The scariest pricing idea ever. That works.

http://thefreelancery.com/2010/04/the-scariest-pricing-idea-ever-that-works/

by pw • 16 years ago

264 71 16 years ago

snitko2• 16 years ago

I like it, actually. Might not work as well when you're selling a product, but could indeed be profitable when selling a work. Interesting.

RiderOfGiraffes5• 16 years ago

Actually mentioned explicitly in "How to Win Friends ..."

snitko2• 16 years ago

Almost true. I believe it was mentioned as a way to solve conflicts, not to charge people on a regular basis.

RiderOfGiraffes5• 16 years ago

I think you're right.

_pius4• 16 years ago

If this technique improves your profits, your rate is too low. It's that simple.

RiderOfGiraffes5• 16 years ago

No, it's not that simple. Doing this sort of thing changes the dynamics of the relationship between you and your customer. As it says in the article, if your job is a one off, don't do it.

But if you are looking for an on-going relationship, this changes the dynamics and gets much more money than simply hiking your rates.

It's related to the game where one person gets $10 and then has to share it with another, who has the option of rejecting it. If they reject it, you both lose all the money. The simple game theoretic analysis is that you should offer $1. They're better off accepting than rejecting, so they should accept.

But they don't. Experiments show that people will reject any amount below $3, and $3 itself is marginal. People have an inate sense of fairness, and if they think you're not acting fairly then they will punish you, even if it costs them money.

There is often more at stake than the obvious financials, and this is an example where that is being recognised and used.

EDIT:

+ http://www.google.co.uk/#hl=en&q=ultimatum+game

+ http://en.wikipedia.org/wiki/Ultimatum_game

thehigherlife• 16 years ago

Do you have a source for this study? I'm not calling BS, i'd just like to read more about it.

_pius4• 16 years ago

That game theoretical analysis is interesting, but it is only applicable to optimizing the pricing with one particular client. In practice, it's far more interesting to figure out how to optimize your interaction with the market as a whole.

If a good contractor is in a market where there are many clients who will pay a higher, more appropriate rate for certain work, why should that contractor absorb the risk of this technique? And that's even before considering the practical problems with doing spec work for a client without tying the requirements to cost. If you've ever done that with a real client, you probably know how painful it is.

Ultimately, part of your expertise as a professional is knowing how to put a value on your work. If you need to rely on laymen to do that, you probably need to take some time to learn about pricing. When you set a rate, you send a signal to the market about the value of your work. And, empirically, I've found that the quality of your client interaction is directly proportional to the value of your work. So: if you do good work, charge an appropriate rate, and only work with clients who are willing to pay for that quality. However you set your rate, you'll get the clients you deserve.

If you have no idea how to value your time, this method will improve your margins but it's far from optimal. Worse yet, it will increase your risk as well as the likelihood that you end up spinning your wheels with clients who have no respect for your time. That's no way to make a living.

andreyf• 16 years ago

Doing this sort of thing changes the dynamics of the relationship between you and your customer.

Let's not forget that it also changes the dynamics from the developer's perspective, as well. I don't consult anymore, but I imagine I would work a lot more efficiently in the strategy described - it would help me focus on solving the client's real problems instead of creating justifications for the hours I bill.

moultano• 16 years ago

Either that, or it inspires him to do better work than he otherwise would.

wlievens• 16 years ago

In Magical Market Robot Monkey Land, yes.

davidu2• 16 years ago

This works well on a micro level, and fails brilliantly on a macro level. It's a model that doesn't scale.

See, http://en.wikipedia.org/wiki/Tragedy_of_the_commons

asmithmd13• 16 years ago

That has been proven to be not true.

