This is not how basketball works
When it comes to pricing, there are two schools of thought. What you’re thinking, and what everyone else is thinking. Out there it’s a wild spectrum of pricing methodologies and practices among digital client services organizations.
I remember an Owner Camp conversation where Brian Williams (from Viget) and Jon Lax (leading Teehan & Lax at the time) debated the value of tracking hours. At the heart of the time tracking debate was the impact tracking had on scoping, budgeting, and selling projects. When the dust settled, it turns out they were both right. Their respective methodologies were each powerful and successful for them, despite their differences.
Fixed-fee pricing, value based pricing, time and materials invoicing, and agile scoping all work. They’re all different flavors in the same ice cream case. There is no right answer, only the answer that’s right for you and your clients. The utility of each approach is derived from how you view pricing philosophically.
Is pricing a function of operations, or a function of sales?
Where pricing is a function of operations, there is often clarity. An arithmetic model determines a project price based on a scoped effort multiplied by a billable rate. If you scope in hours, the total hours multiplied by an hourly rate = budget. If you scope by feature/value the sum of all features’ value = budget. This method often withstands client scrutiny the most frictionlessly. “It costs what it costs” she told herself as she lay her head down for a night of sound sleep, untroubled by thoughts of “should I have charged more?!?”
Where pricing is a function of sales, there is often opportunity. When you decouple pricing from rigid operational math you can price a client with more money at a higher budget (price the client, not the project). You can cut price to make a proposal more attractive. You can price different clients, different projects, and different days of the week, in different ways. This approach often opens the door to many questions from clients, and especially from procurement departments.
In both cases though, you can successfully price the same project, from a certain point of view.
In a recent conversation with an agency, we discussed the limited profitability of a recent project.
On the one hand, one of the partners was lamenting that this project only netted $5,000 in profit. It was nearly break-even work. He felt this was not a sustainable business model, and he was right.
On the other hand the other partner was thrilled that the real win was that the work resulted in securing a Master Service Agreement (MSA) with their client’s large consumer brand parent company. She felt that if given the opportunity, they would have gladly paid $5,000 to purchase an MSA with this global brand, opening the doors to more opportunities, and she was right.
Truth be told, when I work with clients who adhere to operational pricing strategies or sales pricing strategies, they’re almost always secretly flexible within their own paradigms. An hourly pricing team isn’t opposed to raising their rates when they feel a client can afford it. Another team who prices to sell/close projects will similarly break open a spreadsheet and account for every proposed hour when the right client comes calling.
The morale of the story is that in my experience pricing is typically more alchemy than science, but it helps to determine if you think pricing is a function of operations or sales.
Are you likely to be more comforted by a reliable/transparent pricing strategy, knowing there is a ceiling to how much you can charge?
Or are you more concerned that you’re leaving money on the table by underpricing an opportunity, knowing that there is a potentially higher reward, but also increased risk?
Once you’ve made a determination about where you live philosophically, settle in, but don’t get too comfortable. Continually challenge your stance, and question whether you should introduce more formula into your thinking, or more flexibility. The only wrong answer in the long run, is getting lazy, and rigidly adhering to one camp or the other without occasionally weighing your alternatives.