10.52, Thursday 27 Oct 2005 Link to this post
Pricing. When I started freelancing, the hardest thing to do was figuring out how much to charge. After a little advice, I decided how much I wanted to earn in a year (based on previous salaries), and assumed I would be paid to work only 50% of the working days available (the remainder being holiday, time spent on overhead and looking for new work, and to compensate for benefits). I set that as my day rate.
That pricing model, however, puts the control of what work I do with whoever is paying. The first thing that happened was I gave myself two different rates. Work that would progress my career (writing, work for charities, and work I wasn't already established in) was one, lower rate, and everything else was the regular day rate or a little higher. Regarding how I spent my time, I tried to keep this to half and half.
By the time I finished freelancing, I had five pricing bands, based on a game Es and I play while we drive through the New Forest. On that drive, we usually see horses (it's a beautiful part of the country, and there are feral horses allowed to roam everywhere), and the game is to guess how many. You can see None, obviously, and the three next bands, increasing in number, are: Few, Some, and Many. There's a fifth one, very rarely used, which is Legion.
The thing is, it isn't appropriate to think about numbers of horses. When we drive through the Forest (which is heath; there are very few actual trees in the New Forest. Also it's 900 years old), we may see members of three or four herds of ponies. If we see only two or three actual ponies, that means there's likely a herd not far away. So let's say we see three ponies, and they're not together but still close. That's only one herd, and not much of a glimpse, therefore Few. But if the three are scattered (some early in our drive, some much later), that could be the edges of two or even three herds, so that's more like Some (or Few-becoming-Some).
The difference between Many and Legion is similarly nuanced. It's not enough to see ponies at every moment of the drive. You need to see cows and preferably some deer too, because it needs to be supernormal horseness, like a cubist portrait, to push up to Legion, and generic animals will do that.
With this banding system, it's really hard to break it down, and it doesn't even slightly map to numbers--but it's really natural to use. We're not measuring the number of horses we see: We're measuring the cross-section of the idea of horseness stimulated in our minds. We're reverse engineering the way we think.
As I was saying, by the time I finished freelancing, I used those bands. I did small bits of work for None for fun and favours. Regular work was charged Some, and that reduced to Few for especially interesting work, worthy work, and establishing work. I used Many to charge for work I have expertise in, when it was for people who could afford it (and they were getting a lot of value out of me) and when it was not the kind of work I wanted to continue doing forever. I never used Legion, but that's for when there's also a lot of money being made out of my involvement. This worked because, although I couldn't really describe how I made decisions, I could choose very quickly, when I met a client, at what rate I would charge for the work.
Then I started, with Jack, Schulze & Webb, which is a whole other kettle of fish. There's office overhead, benefits, and client relationships to consider, and projects have a different nature to days. Suddenly we have to think about risk, scope creep, time estimates, and opportunity cost. It's not something we have to think about too much at the moment, but it's still interesting to look at different models.
For example, there's the Project Triangle, which is a resource allocation perspective on the problem: There's a trade-off between fast, cheap, and features, and money (to an extent) buys you leeway.
And there's a civil engineering company I've been told about, which internally audits all its projects for profitability, interestingness, and how easy the client is to deal with. If it's not marked well on two of those, future projects are turned down.
It's this second one that interests me. Not using money as a way of explaining how much a project costs, but using money as a way of influencing what kind of work you get, and as fair compensation.
Work must be fun. If I didn't believe that, I'd have a highly lucrative job in the City. And work must be fair. I don't want to charge people too much for what I do for them, or too little. There must be a lot of different work, because our expertise comes from using a large variety of ideas and skills. Also, work creates more work: You get what you do. I'm on a trajectory away from programming, for example. I still do it, but I don't discount my day rate for programming work. The last thing: Money buys freedom. It's good to take well paid jobs, because that gives you the time to pursue the less obvious ideas, and room to develop your own products.
This means that my freelancing banding system still works: Charge more if there's a lot of value being extracted, if the work is dull, and if there's risk involved; charge less if the work takes the company in good directions, if it's really interesting, and if it's for people we like.
But what I'm realising is that there's something else involved, and it's the reason consultancies usually charge so much: We don't have to be doing this. We could be making our own products.
When you work on an artefact, be it a product or a company, its value increases faster the longer you work on it. Two months of effort is more than twice as valuable as one month of effort. When you bring something to the table that you've worked on for a year, it's not only a year's worth of accumulated value, it's also scarce, because people very rarely work for that long on a single thing.
Every day, when I work on projects directly for my company, I'm building something that'll get scarcer and more valuable the longer I do it. And when I do that for a client, I'm helping to build a pearl that they will keep. The argument is that they can compensate me only for the work I do, and not for this future value, because they're providing the risk. (Although if it's a long project, I'm actually doing it at the expense of my own company, which thrives on multiple, short projects.)
Okay, this is fair, and it explains one large factor of my fees: I'm being paid to not be an entrepreneur.
But realising this, it lets me tweak the fee structure, and I wonder whether we should be trying out more experimental pricing models. Let's say we provide early interaction design work and strategy (which we do, it's one of the strands). For certain clients, and certain interesting projects, we should offer to be paid in risk instead of cash. If the client does well, we share in the future value. If not... well, we have a investment in making sure that doesn't happen.
That is - and I'm still thinking this one through - Schulze & Webb could work with clients who don't have much cash (startups, in other words), and provide discounted services in return for a small amount of equity.
Call it "venture interaction design."