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Ask HN: How can I charge my enterprise clients by value?

25 points by rsto ↗ HN
An ongoing theme on HN is to price consulting projects based on the value achieved. Often, people in this context equate value with revenue increase, and almost always they are former web contractors that now mix marketing consulting in their offerings [1]. I find this advice intriguing but fail to connect this to my situation.

Currently, I am running a solo shop as a systems architect and programmer specialised in telecommunications. My clients are big telcos, the projects are part of multi-year initiatives, and their goals range from compliance with regulatory requirements, to new product roll-outs, to cost-cutting. I build them small, special-purpose network services for which the big IT service providers are either too expensive, too slow or just don't have the right skills at hand. I charge either by day or fixed-price, where the latter is still based on an effort estimate, plus contingency.

How should I ever get to the position to price by value? Often, my direct project sponsors themselves can't put a price tag on the value achieved. Working deep on the systems layer, there are many hops and even more so contributors between me and my clients top or bottom line. I see zero chance to get a procurement department agree to a profit-share with a single guy like me.

Do I have the wrong clients for this kind of pricing strategy? Or has someone here achieved it while staying small/solo in the enterprise world? I could also find gigs as a business analyst/program manager at my telco clients, but I don't think it would make a difference in the pricing strategy.

[1] A notable exception from this seems to be tptacek's Matasano. Still, with no experience in the security industry, I wonder how value-based pricing works there, given that security services IMHO seem more geared to preserve value than increase.

12 comments

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kohanz
for which the big IT service providers are either too expensive, too slow or just don't have the right skills at hand

If you know what your BigCo competition charges, can you simply reduce the delta between their price and yours, at a level where your customer will still save significantly?

brudgers
It is possible that there are commodity consulting firms that focus on low-price for some lines of service like HR manuals. Systems consulting for telcoms is another sort of animal.

The customer will save significantly if their operational costs are reduced or their operational benefits are increased. On any worthwhile business project, these will dwarf the pricing delta among consultants. To put it another way, let the client make their money from running their business. Handing the client your profit is a bad idea.

In the engineering equivalent of the CAP theorem [1] better and faster are what matters for any project worth doing.

[1] Fast, cheap, good: pick two.

brudgers
I quote a price, you accept or reject it. If you reject it, I was too high for you. But being too high for you may be just be a natural outcome of any number greater than zero being too high for you. God bless cheap clients, but I don't want them anymore. They're not worth the trouble.

On the other hand, if you accept my offer, I was either perfectly priced or too-low. Odds are the latter. Next time around I should raise my prices. It will make you a better client.

The important point is that pricing is both empirical and social. The empirical part is solely what someone is willing to pay. The social part is how pricing as a signifier effects the business relation. Clients who push hard for zero dollar pricing don't value the relationship. Long term B2B relationships are built around mutual success and the value of working with the same people on future projects.

The pitfall of pricing is imposter syndrome. It's thinking "Surely, I am not worth $15 per hour so I'll offer my services at $10." Fear of rejection also plays a role, "I'm not even worth $7.50 an hour." Note the downward pressure. Remember that for some clients zero dollars is the best price because they don't value the relationship.

All of which is to get to the advice, value based pricing is empirical. The only way to establish the right value is by raising your prices. Time and materials proposals are just as value based priced as fixed price proposals. The value comes from what I do, not the contract form. Value based pricing doesn't mean that I get a share of future revenue. That's a bad idea anyway, it's too much accounting and auditing for both parties. Getting paid quickly trumps just about everything except getting paid.

Finally, your clients aren't avoiding the big IT service providers and calling on you because they are expensive. The slow and low quality are what kills your client. Essentially no matter how much they pay a big IT service your client won't get what they really want. That's why they've contacted you. That's why they are willing to take the hit-by-a-bus-risks associated with a one person shop.

Good luck.

rsto
> All of which is to get to the advice, value based pricing is empirical. The only way to establish the right value is by raising your prices.

Thanks for advice. In the past, I have managed to raise rates from one gig to the other, and I am confident that there is room left upwards. What sounds so intriguing by the posts like patio11 and others though, is that they seem to be able to correlate their service with hard metrics: be that conversions on a website, ad spend, whatever. Maybe I am misreading that.

While I am confident to again and again be able to negotiate my rates, it would have hoped to find an idea on how to use hard facts rather than the current negotiation dance.

brudgers
That's just in the nature of their business. They get to write their own specs, so to speak and pitch the business case against those specifications. It may also be the case that they are dealing with operations closer to the money, rather than deep in the switch gear.

But regardless, they are pitching their services based on what the people hiring them care about and what problem or opportunity is the concern. Your case is no different the slots just have different values. Engineering concerns replace conversion rates and not having to deal with companies who leverage nobody-ever-got-fired-for-buying-IBM fear among middle management to their advantage.

