Be prepared, this is another post where I'm going to dig into the continuing idea of pricing divergence in this industry. I was speaking with someone recently, in fact, a small business owner, about a project we were bidding. I said, "the client said they have a budget of $40,000, and honestly, that won't be enough." Shocked, they asked me how a website could possibly cost that much. This started me down a path of discussing the features, what they entail, and reverse engineering how many hours of effort the entire project would take. And when it was all said and done, I had calculated that the project would take in the area of 1,000 hours of total effort. And when you take the $40,000 budget and divide the 1,000 hours… You arrive at an hourly rate on average of $40.
Now granted, this is a somewhat complex project that was 100% custom designed, required custom development – this wasn't an informational type of website – and would need integrations, commerce capabilities and a bunch more to get to a functional MVP. But, the same level of pricing divergence exists on any number of possible projects. So, in this post, I'm going to give you some tips and tricks to help you predict what your project will cost, based on a few critical factors. This should hopefully better prepare you for the procurement process and beyond.
First, you need to be somewhat realistic. Potential clients never understand the time or effort required to make something work. More and more, they realize the differences between custom building an application or website and taking one off the shelf and configuring it. That is helpful because there is a world of difference between those approaches. However, confusion sets in when you discuss how long things take to do.
I understand that for the layperson, it's not entirely possible for you to accurately predict what effort will go into a project. But, I have a way you can better gauge this vital factor – just ask developers! Frequently, clients are too fast to ask how much something will cost. Instead, I'd appeal that customers ask what the predicted effort is. Cost is based on time, in almost every agency setting, when it comes to development. (Sure, we could talk about value pricing, but that is a bit rarer in the development world.) So, rather than focusing on a project from a cost perspective, why not look at it from an effort perspective instead.
Focusing on effort helps you a couple of ways. First, it lets you understand who is carefully considering your project and who isn't. The reason is that you can ask follow-up questions from a more precise perspective. If one developer tells you they can build you a complex application in 100 hours, and another says 500, then clearly something isn't right. But, you can ask both of them to break those into units. How much time for design? How much for development? Testing? Deployment? Believe it or not, you'll quickly be able to tell how much experience (and talent) your developer or agency has based on this detailed level of questioning.
Also, focusing on effort helps because you'll get a sense of process from the developer as well. They will think about quantifying effort in the order of their process. So it could be X time planning, Y time designing, Z time developing, and so on.
One thing, however, is to be willing to accept that on introductory calls, these figures are just estimates. No developer can tell on one single call precisely how much time something can take. But astute developers with a depth of experience can look back and similar projects and do a reasonably good job in terms of a prediction.
This one tip alone hopefully makes clicking through to this post worthwhile. Focus on effort, and then you can not be distracted by costs and budgets. You'll be able to focus on that in a bit, anyway.
As you ask your agency or developer about the time required, you can then utilize that data to get a sense of the scale of your project. And that allows you to work backward to figure out what your process needs to be, what the steps will be in terms of phases or stages of development, and all of that will enable you to plan and prepare your entire project better.
I wrote a post recently about responsibly planning timelines for a project. This is where working backward is critical. So, rather than rewrite all of those details, have a look at that post and see how you can really understand timeframes, and thus get a handle on planning your projects life cycle.
How does this relate to planning budgets?
Well, common sense sets in here a bit. Projects that are going to take months and months to work through in phases, well, typically they aren't cheap. Understanding what goes into a project is going to help you accurately evaluate if the quotes you are receiving are accurate or just wrong.
Put it in Perspective
Let's say you have now spoken to 2 or 3 developers, and you can reasonably assume that you know your project is 800 hours, give or take. Now, you can start to talk about money. But, you have to put it into perspective before you drive yourself crazy…!
I had a potential client reach out to me about a project. It was written up as "kinda like Airbnb", and the person indicated "I assume it would take no more than 1000 dollars or so to be turn key ready". Now, if this person had taken the above advice into account, and focused on effort, they'd have known that they were in the man hundreds of hours to build something like this. Even if we estimated low, and said 200 hours, do they really believe that they are going to get someone to work for 5 dollars per hour?
