We often hear that people say that you need to take risk to make more money. Generally people say that with trading, but how does it work for a business, a business like mine, a software development company?

There are multiple ways for us to absorb a risk which allows us to charge more money. Let me explain.

A client wants to build an app. They come to us. Now, we engage with them in 2 ways:

  1. Time based pricing
  2. Project/Scope based pricing

In time based, we simply charge for our time. It’s the client here who is taking a huge risk. They don’t know how long we will take to complete their project. They risk us going overboard their budget by a huge number. And that’s why this is the least profitable way for us to make money.

We pay salaries based on (and profits, but that’s irrelevant for our discussion). We essentially work with our team on time based pricing. Doing time based with our clients means we are adding a premium to the rates we are charged and providing that as a service.

Let’s say the client will pay us $60/hr and we pay the team $45/hr. $15/hr is how we need to pay for all the overhead and profits. If we can be profitable with that, our downside is capped, but so is our upside.

With project based, they give us the requirements, and we give them back a time and money estimate. If we go over board a time, the client doesn’t pay anything extra, even though we need to keep paying team members for their time.

But, if we are good with estimation, or are very fast, we get to make a lot more money as our effective time rates goes up.

Let’s say a client wants us to work on a project which we can deliver in a month and they want one price estimate for it. So we tell them it’ll be ~$20K.

Now, if we are able to do it in 1 month, the inputs are the same ($45/hr ~= $7200/mo). But we charged $20K for it, so we make ~$12.5K on this project, giving us a gross profit of ~$80/hr.

Now, if somehow we fuck it up and take 3 months, we end up losing $1,600 on gross margin (net will be even higher).

We’re taking higher risk in the second example, but for a higher reward.

Businesses like App store, stripe, amazon marketplaces, understand this well and have success fees as their primary business model which makes them good money.

You don’t pay stripe any money, even if you keep loading their widget millions of times per day, if you don’t have any transactions.

Think of where you can take risks like these in your professional life, and see whether it pays off with a higher return.

Few things you can take risks on:

  1. Ask for equity in exchange of salary
  2. Take on projects that seem hard to do but are important for business
  3. Spend time and money on improving yourself (ok yeah, this is not really risky)

You get the gist.

Our most profitable project was the one where we helped a company fix their documentation and were paid based on the improvement of conversion rate of users that looked at documentation (and no upfront money). That project alone paid for most of our costs of that year of business.