Cost vs. Value

[JayGoldman]

Fellow TorCampers -

Mike Glenn's talk on Time Management for Small Businesses (see my
notes: http://barcamp.org/index.cgi?ETATimeManagementForSmallBusiness)
generated a really interesting conversation about how we, as
professional services businesses, should be charging for our products
and services. The debate centered around the idea of cost vs. value:
should we charge for five hours of time if a service cost five hours to
build (the 'Law and Accounting' model), or should we charge for what we
think the service is worth to the client (the 'Advertising' model?).

We had to cut the talk short since we ran out of time in the session,
but Mike and I (and a number of other people) would really like to
continue having it. We're proposing a 'break out' session to continue
the debate with results to be shared at the next 'TorCamp' meeting.
Anyone interested?

Thanks,

Jay Goldman
President
Radiant Core, Inc.
www.radiantcore.com

[jon...@gmail.com]

Mike, Deborah and I continued this discussion. Deborah had a great idea
of potentially getting some artists to join the conversation since they
price their artwork based on value rather than cost. Anyway I'm in.

[debhart]

Thanks for posting this, Jay! I'm really interested - but I'm only in
town for 1/2 day before Dec 22. So if, by any chance, you can hold it
this Sat (Dec3) between 1:30 and 6PM, I'm in! I can come straight from
the airport...

I thought that including a professional, selling fine artist in the
conversation might be interesting... anyone married to a sculptor?

Deb

[debhart]

PS: Variable scope contracts:
http://www.plonesolutions.com/about/OptionalScopeContracts.pdf

[jon...@gmail.com]

We've had more heated debates about this in the office today. I've been
thinking more about this and really there are four ways to charge for
work:

Time
Effort
Value
Compensation

Time is what lawyers charge. They track their time religiously and
charge for it in 15 minute increments.

Effort is what we (as an industry) charge. We estimate the effort
involved in delivering something and then we track time. The closer we
estimate effort to time, the more "profitable" we are.

Value is the most arbitrary of all. You charge based on the value of
the work to a client. The problem is value is not fixed. Softer design
work is subject to value metrics. If you design a logo for a client and
that logo defines a brand that is then used widely by an organization
the value far exceeds the effort or even time it took to create that
logo.

Compensation works well where you can directly equate the value of your
work to measurable and auditable metrics. For marketing projects the
metrics are often soft and don't have direct results. Also in large
organizations that have many factors driving online success it is tough
to get an organization to isolate your specific impact on bottom line
results.

Anyway these are just some thoughts, no real answers. This industry has
grown up with certain ways of pricing, it may be time to look at them
and wonder if they are still valid or if they ever were.

[Shannon]

That's a great idea Jay. I would definitely be interested. I have
some artist contacts we could try to include if you want.

Also, agree with the person who last posted on the ways to charge
(time, value, effort...). Agree with the analysis - but the real win
is when we are charging for value. The challenge is how to do this...

Shannon

[mgl...@gmail.com]

Good breakdown Jon.

Given the choice I would rather quote on value if I felt the value was
higher than my usual time for the job. Deb mentioned during our
discussion at Torcamp that this seemed a little bit like ripping a
client off. I think if the client is convinced of the value that you
are brining to their project then it's certainly not a ripoff. If I am
one of the few people that the client is convinced can execute on their
goal then a percentage of the total value is not unreasonable.

The problem of course is determining that value. Most of the time I
don't have inside information on how valuable the project is and the
client isn't always willing to share that information. They'll simply
ask for a quote and if it's below the magical number they're fine with
it. The only time I have a client that is willing to share their
numbers is when they can't afford the web component but they're asking
me to take a stake in their company. If I were playing devil's advocate
I would suggest that this is only fair. If you want to take a
percentage of the profit then you'll have to share the risk.

In the end whether you are quoting hourly or quoting based on the value
of the project I think that each of us and our employees have an hourly
value that we can extrapolate and track to ensure that we're profitable
and by how much within a job.

[Jay Goldman]

Thanks everyone for contributing so far. Maybe we can all get together
for dinner one night and discuss? Mike and I can't do today (and it's
almost 6pm anyway), so maybe we can hold off until January when Deb
returns?

How's everyone for Thursday, January 5th? I'll post a note to the
TorCamp site once we've picked a day to open it up for everyone else.

Thanks,

Jay

[jon...@gmail.com]

I'll be at CES on the 5th, if we could push it until the next week I
would be appreciated.

Jon

[Jay Goldman]

How's everyone for Thursday, January 12th?

:)

Thanks,

Jay
Radiant Core, Inc.
We Build Websites that Build Your Business.

[debhart]

I think I will be driving back that day or next. Or maybe not, things
are fluid here - including early end of contract. I'm a bit
unpredictable for that week right now. Can't wait to get home, though.

But if it suits everyone else, I can catch up later.

Thanks
deb

[debhart]

Now, I'll be back before Jan 12th So count me in, for sure. deb