12 ms·

> For serious engagements, pricing should be defined as a function of the value gained for the client from the engagement. For example, if the client saves $250

> For serious engagements, pricing should be defined as a function of the value gained for the client from the engagement. For example, if the client saves $250k as a result of the engagement, then you should charge a percentage of that savings. Optimyze (later acquired by Elastic) initially tried this pricing model and found that enterprise orgs simply wouldn't go for it, despite the cost being effectively "free".

poulsbohemian 4y ago
I was once part of a consultancy (not related to free software) that proposed this kind of pricing. The challenges became: -- Companies couldn't / wouldn't quantify the savings, or refused to share that information. -- Companies weren't willing to pay it. They would rather have thrown their employees at the problems or paid for the cheapest contractors around, even if it didn't actually solve anything, IE: the illusion they were doing something and at an "affordable" price, regardless of outcomes. I've had more than one customer argue with me over the years that they would rather pay hourly than a fixed price (however that fixed price was calculated) because it "felt" like they were more in control of the costs, IE: they could micromanage the hours. I've had these same customers spend many multiples of what it would have cost them had they agreed to that retainer or fixed cost.
- sumtechguy 4y ago
  If I were to guess accounting rules the company uses do not account for that sort of pricing. Lets say I install software X. It lets me take 3 people and put them onto something else. Do I really save '3 peoples worth' of money installing this project? Maybe I now need 2 to run the thing? Oh and you have to get this info out of a manager who probably is not really managing that sort of thing and lets 'the money people handle it'. Also it was explained to me once 'why do we have so many contractors even though they cost wildly more' 'we have two budgets, one I come up with every year and I have to stay inside of that, the other I can change at any time, care to guess which one the contractor budget comes out of?' Software/hw expenditures are not discretionary usually, and usually have some sort of depreciation schedule. A rev sharing scheme would put a damper on that sort of tax games they play. What you are seeing is a side effect of our tax system.
- derf_ 4y ago
  > I've had more than one customer argue with me over the years that they would rather pay hourly than a fixed price (however that fixed price was calculated) Hello, I have been one of these people. If I agree to a fixed price, then the goal of the contractor becomes "do the minimal amount of work possible to deliver something that can be argued to meet the letter of the contract (and no more)." If I agree to an hourly rate, then the goal becomes "bill as many hours as possible while demonstrating at least some plausible incremental value for those hours." Unless I am _really_ good at specifying a precise deliverable (and who among us in the software world is?), the second set of incentives looks much healthier, both for me and for the contractor. I think this is particularly true for open source deliverables. Maybe it costs more, but bounding that precisely is easy ("cannot charge more than X hours in Y period"). I don't want to micromanage your hours. I don't have time for that. Mostly the fact that when you send me an invoice you might expect the question of "What did you actually do?" to come up is sufficient to make sure you really did something (and if not, pretty easy to resolve). Frequently in the fixed-price contracts I have done, even with reputable people with whom I've had a previous relationship, that "argue" bit above is not hyperbole. Then it falls on me to demonstrate why what you did does not meet the requirements, or is flawed in some other way, and I don't have time for that either. That was why I was paying you. Now the relationship is adversarial and asymmetric: it is easy to not understand a problem, and hard to both understand it and convince another party who is not invested in understanding it to understand. Whereas if you are billing hourly, you are more than happy to be told about problems that you can then charge me to fix. I get something I can actually use that way, too.
  - phphphphp 4y ago
    You’re describing a dysfunctional arrangement in both cases. If the only way to ensure that your requirements are met is by paying hourly so that you and the provider have the shared expectation that you can say “just do it, I’m paying you to do it so do it” then you’re working with bad people. The problem with hourly is that it is a totally different way of running a project from fixed cost: fixed cost front loads the challenges and provides a great opportunity to assess the suitability of your provider, it demands clarity, a shared understanding, it is immediately apparent if a project is going to go to shit: a fixed cost project (managed properly) can’t start without understanding the end. If someone can’t give you a fixed cost that you can rely on: find someone else. If someone can’t give you the confidence that they’ll actually deliver what you want: find someone else. As a software engineer, I bill a day rate for most of my clients because that’s their preference, and it’s easy money for me so I don’t refuse the work, but I actively discourage it because it is terrible economics for clients: it’s burning money. On a fixed cost project, 100% of my time is spent delivering. On a day-rate project, 50% of my time is wasted — because if you’re paying for my time, the dynamic is exactly like that of an employer employee relationship… and to spend a day in any office anywhere in the world, and you’ll find at least 50% of everyone’s time is wasted.
