> But what if you end up working on a product for a company that never makes them any money at all? You haven't provided any direct business value, although you may have done quite a lot of work--maybe months or years.
If you're being paid to do work (you're not working for free) in this situation, you can conclude that either a) you actually are providing roughly $YOUR_BILLINGS of value to your client or b) your client is a moron and is paying for zero value. You may not be able to directly quantify the value you're providing, but your client certainly is aware of the value you're bringing. The point is to try to more accurately quantify your value and capture more of it.
> Measuring value in software development is difficult.
Again, your client has a ballpark of what value they expect you to deliver. Measuring the value is difficult for the contractor. This is a great area for discussion with the client.
Summary: if you're being paid, your client perceives that you are providing business value.
Your point is fair, but they know order of magnitude. They know you're (likely) not bringing $10B annually of value, and they know it's more than your current billing rate (or they wouldn't waste time with you). The point is to talk with the client and try to pin the number down to bring your rate closer to the value.
Somebody in the enterprise is responsible for ensuring that projects aren't run without any expectation of creating value; that's the person/group to talk to. If you're not talking to that person/group, then you're right that value-based pricing is going to be hard/impossible to pull off.
If the buyer doesn't have any idea how much value you can/are creating, then your first task is to help them quantify the value (this is good for them no matter who they hire).
I would grant that they know within three orders of magnitude. If they think you're bringing $10m in value, you're probably bringing at least $100k. I'm not sure I'd concede anything more specific than that, though. A lot of enterprise consulting is the blind hiring the blind, or people hiring partisans for some kind of internecine battle. I haven't even sought it out, but I've seen, at pretty close proximity, millions of consulting dollars go directly down the drain.
The question I still don't see answered is — are you proposing to charge based on the value you might deliver, or the value you actually deliver?
If Apple ask you to bid on creating the iPhone, how would value that? (The world hasn't seen an iPhone.) If you're capable of designing the iPhone and the best your competitor is capable of is creating a Galaxy, would the two bids be equal under the assumption of ideal value pricing?
I would say small companies aren't aware of the value either. If they're small and hiring software development contractors, they probably don't know enough about software development to do the work themselves, which means they have no basis for determining what software is worth. They probably also don't have the skills/metrics in place for determining ROI for individual aspects of their business. They just look at cash flow in and out, and from that standpoint all they see for the contractor is a definite and precise cost with a vague notion of some value.
So you are right, mostly. If you're going to sell yourself on "value" to such a company, you're going to have to spend some time understanding what problem they need to solve, and help them determine what value that provides.
If they can't or won't look past an hourly rate, then you probably don't want to work for them, because their other expectations may be equally as baseless.
If you're being paid to do work (you're not working for free) in this situation, you can conclude that either a) you actually are providing roughly $YOUR_BILLINGS of value to your client or b) your client is a moron and is paying for zero value. You may not be able to directly quantify the value you're providing, but your client certainly is aware of the value you're bringing. The point is to try to more accurately quantify your value and capture more of it.
> Measuring value in software development is difficult.
Again, your client has a ballpark of what value they expect you to deliver. Measuring the value is difficult for the contractor. This is a great area for discussion with the client.
Summary: if you're being paid, your client perceives that you are providing business value.