The scariest pricing idea ever. That works.

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 :)

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.

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.

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.

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".

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

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

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

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.

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

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.

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.

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

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.

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

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

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.

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.

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.

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.

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

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.

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

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

Godfather, anyone? :-)

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.