solar-ice 4y ago
The assumption/trick here is that you are experienced enough that you can make a guess as to how much money the company thinks they will save by contracting you, and you bill them appropriately, without actually telling them what you're doing.
karaterobot 4y ago
Can't really blame them. They just want to know how much it's going to cost them. Somebody is trying to allocate a budget for this project, and they ask "what's it going to cost?" and the answer can't be "the result of a function whose inputs are undefined at this time".
- gnramires 4y ago
  I've come to the conclusion that estimating "value" can be quite tricky. Is it the difference as to what their profit would have been without your specific consultancy, without any consultancy, without a specific solution? To illustrate why, consider the "value" of a (1) a toilet, (2) nuts and bolts (sorry, I'm not great at examples). You couldn't live well without a toilet, the differential cost of having/not having a toilet in your home is immense. That doesn't mean it's reasonable to spend thousands of dollars on a single toilet -- even if you would if you absolutely had to. The cost isn't that high. The same goes for nuts and bolts in a product: they can be essential for the functioning, but it doesn't really cost much, nor makes sense to use uber-costly nuts and bolts. So a naive differential definition of value can be just a rent-extracting proposition, which I think most orgs would try to avoid. If you're sure no one else in the world could deliver this solution (i.e. it's extremely scarce and non-reproducible), then the value proposition starts to make more sense (because your time and attention is also limited). I tend think that's rare. So it seems more natural to adapt to each situation: you need to estimate your (operation) costs and target revenue, and then charge with a healthy margin on that; and if your service is highly unique or in high demand, you adapt by increasing your pricing accordingly.
  - ghaff 4y ago
    >That doesn't mean it's reasonable to spend thousands of dollars on a single toilet -- even if you would if you absolutely had to. The cost isn't that high. Check out Toto washlet prices. :-) e.g. https://www.totousa.com/washlet-with-smart-toilet-g450-10-gpf-and-08-gpf https://www.totousa.com/washlet-with-smart-toilet-g450-10-gp... But I agree with your point. If you have some specialized, almost unique, knowledge, have plenty of demand, and are hard to substitute for--and it's something high value--you can charge a lot.
mitchell_h 4y ago
Value based pricing as been tried a bunch of times. I've only seen it work to lower the price.
brilee 4y ago
I find that if you're getting this response, you're not talking high up enough in the org chart. Eventually, somebody does care about the overall good of the company, over the turf wars/budgetary bureaucracy of the middle management layer. But your project also has to be worthwhile enough to invoke the higher-ups.
claudiulodro 4y ago
Big companies hate rev share, which is essentially what value based pricing model is. Rev share pricing is great for getting small, money-conscious people in the door, but there is a threshold as you get larger where it becomes more cost-effective for the client to go with standard billing. Substack's been running into this problem, where it's easy to get people to try it out, but as a content creator gets popular the rev share amount becomes greater than the cost to hire an agency and "self-host". Someone making $1mm/yr is going to chafe at a $200k rev share when an agency at $50k/yr retainer can do a similar job. Unrelated to that but related to the main topic: it's interesting that people treat FOSS consulting as a weird beast and ignore the thousands of successful WordPress/Drupal/etc. consultants and agencies. There's a lot to be learned from analyzing their strategies!
- deleted 4y ago
  [deleted]
- R0b0t1 4y ago
  It's not more cost-effective for the client if the work just never happens. Further, I don't care what is more cost effective to them. I want to capture some of that value. That's the mistake these businesses are making and what you need to inform them of.
benjaminwootton 4y ago
I agree it is extraordinarily difficult to pull off. I have seen it attempted hundreds of times in technical professional services deals and never once seen it get past procurement. You can however incorporate into your pricing by charging $high_day_rate or $high_fixed_price if you have established the value.