Radiohead made more money from the "pay what you like" download of their album "in Rainbows" than they did from the release of their previous album.

http://www.nme.com/news/radiohead/40444

ekanes• 16 years ago

It's great that it went well, but it's a stretch to say it proves anything. It was the first (mainstream) attempt at this model, and so many people (may have) paid to ensure that it worked.

sparky• 16 years ago

Were they with a label in 2003? If so, it is certainly reasonable that 100% of a small number (their take from "in Rainbows") could trump 1% of a large number (their take from "Hail to the Thief"). HTTT sold well upwards of a million copies (gold in the US, platinum in the UK, which is at least 1.1 million). If the label's cut were not so excessive, Radiohead probably would have made more from their previous albums than from "in Rainbows."

tedunangst• 16 years ago

There's more than one variable at work with the Radiohead album.

1. Over time, you would expect to make more for an album. Expanding fan base, inflation, ...

2. Insane word of mouth advertising because of the pricing plan.

3. It was probably a better album. As the article mentions, pay what you want is a great way to inspire better work.

trafficlight• 16 years ago

Derek Sivers had a blog post about this as well.

http://sivers.org/livecd

His post is about offering CDs after a live performance and asking people to pay what they want. They band in question went from $300/night in CD sales to $1200/night.

cynicalkane• 16 years ago

That's not the tragedy of the commons at all. The problem with this method of pricing is the client might underpay. This is explicitly why the article recommends you only use it situationally. It's not a tragedy, and it's certainly not of the commons, since nobody else will get hurt if some one person or company is undercharged.

roel_v• 16 years ago

A few years ago I had a page on my website about how to use a certain open source library on Windows, since the maintainers didn't want to/couldn't provide support for Windows. Then a few months later, out of the blue, a guy emails me and says 'listen, I need a small program for Windows that does X, Y and Z and they are all related to the library you have on your website, can you write me a quotation on how much it would cost to develop this'. This guy wanted it for personal use; I did a back of the envelope calculation and it came into about 5 or 8 hours of work. I wanted to be paid a commercial fee of about 70 euros an hour at the time, but I figured that this guy wasn't going to pay several hundreds of euros for a small toy for personal use. It looked like a nice, interesting, small project though, so I basically told the guy 'here's the deal, I don't really have time to write this program and I don't want to commit to anything that I can't live up to. But, I will write this program for you and then release it as open source. The catch is that any time I put into this project is going to be time that I don't get to spend with my girlfriend. So what I'm asking you in return is that you think of a nice present for my girlfriend, she likes X, Y and Z, to make up for that.'

The guy was very surprised but after talking it over with his wife (brainstorming for ideas I guess) agreed. So I wrote the program, went back and forth with him a few times until it did what he wanted; had to switch libraries because the one I had on my website didn't work so in the end I think I put in about 10 or 12 hours. The guy was very happy with the result, I send him a version that did what he needed and then we left on vacation, and I sort of forgot about it.

A few weeks later we came home and there was a small wooden box waiting for us; at first I didn't know what it could be, then I cracked it open and it had an iPod for my girlfriend (this was a few years ago when they were still several hundred euros) and a bottle of very nice champagne for the both of us, and a note saying how much he and his wife had appreciated the program and how they hoped we'd like the gifts.

Per hour I don't think I made that much, but it felt much better than any of the money I've ever made from the odd job through elance :)

compay• 16 years ago

What a great story. One of the things I love most about our field is hearing from and meeting people like you who obviously love what they do for a living.

justliving2• 16 years ago

indeed! Nice story!

rapind• 16 years ago

I think the point being made is that giving your client the option to determine what your work is worth carries with it the hidden threat that you'll lost interest in doing work for them if they undervalue you. Only useful with existing relationships, but it's like getting validation that they value the work you've done.

The real problem I see with this is that occasionally clients will opt to do something fairly complicated from a technical perspective that will end up having a very small financial return. If the end results only improve their situation by $1000, but implementing it cost you $2000 based on your usual billing rate... well you're not going to get your money out of it.

