Measuring value in software development is difficult. If you can tie your activities directly to either higher revenue or lower cost, that's great. As an international tax lawyer, I'd think you have a relatively straightforward way to demonstrate value: it's proportional to the money your clients save on their taxes. patio11 has the same advantage: consulting time spent optimizing conversions through A/B testing can be directly tied back to increased revenue.

But what if you end up working on a product for a company that never makes them any money at all? You haven't provided any direct business value, although you may have done quite a lot of work--maybe months or years. Are you going to charge them nothing?

Rates are a proxy for value that accounts at least in part for the risk of project failure. High-risk individuals might account for this by trading equity for hourly rate or accepting some other form of in-kind compensation, as many startup employees do. But you have to be a strong believer in the project in order to do so, and most freelancers, to put it bluntly, aren't. Otherwise they'd be employees.

Nonetheless, don't start at the bottom by calculating costs. There's a market value for your services in the area where you live. If you can, start by asking other freelancers and consulting firms. The value of a good is what people will pay to get it, not what it costs to make.

The value to my clients comes in two forms: (1) amount of tax saved and (2) stress and fear eliminated.

The first is easy to quantify. It also means there is an upper cap on your income. The upper cap is the amount of tax saved. As your price approaches that number, the likelihood of a "yes" decreases.

Do not set your pricing based on easily quantifiable criteria, unless you're working on huge deals where you can take a small fraction of the value as compensation. (By small I mean low single digit percentages).

The second is where the true value sits. People are willing to exchange money for a peaceful brain. People are willing to exchange money in exchange for more time in their lives. It is here that personal value choice discontinuities work in your favor. Set your pricing based on intangibles.

A business owner is willing to throw money at a problem to not have to think about the problem at all. This frees up the owner's brain to think about stuff that really matters and will make money.

An hour spent by a CEO looking at tax returns could be an hour taken away from making a deal that brings in $1 million for the company. It's worth spending $1,000 to make the problem go away. You are happy to take the $1,000 because it takes you $125 of time input to solve that problem.

I have seen this with very large companies. There is a reason why their compensation packages include "your employer will pay for a lawyer, accountant, and personal financial planner." You don't want an executive with 10,000 employees under him/her to be sweating credit card payments, or "Is my will up to date?" or any trivia like that.

Moreso, however, I see this with entrepreneur-driven companies. The owner is the manager and this person's time is incredibly valuable and should not be spent on trivia, especially emotion-laden trivia.

> A business owner is willing to throw money at a problem to not have to think about the problem at all. This frees up the owner's brain to think about stuff that really matters and will make money.

Yes I am. As a business owner, I completely agree with this statement. After a while of running a business, one day you will calculate how many dollars per minute your expenses are and it will scare the hell out of you. Then you will understand why you throw money at problem X to make it go away, because you need to focus on opportunity Y to bring in more revenue.

> But what if you end up working on a product for a company that never makes them any money at all? You haven't provided any direct business value, although you may have done quite a lot of work--maybe months or years.

If you're being paid to do work (you're not working for free) in this situation, you can conclude that either a) you actually are providing roughly $YOUR_BILLINGS of value to your client or b) your client is a moron and is paying for zero value. You may not be able to directly quantify the value you're providing, but your client certainly is aware of the value you're bringing. The point is to try to more accurately quantify your value and capture more of it.

> Measuring value in software development is difficult.

Again, your client has a ballpark of what value they expect you to deliver. Measuring the value is difficult for the contractor. This is a great area for discussion with the client.

Summary: if you're being paid, your client perceives that you are providing business value.

> but your client certainly is aware of the value you're bringing

In a small company, probably, but in Enterprise contracting, I would be surprised if this is usually true.

Your point is fair, but they know order of magnitude. They know you're (likely) not bringing $10B annually of value, and they know it's more than your current billing rate (or they wouldn't waste time with you). The point is to talk with the client and try to pin the number down to bring your rate closer to the value.

Somebody in the enterprise is responsible for ensuring that projects aren't run without any expectation of creating value; that's the person/group to talk to. If you're not talking to that person/group, then you're right that value-based pricing is going to be hard/impossible to pull off.

If the buyer doesn't have any idea how much value you can/are creating, then your first task is to help them quantify the value (this is good for them no matter who they hire).

I would grant that they know within three orders of magnitude. If they think you're bringing $10m in value, you're probably bringing at least $100k. I'm not sure I'd concede anything more specific than that, though. A lot of enterprise consulting is the blind hiring the blind, or people hiring partisans for some kind of internecine battle. I haven't even sought it out, but I've seen, at pretty close proximity, millions of consulting dollars go directly down the drain.

The question I still don't see answered is — are you proposing to charge based on the value you might deliver, or the value you actually deliver?

If Apple ask you to bid on creating the iPhone, how would value that? (The world hasn't seen an iPhone.) If you're capable of designing the iPhone and the best your competitor is capable of is creating a Galaxy, would the two bids be equal under the assumption of ideal value pricing?

I would say small companies aren't aware of the value either. If they're small and hiring software development contractors, they probably don't know enough about software development to do the work themselves, which means they have no basis for determining what software is worth. They probably also don't have the skills/metrics in place for determining ROI for individual aspects of their business. They just look at cash flow in and out, and from that standpoint all they see for the contractor is a definite and precise cost with a vague notion of some value.

So you are right, mostly. If you're going to sell yourself on "value" to such a company, you're going to have to spend some time understanding what problem they need to solve, and help them determine what value that provides.

If they can't or won't look past an hourly rate, then you probably don't want to work for them, because their other expectations may be equally as baseless.

