
The scariest pricing idea ever. That works. - pw
http://thefreelancery.com/2010/04/the-scariest-pricing-idea-ever-that-works/
======
roel_v
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
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.

~~~
justliving
indeed! Nice story!

------
F_J_H
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.

~~~
JCThoughtscream
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."

~~~
nandemo
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.

------
rapind
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.

~~~
asmithmd1
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.

------
lmkg
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.

------
Silhouette
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".

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

[http://74.125.77.132/search?q=cache:2VuRPkGxvVUJ:thefreelanc...](http://74.125.77.132/search?q=cache:2VuRPkGxvVUJ:thefreelancery.com/2010/04/the-
scariest-pricing-idea-ever-that-works/+http://thefreelancery.com/2010/04/the-
scariest-pricing-idea-ever-that-works/&cd=1&hl=en&ct=clnk&client=safari)

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

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

\+ <http://en.wikipedia.org/wiki/Ultimatum_game>

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

~~~
Shamiq
Also read about Prospect Theory:
<http://en.wikipedia.org/wiki/Prospect_theory>

------
drcode
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
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".

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

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

~~~
RiderOfGiraffes
I think you're right.

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

~~~
yardie
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.

------
shoesfullofdust
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.

------
davidu
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>

~~~
asmithmd1
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>

~~~
trafficlight
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.

~~~
nandemo
They were selling more CDs, but the average price was lower. It's still
amazing that they got so much in total sales, but maybe they could have
achieved something similar by just lowering the price.

 _Terry said that the band did this for a while, and soon they were selling
about $1200 per night on average, even including those people who took it for
free! I think the average selling price was about $10._

------
snitko
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.

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

[1]
[http://www.google.com/search?q=cache:2VuRPkGxvVUJ:thefreelan...](http://www.google.com/search?q=cache:2VuRPkGxvVUJ:thefreelancery.com/2010/04/the-
scariest-pricing-idea-ever-that-works/+http://thefreelancery.com/2010/04/the-
scariest-pricing-idea-ever-that-works/&cd=1&hl=en&ct=clnk&gl=us) (google
mirror)

------
betterlabs
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
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.

------
inboulder
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.

------
iuguy
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.

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

------
dagw
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.

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

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

------
theashworld
Godfather, anyone? :-)

------
ahoyhere
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
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.

~~~
ahoyhere
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. :)

~~~
mattm
A couple good pieces I've gotten regarding pricing are:

\- If you're not being told F-off 50% of the time, your rates are too low.

\- Price so that you would be happy no matter the outcome - whether you get
the project or not.

I've been using this one lately and for projects I'm not really interested in,
I quote a much higher rate than for projects I would enjoy more.

