[badclient]

Smart customers have their own method of pricing to compete with the value-based pricing suggested in the post. It's called market-based pricing. Even if my programming work will make the client $100,000, if the client is convinced he can get that programming work done for $5,000, he will pick that over my $20,000 quote.

I've read these several posts along these lines. The one huge assumption they make is that you have good clients who aren't on a budget and won't go shopping. Those clients are much harder to find as a freelancer.

[larrys]

"The one huge assumption they make is that you have good clients who aren't on a budget and won't go shopping. Those clients are much harder to find as a freelancer."

Agree. And it's not even so much budget as "not a schmuck" (sorry not a better way to put that).

When I saw this, I laughed:

"As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website."

So we are taking a totally speculative number of profit ($100,000) and charging $40,000 to get there. You would have to either be working for a large corporation (using OPM) and have no clue to buy into a proposal phrased like that or be new in business and totally naive. The entire presentation to me smacks of naiveness.

But here's the good part. I can totally see how things like this could and do work. That said you will have to find the type of customers who will fall for something like this.

Most business people who have been around can smell a sales presentation a mile away and to many of them (me in particular) it's an instant turn off because it reaks of "you are going to be paying a lot for this that's why we won't tell you upfront the cost. Because we are going to do some smoke and mirrors to make you go for it."

Lastly, one of the reasons in favor of discussing pricing in advance of a presentation is also to qualify people. I've seen to many salesman stupidly come in and not qualify people in advance simply not realizing that the local small restaurant simply isn't going to part with $10,000 no matter what you promise or tell them (or will have contract signers remorse and back out.)

[Silhouette]

When I saw this, I laughed:

"As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website."

Exactly. Leaving aside the sleight of hand of comparing hypothetical/perceived benefit with actual cost, what you've really got here is a consultant offering you $60,000 of benefit this year. If another consultant can do the same job but only charge you $20,000, then they have offered you $80,000 of benefit this year. Assuming both are being honest about the expected benefit and can do work of a similar quality within their quoted budgets, so one really is just pricing higher arbitrarily, who are you going to choose?

Value-based pricing is interesting to discuss, and it's certainly a more rational and business-like way of handling engagements than billing your time out hourly in something not so far from an employment relationship. However, the value added is benefit minus cost. Unless you really are the only game in town, you can't just raise your rates until they are 99% of the value you claim to generate for your client and argue that it's still a good deal for them because they're 1% better off if they use you than if they hadn't. That ignores the third option of using someone else.

That third option is a possibility for almost every client of almost every consultant. If you as a consultant have the sales and marketing skills to find clients who will believe that they don't have that option and convince them that you really are the only sensible choice and they should pay your inflated rates accordingly, then good for you. However, please don't pretend that winning jobs at those inflated rates has anything to do with some natural value proposition rather than simply being better at sales and marketing.

[mistermann]

Exactly. The only way I can see this working with a non-naive person is if its accurately measurable, and if you don't achieve the 100k, you don't pay the 40k. THEN, I can see it working. If that isn't how it works, then I can't understand how you think you are righteous in selling these services at a much higher place - put your money where your mouth is.

[Silhouette]

FWIW, I don't think righteousness is really the issue here. All consultancy is ultimately based on selling valuable information and/or judgement that the client doesn't have but the consultant does, so in a sense it's always based on the consultant charging money because of the client's ignorance. It's hard to find any objective standard for reasonable pricing other than "what the market is willing to pay".

Maybe it becomes more ethically dubious when the consultant is taking advantage not of the client's ignorance in the field where they're paying for advice but of their ignorance of the consulting market itself in that field. Even then, it's the natural position that a new customer doesn't know the sellers' market, and a large chunk of sales and marketing is based on trying to convince uncertain prospective customers to buy from you and not someone else, so again it's hard to find any objective standard for what is fair and what is unfairly taking advantage. (This is a major argument for licensing practitioners in industries where bad advice can be particularly damaging, such as healthcare, law and accountancy.)

One thing that is very clear is that the value-based pricing approach only works if you can find some credible and quantifiable means to demonstrate the value you might offer to a client. If you work in a field like conversion optimisation, that's easy enough. If you (or your consultancy including colleagues/subs) are building an entire system that will have concrete benefits for the business, you can probably do it too. If you build software in general, maybe as part of a wider team or making incremental functional changes to an existing system as many freelancers/contractors do, then it's not the same situation.

This is why it sometimes irritates me when a handful of HN celebrities post repeatedly about raising rates and changing the basis for charging as if everyone can do it, even in response to someone who would obviously have to fundamentally change the kind of work they do before the advice would make sense for them. It sets false expectations, and potentially damages the careers of people who go out to customers/clients with unrealistic expectations and wind up missing out on reasonably profitable work. Worse, it could tarnish their reputation and leave unhappy clients behind, because even though they did what they said they'd do, the client later discovered they'd paid well over the odds and felt ripped off. It's never happened to me, because I choose not to work that way, but I've seen it happen to others and the results are never pretty.