As for negotiations, one thing I've learned from HN is only negotiate on scope not your rates. If your price is over budget, the solution is for the client to prioritize. Let them change the spec, it's going to happen anyway as the project advances. Realism regarding resources is one of the key insights of agile methodology.

Finally, if you're not willing to walk away, don't kid yourself into believing that you're really in a position to negotiate. 50% less work at 200% rate is better because it provides time for identifying leads, qualifying prospects, and closing deals at the higher rate.

Good clients are not opposed to your prosperity. Bad clients are.

JoachimSchipper
Can't you put a page in your proposal like

                   | Big Enterprise IT | Me          |
    feature X      | Yes               | Yes         |
    feature Y      | Yes               | Yes         |
    feature Z      | No                | Yes         |
    feature A      | No                | Yes         |
    feature B      | No                | Yes         |
    time-to-market | ~1 yr?            | 2 months[1] |
    ROI            | 5 yr              | 18 months   |
(I have no experience in sales, but since you explicitly make the comparison yourself...)
ark15
>> Clients who push hard for zero dollar pricing don't value the relationship. Long term B2B relationships are built around mutual success and the value of working with the same people on future projects.

>> Essentially no matter how much they pay a big IT service your client won't get what they really want. That's why they've contacted you.

As someone who runs ( _is trying to run_ might be more appropriate) a small practice with enterprise clients, I just want to say to other readers that this advice is absolute gold.

taprun
If the directors can't put a value on the work, you need to work with them in order to do so. If they don't know the value of a project, they'll never be able to figure out if it should be funded or not. If you can help them at this stage, your value to them will go up, and your opinion will be respected more than that of a "mere technician". You don't want to be the guy who wrote the switching algorithm. You want to be "the guy who saved the firm six million dollars." The latter looks much better on a consultant's resume. Also, the directors can pass your analysis along to their managers to show how well they manage their affairs.

Charging by value isn't simply about setting prices. It's about figuring out how to include items that might not cost you much money but provides extreme value to your customer. As an example, I worked for an organization where I bundled a specific type of graph into their software. Time for me to build: a few hours. Value to the customer: saved thousands of man-hours per year. That's a BIG savings that I could charge a lot for.

The key aspect of value pricing is that you will charge different amounts to different people for the exact same work. Why? The value a given piece of software will create will depend upon who is using it. Want to sell me a system to manage huge amounts of data? I wouldn't even pay a penny for it. Want to sell it to Google? They might spend a hundred million without a second thought.

I think that Sean Wes has a good worksheet for interviewing clients: http://seanwes.com/value-based-pricing/

As a shameless plug, I also wrote a book on how to price software http://TapRun.com/pricing

JSeymourATL
If you're dealing with clueless corporate managers and procurement flunkies, I'm afraid selling value is a bit of lost cause.

If the project sponsors can't answer the question-- what are the three greatest impacts resulting from this project's success? Or-- what would be your boss's reaction be to this success? Then trying to establish your value won't help. You're just another 'vendor' to them. Easily replaceable with 50 other vendors on their approved list.

Alan Weiss has a good take on this-- "Fees are actually dependent on only two things: is there perceived value for the services provided that justifies the fee, and do both parties posses the intent of acting ethically."

Suggest reading Value Based Fees> http://www.goodreads.com/book/show/1145457.Value_Based_Fees

kerryfalk
Quantify the value. This is part of an effective sales process. During your investigation identify what they're trying to improve - sales is an obvious one but business value can be assessed to be things other than increasing revenue. Other examples: improving efficiency/operational cost by reducing overhead or making a process more efficient so that resources can be reallocated to other parts of the business, improving margins, expanding the addressable market through product changes or other avenues, etc.

The key is being able to quantify the change/goal. If it can't be quantified it's probably not worth your time or theirs, seek something that is. Once quantified you can price it based on the value you'll deliver. They can make the decision based on whatever they want to use to assess its cost/benefit but it should be obvious and a no-brainer if the investigation was through.

If you're stuck in pricing things based on your costs or dealing with individuals who can't articulate/quantify their pain it might be best to seek other opportunities.

rsto
> If it can't be quantified it's probably not worth your time or theirs, seek something that is.

This

> If you're stuck [...] with individuals who can't articulate/quantify their pain it might be best to seek other opportunities.

and this. Thanks. I come to realise that the best opportunities/credentials I have so far, are the ones that were closely related to performance improvements. Whereas the ones that were most dreadful to negotiate and execute were the projects with no tangible outcome. Those were also the ones that also had the least sponsor buy-in.