This means you need to be anticipate it and be picky about what projects qualify for this type of pricing. You need to be able to validate ahead of time that the return will actually be worth the amount of work... which is a really good idea anyways, because it means you have to wrap your head around the actual value of your end product and really understand the problem you're solving. It increases your involvement with the client's business, which many clients and even some developers don't realize is always necessary in order to deliver a quality product.

asmithmd13• 16 years ago

You are exactly right, don't just blindly give a quote on what they are asking for. Dig in deeply enough to understand what the clients goals are and propose alternate solutions - as well as giving them the quote for the original work. Sometimes word comes down on high to get X done using Y. you don't want to be the PITA supplier they always have to argue with just to get a price.

drcode• 16 years ago

I disagree with this completely.

I think the golden rule is "either work for full price, or work for free, but never work for cheap." It is unfair to you and your clients to even suggest that a "cheap" price exists and that it may be acceptable- It isn't.

I think it would give me tons of anxiety as a client if I had to decide on the price after the fact, without a clear guideline from the contractor.

kaib• 16 years ago

If you read the article to completion you'll note that the author addresses both of your points. He only recommends it for clients who you have a long running relationship with and who thus have a pretty good idea of what your services cost. He also notes that the price generally comes out to more than what his normal rate would be, given you use the tactic in the situation he outlines. Plus he explicitly addresses clients who feel they can't judge the value properly: "just give them a quote".

lmkg• 16 years ago

What this is doing tying cost of goods more closely to the value of the goods than the production cost of those goods. As we're fond of pointing out here, the true monetary cost of something is whatever people are willing to pay for it. Nonetheless, cost of work or cost of product is often quoted based on internal cost of production, not on value added. What the article is proposing is one way of breaking that habit.

If I do some consulting and save a client a million dollars, they should be willing to pay an appreciable fraction of a million dollars for that advice. And that fraction that they're willing to pay doesn't change based on whether it took me four hours or four thousand to come up with my recommendation. The idea of charging based on the amount of effort it took you is silly. The effort is your problem, and irrelevant to the client. They should pay, and you should charge, based on the value that it gives them.

The guidelines that the articles gives are basically guidelines for when the client can be trusted to give a fair value-based valuation of you work. However, what the technique does in general is it moves the focus away from cost-of-production and towards value. It's not the only way to do that. Fixed-bid, rather than hourly, contracts also do that and are easier to reliably negotiate without a good client relationship.

yardie2• 16 years ago

The last project I did was as a barter. At first it started with talk of money being exchanged. Setting up a new webserver, installing some LAMP applications, etc. This was supposed to take a few hours, it really only took 2. My billable rate wasn't even worth the time it would take to do the paperwork (this would include getting a tax id and paying payroll tax). So I just asked for a slice on his ESX server. I'm happy, client is happy, a single penny wasn't spent by either of us.

scotty79• 16 years ago

Shouldn't you have taxed it as non monetary gain?

ahoyhere3• 16 years ago

In the US at least, all barter transactions must be reported as income.

http://www.google.com/search?q=us%20barter%20tax

yardie2• 16 years ago

If I'm reading the IRS page correctly. You only need to report it if you are bartering as a business. Since I didn't want to get involved with tax ids and 1099s I feel I fall outside the requirement. Plus the value of transaction was small enough that I don't need to declare it. But I'll see at next tax season.

F_J_H2• 16 years ago

I have hired a lot of contractors over the years, and I must say that if one of them pitched this to me I would likely walk away.

Not only does it give the appearance of someone being unsophisticated, naïve and lacking confidence, it puts the onus on me to figure out approximately how much work will be involved and what the fair market rate for that would be. It would put me in a totally awkward spot and would be a lot more headache then simply knowing that a person will do X work for X dollars.

In short, this has the appearance of being a gimmick. Basically it says to me “I don’t really know how much to charge for this, so I am going to put the onus on you to decide and hope that you won’t want to appear stingy and so will pay me more than I feel I could ask for without being embarrassed.”

A true professional knows their value and the value of the services they provide, and is not shy about making it known. In fact, that is part of the service they provide – estimating is a skill.

