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".
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!
-- 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.
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.
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.
Here’s how I did this on software dev projects in the past that I thought was very fair. I did a monthly retainer of $xx,xxx, where that number is equitable for everyone and is actually discounted off the equivalent hourly rate. Why? Because it’s a pain in the ass to track hours, to argue with you in advance over how many hours each task is going to take, to argue after the fact about why it took more hours, etc, etc. So for me, it’s worth a discount to just bill the client monthly, do the work, and everybody wins. But more often than not, clients still wanted to pay the hourly rate premium.
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.
Check out Toto washlet prices. :-) e.g. 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.
Indeed I would complete the analogy as follows: if only you could produce toilets in the entire world, you could (and probably should) charge a lot of it, since it would be so scarce -- it would be the stuff of world leaders and celebrities; or you could charge for 'how to make a toilet' (which makes sense since your production capacity is limited). That's when your product/service justifies something close to value pricing.
I don't really know why. It's partially hubris. But I think it stems from not being able to separate the superficial understanding that happens when being told something from the true understanding of synthesizing that understanding yourself. Most executives seem to go through life thinking they are amazing just because they can understand what people are telling them and attribute it to themselves, when in reality they can make nothing of value.
You can however incorporate into your pricing by charging $high_day_rate or $high_fixed_price if you have established the value.