated. At least, I could convert this experience into a whitepaper and a talk at a developer conference. These are two small steps towards creating my own brand, which is the topic of the next section.

I have used hourly billing for the last six years. It enabled me to put aside a good amount of money. So, hourly billing has served its purpose for me. I decided this month to switch to value-based fees. I’ll keep you posted about my experiences.

My best advice to aspiring solo consultants is: Buy Jonathan Stark’s Complete Bundle for $ 119, which includes his book Hourly Billing is Nuts and a couple of webinars focusing on topics like How to Price Your Services, How to Write Proposals That Close and How to Prevent Scope Creep. The long Q&A sessions of the webinars are an additional gold mine of information. And, don’t forget to sign up for his newsletter. Jonathan’s Complete Bundle is the one resource I wish I would have had when I started solo consulting six years ago.

Make Potential Customers Contact You

During the last six years, I conjured 2 out of 20 projects out of nothing – starting with a cold email. One project was huge, the other small. The odds are pretty bad to win such a project. You don’t know whether you contacted the right person at the right time about the right topic. A lot of things must be right at the same time.

I found 5 of my 20 projects through trusted relationships. Someone at the customer helped me or referred me. 10 of the 20 projects were follow-up projects. If you bill by the hour, you should raise your rate for every follow-up project by more than the inflation rate. So far, I have been too stupid to do it.

3 out of the 20 projects found me – without me doing anything. One project was big, the other two were small. After seeing my project portfolio or reading one of my blog posts, these customers decided that I was the right person to help them.

These customers are your ideal customers. They have identified some pain points. They know that they need some help. They call you. Your acquisition costs are close to zero. The million-dollar question is: How do you make potential customers contact you?

The short answer is: Create a strong brand! If a potential customer says “Get me X to solve this problem!”, where X is your name, you obviously have a strong brand. Here are some suggestions to improve your brand recognition.

Write informative blog posts on your web site about your special areas of expertise.

Publish articles and white papers on web sites and in printed journals that your potential customers read.

Send a monthly or bi-monthly newsletter to relevant people.

Give talks at conferences, trade shows and meet-ups visited by your potential customers. Exhibit at these events.

Hold webinars, online courses and trainings.

Write books.

Give interviews and appear on podcasts.

It’s only now after six years that I fully understand how a strong brand makes finding new projects so much easier: New projects find you! Be aware that building up your brand easily costs you 60 hours per month. Philipp Johnston over at Embedded Artistry does a fantastic job at building a strong brand.

Offer Productised Services

I implemented the CAN communication for two harvesters and an e-bike, twice including code generators. I wrote several on-screen keyboards and keypads. I checked Linux systems for FOSS license compliance. I regularly customise Yocto-based board support packages such that customers can start developing their applications.

In short, I solved the same problem multiple times. The solutions have a high overlap, but also need some customisation. These solutions are part product and part service. They are productised services. You implement the product part once and perform the service part for every customer. You maximise your profit by minimising the time spent on the service part. You may be able to evolve some of your productised services into full-blown products.

An easy way to build up productised services is to keep the rights to use of the software that you write or that you oversee others writing. This works best for software that doesn’t give a competitive edge to customers and that is not specific to customers. Your leverage is to give a discount on your fees, if you are allowed to keep the rights to use.

Productised services are a form of intellectual property (IP). Such IP makes it easier to sell your services. Your IP enables potential customers to bring their products faster to the market. It proves to potential customers that you are “the” expert for their projects. It strengthens your brand and makes potential customers call you.

I don’t offer any productised services yet. I have many ideas for productised services from six years of project work. Unfortunately, I don’t have the rights to use of the software I have written. So, I must implement the product part another time, but it will be the last time.