Maybe it is unfair, but if someone pitched this to me, I would immediately think they were fairly junior (and somewhat desperate) rather than a professional, even if I had worked with them before. It tells me you don’t have anything else on the go right now, because if you did, why would you take the risk to work for an unknown reward?

Just my thoughts…I would really think this through before adopting it as an approach.

rokhayakebe2• 16 years ago

What if the programmer says "I will put 9 hours of work into this and I will do this, that, use this, that because I want to anticipate this or that need"?

F_J_H2• 16 years ago

Sorry, I read your comment several times and I can't really figure you out what you are asking. Are referring to peforming R & D type work?

JCThoughtscream• 16 years ago

It is mentioned in the body of the text that the author advises it to be used with clients that you've already established a history with. And whom have a significant personal stake in the product anyhow. So it's less a junior contractor and more a close friend going "eh, sure, I'll do it for you. Just pay what you think it's worth."

nandemo2• 16 years ago

Sure, if you've done several projects for that client and you charged them $100/hour each time, they'll be more likely to offer a price that's in line with that.

Still, it's a kind of gamble and not a very smart one.

reduxredacted• 16 years ago

I have hired a lot of contractors over the years, and I must say that if one of them pitched this to me I would likely walk away.

I thought this at first, as well. However, after reading the advice about only using "long-time customers" for this approach.

1) Only applies to a long time (happy) customer...and:

2) Said project should be appropriate for this sort of billing method. And will often vary, but I think he got it right. It should be a project that is important to the business where quoting and billing is difficult to nail down.

An example from my past: I used to do network config/wiring/support work for a small firm. They found out that I also wrote software and asked for my assistance on a small, very important, project in an area that was not my expertise (an EDI system). They didn't ask me for an up-front quote due to our previous business relationship. They did, however, gave me a short, hard deadline.

I billed them two hours instead of the twenty or so it took me to figure out the problem because I was inexperienced in the technologies they used. They volunteered a $1000 bonus to me on its completion.

I learned later that the short deadline was to give them enough time to pass the work off to a well known company that could easily get it done, but had quoted them north of $10,000.

I'm not complaining. This company and a few others that I did regular odd jobs for made my college years reasonable.

Really, all you're doing here is leveraging the relationship you have with a customer and the circumstances of the job are largely going to determine whether or not it would work or, as you put it, come of as naive and lacking confidence.

This customer knew from my past work that I was a little less expensive than most of their other options and yet I did quality work. They also knew I was going to school and -- like an employee of their company -- had to give me incentive to take on more work when it was necessary. I needed them, they needed me. In the case of this small assignment outside of my area of expertise, they saw underpaying me as more to their disadvantage.

I was shocked to receive the unsolicited bonus, but I'm willing to bet it would have been more than $1000 if I had just said "I don't know how to bill this. Pay me what you think it's worth" to this particular customer.

lsc• 16 years ago

estimation is a skill... it's an extremely difficult skill to master. I know I'm horrible about it. So yeah, you are right, this pitches the (difficult) job of pricing back on to the client.

However, I don't think that's always a bad idea. The thing is, as a contractor, I'm looking at the opportunity cost of the time and effort I put in to the project, right? but, as the client, you are looking at the value you get out of it. The two are almost wholly unrelated.

Now, if you've looked at how I set my prices, I generally use the 'what it costs me plus a reasonable profit' method (for me, 'reasonable profit' has to do with how long it takes to pay for my hardware, as that's basically what I'm selling.) And really, for commodity goods that have significant marginal costs in terms of investment capital required, I think that is the best and most fair way to do it. (using non-transparent and inconsistent pricing structures is a good way to get your commodity customers really, really pissed off.)

Now, I think contracting is fundamentally different from selling a commodity good. When I'm selling a commodity good, I don't really mind that my margin on each unit is a little (or even a lot) less than my competitors. I can make it up by simply selling more.

