On pricing philosophy

Via 37Signal’s Sig­nals vs. Noise blog I came across a fas­ci­nat­ing post writ­ten by Bri­an Fling of Blue last year on pric­ing a project. I’d like to talk about it and to explain my own phi­los­o­phy. First a extend­ed quote from Brian:

I find it fun­ny… in a sad sort of way, that we often
start out our part­ner­ship with bluff­ing, no one say­ing what they are
real­ly think­ing… how much they are will­ing to pay and how much it
should cost… Though every book I’ve read on the top­ic of pric­ing says
to nev­er ever ball­park, I have a ten­den­cy to do so. If they can’t
dis­close the bud­get I typ­i­cal­ly try to start throw­ing a few numbers
from pre­vi­ous projects to help gauge the scope of what we are talking
about, call it a good faith effort to start the dis­cus­sion… While this
is very awk­ward part of the dis­cus­sion it is almost always fol­lowed by
can­dor. It’s as if once some­one starts telling the truth, it opens a
door that can’t be closed.

I com­plete­ly agree that can­dor is the only way to work with clients.
Maybe it’s the Quak­er influ­ence: we report­ed­ly pio­neered fixed pricing
back when every­one hag­gled, with the phi­los­o­phy that charg­ing true
costs were the only hon­est way of doing busi­ness. My offi­cial rates and con­tact page includes my list of “typ­i­cal costs” — essen­tial­ly these are the “ball­park esti­mates” that Bri­an talks about.

When I put togeth­er esti­mates I base it on my best-guess informed
esti­mates. I start by tab­u­lat­ing the client’s request­ed fea­tures and
deter­min­ing how I’ll achieve them. I then esti­mate how long it will
take me to imple­ment each fea­ture and use that to deter­mine a
first-guess for project cost. I then com­pare it to past projects, to
make sure I’m being real­is­tic. I know myself well enough to know I
always want to under­es­ti­mate costs – I usu­al­ly like the project and want
to make it afford­able to clients! – so I do force myself a real­i­ty check
that usu­al­ly ends up adding a few hours to the estimate. 

When I put togeth­er my offi­cial esti­mate I try to guess where
poten­tial bot­tle­necks might hap­pen. Some­times these are technical
issues and some­thing they’re more social. For exam­ple, a client might
be very par­tic­u­lar about the design and the back-and-forth can take
longer than expect­ed. If I think any­thing like this might hap­pen I
men­tion it in the esti­mate. Some­times as we work through the details of
a fea­ture I’ll learn that the client wants some enhance­ment that we
hadn’t talked about pre­vi­ous­ly and which I didn’t fac­tor into the
estimate.

When I do see a par­tic­u­lar part of the work tak­ing longer than
expect­ed I flag it with the client. I try to keep them informed that
this will add to total costs. In many cas­es, clients have been hap­py to
go with the extra work: I sim­ply want to make sure that we both are
aware that the esti­mate is chang­ing before the work happens. 

I charge by the hour rather than on a per-project basis since I find
it to be a much more open busi­ness mod­el. Bri­an Fling’s post agrees:

The prob­lem [with per-project billing is that] one way
or anoth­er some­body los­es, either the client pays too much, meaning
pay­ing more than it’s mar­ket val­ue, or the ven­dor eats into their
prof­it… One ben­e­fits to hourly billing is the client is respon­si­ble for
increas­es of scope, pro­tect­ing the ven­dor and the cus­tomer. If the
project is com­plet­ed ear­ly the client pays less, pro­tect­ing the client.
This puts the onus on both par­ties to com­mu­ni­cate reg­u­lar­ly and work
more effectively.

I have very lit­tle over­head: a home office, lap­top and DSL.
This means my rates are very com­pet­i­tive (one client described it as
“less than plumbers and elec­tri­cians charge, more than the kid who mows
the lawn”). Being very care­ful with esti­mates mean that I often
com­mu­ni­cate a lot with clients before I “start the clock.” I’ve often
worked with them a few hours before the esti­mate is in and we’re moving
for­ward and of course some of this un-billed work doesn’t result in a
job.

Putting togeth­er fab­u­lous web­sites is fun work. It’s very much a
back-and-forth process with clients, and it’s often impos­si­ble to know
just what the site will look like and just how it will work until the
site actu­al­ly launch­es. Half of my clien­tele have nev­er had websites
before, mak­ing the work even more inter­est­ing! It’s my professional
respon­si­bil­i­ty to make sure I work with clients to fore­see costs, dream
big, but most of all to be open and hon­est about costs as the process
unfolds.

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