poulsbohemian 4y ago

I was once part of a consultancy (not related to free software) that proposed this kind of pricing. The challenges became: -- Companies couldn't / wouldn't quantify the savings, or refused to share that information. -- Companies weren't willing to pay it. They would rather have thrown their employees at the problems or paid for the cheapest contractors around, even if it didn't actually solve anything, IE: the illusion they were doing something and at an "affordable" price, regardless of outcomes. I've had more than one customer argue with me over the years that they would rather pay hourly than a fixed price (however that fixed price was calculated) because it "felt" like they were more in control of the costs, IE: they could micromanage the hours. I've had these same customers spend many multiples of what it would have cost them had they agreed to that retainer or fixed cost.

sumtechguy 4y ago
If I were to guess accounting rules the company uses do not account for that sort of pricing. Lets say I install software X. It lets me take 3 people and put them onto something else. Do I really save '3 peoples worth' of money installing this project? Maybe I now need 2 to run the thing? Oh and you have to get this info out of a manager who probably is not really managing that sort of thing and lets 'the money people handle it'. Also it was explained to me once 'why do we have so many contractors even though they cost wildly more' 'we have two budgets, one I come up with every year and I have to stay inside of that, the other I can change at any time, care to guess which one the contractor budget comes out of?' Software/hw expenditures are not discretionary usually, and usually have some sort of depreciation schedule. A rev sharing scheme would put a damper on that sort of tax games they play. What you are seeing is a side effect of our tax system.
derf_ 4y ago
> I've had more than one customer argue with me over the years that they would rather pay hourly than a fixed price (however that fixed price was calculated) Hello, I have been one of these people. If I agree to a fixed price, then the goal of the contractor becomes "do the minimal amount of work possible to deliver something that can be argued to meet the letter of the contract (and no more)." If I agree to an hourly rate, then the goal becomes "bill as many hours as possible while demonstrating at least some plausible incremental value for those hours." Unless I am _really_ good at specifying a precise deliverable (and who among us in the software world is?), the second set of incentives looks much healthier, both for me and for the contractor. I think this is particularly true for open source deliverables. Maybe it costs more, but bounding that precisely is easy ("cannot charge more than X hours in Y period"). I don't want to micromanage your hours. I don't have time for that. Mostly the fact that when you send me an invoice you might expect the question of "What did you actually do?" to come up is sufficient to make sure you really did something (and if not, pretty easy to resolve). Frequently in the fixed-price contracts I have done, even with reputable people with whom I've had a previous relationship, that "argue" bit above is not hyperbole. Then it falls on me to demonstrate why what you did does not meet the requirements, or is flawed in some other way, and I don't have time for that either. That was why I was paying you. Now the relationship is adversarial and asymmetric: it is easy to not understand a problem, and hard to both understand it and convince another party who is not invested in understanding it to understand. Whereas if you are billing hourly, you are more than happy to be told about problems that you can then charge me to fix. I get something I can actually use that way, too.
- phphphphp 4y ago
  You’re describing a dysfunctional arrangement in both cases. If the only way to ensure that your requirements are met is by paying hourly so that you and the provider have the shared expectation that you can say “just do it, I’m paying you to do it so do it” then you’re working with bad people. The problem with hourly is that it is a totally different way of running a project from fixed cost: fixed cost front loads the challenges and provides a great opportunity to assess the suitability of your provider, it demands clarity, a shared understanding, it is immediately apparent if a project is going to go to shit: a fixed cost project (managed properly) can’t start without understanding the end. If someone can’t give you a fixed cost that you can rely on: find someone else. If someone can’t give you the confidence that they’ll actually deliver what you want: find someone else. As a software engineer, I bill a day rate for most of my clients because that’s their preference, and it’s easy money for me so I don’t refuse the work, but I actively discourage it because it is terrible economics for clients: it’s burning money. On a fixed cost project, 100% of my time is spent delivering. On a day-rate project, 50% of my time is wasted — because if you’re paying for my time, the dynamic is exactly like that of an employer employee relationship… and to spend a day in any office anywhere in the world, and you’ll find at least 50% of everyone’s time is wasted.