This is not true with contracting. my body has a expiration date; I mean, it's not set in stone, but my life will consist of a finite number of days, and each day I can only productively work for a small number of hours. So I really want to squeeze every bit of value out of it. So yeah; someone is going to have to do some work pricing it, either the client or the contractor. It sounds like this is one strategy for letting the contractor potentially share in some of the massive upside possible from technology work.

palish• 16 years ago

You are correct, however, consider that the quality of the work will probably be much higher from someone who is willing to do this kind of unorthodox pricing. One reason is because if any issues or changes come up then they'll be fine with adjusting their work without changing the price. You'll probably wind up paying less overall.

It even seems reasonable to spend 10 minutes figuring out what a fair price is, then pay them 20% less, since what you think is fair is usually too high. And if it isn't, oh well... it was their risk doing this pricing model in the first place.

This pricing model relies on high quality of the finished product. It wouldn't work otherwise. Therefore I don't understand why you'd walk away. You really would, if this were offered to you? It's likely you'd get an extremely good quality finished product along with any changes you needed afterwards.

betterlabs2• 16 years ago

I think "how you do it" matters a lot in this case a lot and context/relationship/the particular requirement all play a big role. Basically you are not just casually saying "pay me whatever you like". The customer already trusts you, values your skill/offerings, knows she wants to get the task done from you, and understands that it may be tough to price so a more flexible approach is good to ensure no time is wasted in coming up with a price.

harpastum• 16 years ago

The server appears to be down, but google's cache [1] works

[1] http://www.google.com/search?q=cache:2VuRPkGxvVUJ:thefreelan... (google mirror)

wesley• 16 years ago

Google cache version (since site seems to be down):

http://74.125.77.132/search?q=cache:2VuRPkGxvVUJ:thefreelanc...

Silhouette• 16 years ago

Cold, hard reality check: If you adopt this approach with most big businesses or almost any government department, the people you are dealing with will be required as a matter of corporate policy way over their pay grade and/or law to pay you as close to nothing as the contract permits.

It's a cute gimmick, but as the article suggests, its applicability is basically limited to ongoing relationships with regular customers who already know roughly what you charge. In that case, presumably there is little scope for them to dramatically over- or under-estimate your effort, and all you are doing is adopting the risk that on balance they underestimate instead of charging a fair price for actual hours worked and gaining a fixed return for your effort.

There is a technical term in the business world for someone who adopts risk out of proportion to the expected reward: "fool".

ahoyhere3• 16 years ago

I'm getting a 403 Forbidden error but from what you've all said, it's about telling clients to "pay what they want"?

This is almost never going to work out for the freelancer. The vast majority of potential clients you will run across don't look at your work as a value creation, but something they should dispense with as cheap as possible.

Thinking of spending money as value creation is a fairly rare way of thinking.

Any freelancer who's worked with more than a handful of clients is going to have practically INFINITE stories of clients trying to stiff them, devalue their work, complain about how long it takes, "It's on a computer, can't you just, like, click a button?" etc.

Moreover, freelancing is not just about creating value for the client. It's about meeting their specifications. If the business value they receive is less than your hourly rate, they should have said "No." or not done the project to begin with.

Moreover again, even if the project creates more business value than your hourly rate, and even if the client thinks in terms of value investment instead of costs... they would still need to be understand the amount of work involved in making it happen.

What a mess.

People are probably excited about this idea because they're too scared to price. They'd rather wave their hands and hope the problem goes away.

When you're afraid of something, the thing to do is not run away from it, but educate yourself.

mononcqc• 16 years ago

Reading the article, the author especially warns about doing this with anyone and instead suggests trying this technique with long term customers who you trust (and trust you back), find the project to be important for their enterprise (not just a corner of the table site), etc.

The author also gives example stories where he got much less than he expected and whatnot.

Look around the comments for the cache link -- the post is better written than I would have expected and it's not just evangelism.

ahoyhere3• 16 years ago

I got a chance to read it. You're right, it's much better than I thought.

But still, I disagree with the premise. It's a gamble. Better to just charge more to begin with.

The best freelance pricing advice I've ever heard - and ever given - is the slap-across-the-face rule.

First, you slap the client across the face. Then you tell them your rate.