[larrys]

"when a handful of HN celebrities post repeatedly about raising rates"

Exactly. An similar example might be me. While not an HN celebrity I do get referrals for what I do from people who are celebrities (could do an entire post on how that went down actually). I do it because it's a) fun (it's not the main way I make money - very time consuming) and b) I do it to plant seeds for future things (contacts with important people) as well.

Consequently I am able to say "I want $x for a strategy and research fee and $y upon successful completion of the task". So far I've had no kickback from anyone so I just have to evaluate and try to maximize x and y perhaps and raise to make more iic. The "research/strategy" though appears to work even w/o the celebrity connections because of my other obvious qualifications and what I do.

There are lessons to be learned from how I operate but they would probably be more centered around how I got to that place rather than "here is how you can charge what I charge". Otoh if I wanted to become an HN celebrity (I don't at least not now for sure) I could spin this any way I want. I could make anything the "thing" that should be paid attention to.

There are lessons to be learned from all of this of course but I fear that someone just starting out may have a much harder time seeing the 50% they should pay attention to and the 50% they should not.

[patkai]

I don't know if you tried it but when I offered pricing on the basis of perfectly measurable metrics everyone rejected. They all said they can't budget for possibly outstanding results. Based on this interlude I got the impression that there is a certain amount they _want_ to pay, and they are looking for an offer similar to their idea of a budget.

[ProblemFactory]

> That said you will have to find the type of customers who will fall for something like this.

I don't think customers that who accept (and find value in) this proposal are necessarily fools. Writing code is a cheap commodity. Making business decisions is not, and development cost is inversely proportional to how precisely you know what you want.

A business owner who has made all the business and technical decisions, and approaches developers with extremely detailed photoshop mockups and specs can probably successfully get an app or website made for $10/hour on elance.com, and keep all the extra value.

A client who has made all the business decisions and knows what development they want on an approximate "outline" level needs to hire a 10x more expensive local developer who is willing to meet and push back on any technical assumptions. They are paying 90% for the decision-making expertise on understanding what they want, and writing code is a tiny part of the service.

A client who may see value in a $40000 website offer is one who has not or cannot make the business decisions themselves. They are paying primarily for the business or marketing strategy consulting, and the entire development side is a tiny part of the service. Perhaps the client should make these themselves to be able to use a cheaper developer, and keep more of the value - but if they can't, then an expensive offer may still be profitable.

[badclient]

What business or marketing strategy am I providing to a client when it's pretty clear he just needs a simple Wordpress set up with a template he's already found? I didn't get the feeling from the post that I was being paid for strategy as much as to wrap my work and call it strategy because it might pay much more.

[ProblemFactory]

I do freelance work for people who want apps built according to their vague vision, and don't have experience with the strategy-level consulting myself. But I assume the step up would be similar to the step up at not needing precise specifications and asking the client about each ambiguity.

An important point not directly mentioned in the article is: as you start doing more expensive consulting, you should also find new clients. Clients who do require the services and are willing to pay a premium for them.

While it's sometimes possible to charge a premium for a simple job, I find more honest to carefully explain the cheaper options (other freelancers, elance) to them first.

Setting up Wordpress could be "strategy" or 2 hours of sysadmin work depending on the involvement of the client. If they know that they just want a Wordpress setup, they could get the service for cheap elsewhere, and it would be appropriate to inform them of this before accepting. If they want a "website that my assistant can update", then choosing a platform for their requirements may be the experience in technical decision-making they are paying for, and actually setting it up Wordpress is a small part of the service.

[badclient]

Speaking of schmucks, here's one that got me to give up on consulting from couple years ago: http://cliffkaplanfraud.com/

[skore]

Sorry for being a bit tangential, but I'm always astonished how people are still using checks for business. Especially in the US, where it seems standard industry practice of assholes to bounce checks.

(I read about France still being in love with checks as well, although they have basically your standing with banks depend on you handling checks well. So even if they're still using a horribly outdated method of payment, at least they attach the right consequences to fraud.)

[Silhouette]

Part of the problem with modern financial systems is that as a business, you almost never actually have the money you think you have, guaranteed, just because it's in your bank account. The number of ways that different kinds of transaction can be reversed -- in a compulsory way, by the other party, and possibly with them getting the benefit of the doubt in any dispute process -- is crazy. And that's just the technical measures, before you get into payment services that demand authority to instruct your bank as a business practice and obviously whatever legal remedies a court might order if you litigate a dispute.

I wonder how much more efficient the world would be if we had practical small claims systems in courts that were respected across borders, so there was an official and genuinely independent way to resolve disputes over small amounts of money, and then we did away with chargebacks, reversible transactions (other than in cases of genuine error), etc. While I'm dreaming, we could fix the crazy way that many of these payments are authorised, too. If bad people couldn't sneakily take your money so easily in the first place, you wouldn't need so many protections to get it back, which could then be abused against good people if the bad person is the customer.

[reedlaw]

Can a smart customer really get the job done for $5,000? Of course, because this customer will have clearly defined his requirements up-front. The average client will not have clear goals or requirements thus forcing the programmer to iteratively come up with a solution that meets the client's unwritten expectations. This overhead will generally add up to the amount of the higher asking price. So in the case of a poorly defined project, a $5,000 job will be woefully inadequate and will require the client to start over from scratch.