The design industry, in general, suffers from an obscene undervaluation compared to other verticals. I've said it before – people spend obscene amounts of money on professional services. Lawyers, doctors, home improvement, therapists, trainers, nutritionists, golf professionals (the latter being obviously aimed at me!). In each of those scenarios, no one ever wants the cheapest provider. In fact, with each of those above professions, the pricing offered and considered is usually anchored by the rates provided by the experts of the experts. When we hear on TV that some lawyers are $1000 per hour, then we are perfectly fine paying $250 per hour, right?
In the creative world, it's totally the opposite. We are anchored from a pricing perspective from services like Fivvr, or our cousin who "knows websites." Procurement of digital services is typically a race to the bottom, whereas with other professional services, there is either a risk or a shame in hiring the lower-priced resources.
Now, granted, you could say that those professions mentioned above have higher amounts of training, certification, and regulation. And, I'd agree with you – licensing for digital services should probably become required. We deal with personal data and proprietary information when building projects. And perhaps that's what we need to fix the creative services industry. But just because there isn't licensing doesn't mean that our services aren't valuable.
In reality, digital services are more valuable than almost any others, especially when your business relies on them. In the above example of the small business owner, which I mentioned in my introduction, the person in question had one of his employees do the site with their friend, which netted them real savings. However, the website came out awful, and when compared against their competition in the local area, you can definitely see a difference. So what is the lost opportunity cost? Indeed, there is a value, when you consider that one or two new customers per month would have helped them break even on a budget 5x what they spent in the first year.
Fact is, digital services are valuable, and you have to consider that the truly expert practitioners in this industry are at a level that is on par with your accountant or your attorney. It's just that important.
And by the way, one last "in your face" moment of reality while we are on the topic of keeping things in perspective… If you are building the next Airbnb or any business that is 100% digital, be realistic about what it costs to develop such a system. Companies such as Airbnb have spent hundreds of millions of dollars developing their platform. Let's get real, folks!
Rates & Value
I wrote a detailed post about the different types of agencies, freelancers and web professionals you'll see offering services, and comparing how they work versus what they charge. I encourage you to read it, and I won't cover all of that here, to save time. Rates do diverge, and that is something you see in all professional services. However, they seem to differ more in the digital space.
You can see rates anywhere from $10 per hour to $250 for the same service, such as web design, development, or marketing services. This is a big difference, to say the least. Much of the delta is determined by overhead, geography, and other factors outside the control of the practitioner. However, much is also determined by the skill level of the person doing the work, as well.
Hours always are a sticky subject and in the grand scheme of things a wrong metric to use. But, it's what we got, and it isn't going away. An expert that costs $250 per hour may draw upon years of experience to work faster and produce more return than an inexperienced beginner. Is a web designer that can optimize an e-commerce homepage to increase sales 5% worth $250 an hour? What about if that means a million dollars a month in increased volume?
I'd like to reinforce my first point… Focus on effort first, then you can determine what rate you are comfortable spending on the resource. If you talk to a web development agency that you like, and you trust their work-effort estimate, you will have to evaluate if that rate works against the other options, and determine what risk level you want to accept in completing your project.
Remember the above example – a $40,000 budget for a project that is 1000 hours? Well, cross reference those figures with the post I linked to above. At $40 per hour, you're looking at two real options: an offshore agency or an onshore freelancer. The overseas agency carries a level of risk on its own, and a freelancer as an individual can't pack all the skills into their toolbox as an agency can. So, if you are uncomfortable with those choices, an onshore agency is your best bet. And suddenly your project is into the six-figures. That's the reality of how budgets all come together and why divergence exists the way it does. Remember, as price increases, your risk decreases.
My loyal readers (I know who most of you are!!) would know I approach this topic often in our blog. Obviously, it's self-serving to an extent. I'm in the business of selling digital services – so of course, I have an opinion. But, in all honesty, this topic goes beyond myself or the NP Group. It's a problem for the thousands of clients who go out and procure services poorly and get burned in the process. Hopefully, this post clarifies a few points ahead of your next project and enables you to avoid project failure, which ultimately results in lost time and budget