If they're not more shocked by the latter than the former, then your rates are too low. :)

justliving2• 16 years ago

unfortunately, can't access it. Getting a 403 error. Is it just me?

bertdingman• 16 years ago

Site is back up. All the hits probably crashed the server. http://thefreelancery.com/

dagw• 16 years ago

I did that once for a for a company I used to work for. Basically they called me up a couple of weeks after I quit and where in bind and needed this thing fixed right now or they'd miss an important deadline. So I basically did what this article said, got royally screwed and I learnt my lesson. Only do that if you're genuinely OK with being paid nothing.

inboulder• 16 years ago

This will work in certain situations. Basically, in negotiation the one to mention price first 'loses'. The reason the first party to mention a price 'loses', especially if it is the payee, is fairly simple game theory. The first price mentioned by the payee will set a high bound. If they payer must set a first price, this will be the low bound, and may exceed the payees high bound. For instance, if a dev offers to do work for $100, but it is really worth $200 to the client, the client will accept the $100. The client may have offered $200, but now with the information that the dev will do it for $100, of course they will only offer $100.

tl;dr - The client must come up with a price first, and if they have a personal relationship with you and the value they gain is higher than your sunk costs, it will probably be higher than what you would have set.

shoesfullofdust• 16 years ago

Very interesting discussion. Years ago, I did renovation work and often used the same gambit. Often it was a model of "OK, here is the labour price, here are the material prices, but what you're asking for is something we've never done before and it's impossible to estimate a fair price." Surely my poor estimating skills were on display - but that's not what I was being paid for. Could we do it? Yes. Could we price it out to the penny? No. But we still got the job.

Once in a while it was simply, "Yes, we can do that. No, I don't know how much it's worth. Let's do it and figure it out later." And, with people who had confidence in my work, there was never a problem with this approach. I was often surprised at what people would pay. And as the article mentions, I would never use this approach with someone new or a large enterprise. But with familiars, this always worked out OK for me.

Fascinating to see this model applied to untried, almost purely intellectual work (code).

As with renovations, where you're often busting you're ass against someone with a pickup truck looking for beer money for the weekend. Working with code pits you against every chump with a computer. So how can you differentiate yourself?

Being able to say, "Hey, no problem. I can do that, We'll square up on Monday." is one way. Weekend warriors won't do that.

theashworld• 16 years ago

Godfather, anyone? :-)

betterlabs2• 16 years ago

This is very well articulated. I have definitely tried this before and it works like a charm. However, you do have to be careful about who you try this with though. Long term satisfied customers, customers in urgent deadlines and ones who are generally reasonable about costs value this sort of a pricing/engagement.

I have seen that a bigger benefit from this sort of a pricing model is a stronger relationship that develops with customers who come back to you time and again.

Another thing I have done in the past (ours was not really a services business but a niche solution business) is defined the pricing and after discussing with the customer that it doesn’t fit with their current quarters budget, I agreed to discount it to “make it happen” and they greatly respected that. And then made up for it the next quarter.

I would highly recommend it, but you need to know "how" to do it right. You should not come across as casual or clueless in doing so.

aufreak3• 16 years ago

There is a restaurant in Singapore called "Annalakshmi" which has been operating like this for, like a decade at least. You go there, eat, and pay what you feel like paying. The food as well as ambience is good and I think on the average people overpay. I think the proceeds go to fund a non-profit organization for Indian fine arts.

_b8r0• 16 years ago

We do this with clients where we have particularly strong relationships. This is particularly helpful when clients are getting the budgetary pinch or if they've run out of money before their budget periods are over.

There is a definite risk that comes with this which is that a client you're not familiar with who's short on cash may take advantage of this, so I'm not convinced it's well suited to everyone's needs but where there's mutual respect and trust this type of pricing model (and flexibility) can really cement bonds with customers.

tzury• 16 years ago

I will try this in my next project with a customer I am having a long relation ship.

The scariest pricing idea ever. That works.

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