solar-ice 4y ago

The assumption/trick here is that you are experienced enough that you can make a guess as to how much money the company thinks they will save by contracting you, and you bill them appropriately, without actually telling them what you're doing.

karaterobot 4y ago

Can't really blame them. They just want to know how much it's going to cost them. Somebody is trying to allocate a budget for this project, and they ask "what's it going to cost?" and the answer can't be "the result of a function whose inputs are undefined at this time".

gnramires 4y ago
I've come to the conclusion that estimating "value" can be quite tricky. Is it the difference as to what their profit would have been without your specific consultancy, without any consultancy, without a specific solution? To illustrate why, consider the "value" of a (1) a toilet, (2) nuts and bolts (sorry, I'm not great at examples). You couldn't live well without a toilet, the differential cost of having/not having a toilet in your home is immense. That doesn't mean it's reasonable to spend thousands of dollars on a single toilet -- even if you would if you absolutely had to. The cost isn't that high. The same goes for nuts and bolts in a product: they can be essential for the functioning, but it doesn't really cost much, nor makes sense to use uber-costly nuts and bolts. So a naive differential definition of value can be just a rent-extracting proposition, which I think most orgs would try to avoid. If you're sure no one else in the world could deliver this solution (i.e. it's extremely scarce and non-reproducible), then the value proposition starts to make more sense (because your time and attention is also limited). I tend think that's rare. So it seems more natural to adapt to each situation: you need to estimate your (operation) costs and target revenue, and then charge with a healthy margin on that; and if your service is highly unique or in high demand, you adapt by increasing your pricing accordingly.
- ghaff 4y ago
  >That doesn't mean it's reasonable to spend thousands of dollars on a single toilet -- even if you would if you absolutely had to. The cost isn't that high. Check out Toto washlet prices. :-) e.g. https://www.totousa.com/washlet-with-smart-toilet-g450-10-gpf-and-08-gpf https://www.totousa.com/washlet-with-smart-toilet-g450-10-gp... But I agree with your point. If you have some specialized, almost unique, knowledge, have plenty of demand, and are hard to substitute for--and it's something high value--you can charge a lot.

mitchell_h 4y ago

Value based pricing as been tried a bunch of times. I've only seen it work to lower the price.

brilee 4y ago

I find that if you're getting this response, you're not talking high up enough in the org chart. Eventually, somebody does care about the overall good of the company, over the turf wars/budgetary bureaucracy of the middle management layer. But your project also has to be worthwhile enough to invoke the higher-ups.

claudiulodro 4y ago

Big companies hate rev share, which is essentially what value based pricing model is. Rev share pricing is great for getting small, money-conscious people in the door, but there is a threshold as you get larger where it becomes more cost-effective for the client to go with standard billing. Substack's been running into this problem, where it's easy to get people to try it out, but as a content creator gets popular the rev share amount becomes greater than the cost to hire an agency and "self-host". Someone making $1mm/yr is going to chafe at a $200k rev share when an agency at $50k/yr retainer can do a similar job. Unrelated to that but related to the main topic: it's interesting that people treat FOSS consulting as a weird beast and ignore the thousands of successful WordPress/Drupal/etc. consultants and agencies. There's a lot to be learned from analyzing their strategies!

deleted 4y ago
[deleted]
R0b0t1 4y ago
It's not more cost-effective for the client if the work just never happens. Further, I don't care what is more cost effective to them. I want to capture some of that value. That's the mistake these businesses are making and what you need to inform them of.

benjaminwootton 4y ago

I agree it is extraordinarily difficult to pull off. I have seen it attempted hundreds of times in technical professional services deals and never once seen it get past procurement. You can however incorporate into your pricing by charging $high_day_rate or $high_fixed_price if you have established the value.