"But what if you end up working on a product for a company that never makes them any money at all?"

This isn't something that happens to you, this is something you choose. It's your responsibility as a consultant to pick your clients carefully.

If you're talking about a project that everyone expects to have an enormous upside, but doesn't, and it's not your fault, you base your rates from the outset on the client's expectation of value returned, not what the actual result is.

> It's your responsibility as a consultant to pick your clients carefully.

In the mobile industry, (and the web dev industry as well), the market functions on the basis that 90% or so of projects won't make the return, and the industry is carried by the 10%. In some sectors (consumer) this is higher, in others (B2B) it's lower, but it's about the right frame of reference give or take for most projects that ordinary people on HN perform.

Now if you are a professional investor a 90% failure rate is easy because you just do 20 projects at once and you're fine. Similarly, if you are a large size consulting shop you're basically an investor with other people's time, so same story, just do 20 projects and 2 or so blow it out of the park and the rest are a waste and you get the quarterly bonus.

However, if you're an individual or a couple of guys in a broom closet somewhere, 20 projects is a very long time. Unless you are independently wealthy and can just float many years of work, you can't make any money. And if you are independently wealthy, you have a higher chance of success becoming the large consulting shop or being a professional investor (or starting your own startup) than you have doing lots of free projects for other people.

So what you are saying is nice in theory but for the average mobile/web developer thinking about contracting they don't have the volume necessary to assume the risk that the market ordinarily bears for development projects.

"So what you are saying is nice in theory but for the average mobile/web developer thinking about contracting they don't have the volume necessary to assume the risk that the market ordinarily bears for development projects."

I know VERY "average" mobile web / mobile app developers who can charge well in excess of $100/hr. People without a single major hit. Seeing the quality of their output, I would never pay that much, and yet somehow they have all the work they need. (Note: they're not marketing geniuses either.)

Just look at the rates people ask for, and get. They're way up there. Because there are so few of these people around, relative to demand, and because every Joe Schmo who wants to do a mobile app expects to strike it big, they can charge anything they want.

This.

It might sound strange, but most service providers are "selfish" in their pricing. Meaning, a rate is determined by looking inward — how much do I need to charge to make more than my monthly fixed expenses? What's the equivalent hourly rate when I was a salaried employee? What are my peers charging?

I've been able to continuously raise my rates over the years ($50 -> $250+/hr) by getting better at understanding the business problem at the root of a project request (i.e. they don't "want a new website designed", they really just want more walk-in customers) and tailoring my proposal, discussions, and execution toward that end.

As long as you can position yourself as an investment instead of an expense, and wield your technical + business skills to make your client's business better off than they were before hiring you, your ceiling is whenever the project cost outweighs the potential payoff.

(FYI, I wrote a book on this: http://doubleyourfreelancingrate.com)

> Your job, as a business owner, is to set your price based on the customer, not based on your costs.

That's true, but customers will consider your costs when deciding what price they think is fair for them to pay, so neither metric is isolated from the other.

I think you just obviated about 200 years of economics debate.

I don't mean to sound trite, but that's basically a resolution of the whole debate between the subjectivist/marginalists and the "labor theory of value"/"cost the limit of price" camp.

I'm not an expert in the history of economics, but I don't see how anything I said is controversial or obviates any debates. I find it hard to believe that any economists think that consumers do not consider these things when deciding what prices they believe are fair.

I don't claim you were the first to come up with that resolution, but it's an insight without which the two camps were effectively talking past each other, unable to identify where the real disagreement was.

As a customer, I can look up the price of a C-class, but how can I judge the value? I do it mostly by comparing with other cars available, and what they can do, but what was the price of the other cars based on? And what is the value anyway? How fast it goes, how it makes me look to others, how big the luggage compartment is? There is no one true objective value.

I'd argue the reason your customers are happier with a fixed price is not to do with value (after all, what is value - can a customer tell you?), but to do with predictable expenditure and risk. It's a good policy and popular with clients (and also helps to make scope very clear and costed), but it's popular with customers because it gives you a very good incentive to finish on time and on budget, as compared to hourly billing. I'm not sure that's really comparable to shopping for a car.

A lot of the value in a car is the social signalling it represents. Which is (in a curiously recursive fashion) largely determined by its price.

I've tried fix-rate project delivery. It's a nightmare. Either you spend so much energy up-front to document in detail the finish line, or you spend so much energy on the backend fighting scope creep. Maybe I did it wrong the times I've tried.

> In other words, hourly billing guarantees a built-in cap to your annual income.

In practice that cap works out to a hard ceiling of 350K.

Which is pretty good considering you need to feed only one family of it.

What are you saying? That no one can charge more than $1k per day? Why?

What it means is that for normal IT consultants that work 'normal hours' if you are paid by the hour that is roughly what it works out to. 1000 hours at 350 / hour or thereabouts. Sure there are some gods that can charge more than that but for mere mortals this seems to be roughly the cap.

Sure you can charge more than $1k / day. It's just that at that rate you'll find it hard to book 350 days / year. Billable days are anywhere from 125 to 200 / year depending on your rate, reputation and skillset. If you bill $2k/day (definitely doable) you'll find that it gets harder to book all your days, it's simply demand and supply. Elsewhere in this thread someone is charging $800 / hour, which is great, you would only have to work a very small number of hours at that rate to have a living, or you could work a much larger number of hours and save like crazy. But I don't see that as the norm for IT consultants, programmers (Ruby, PHP, Java that sort of thing: $80 to $150 / hour, clojure and other 'exotic' stuff $120 to $250 / hour, M&A work $300 to $500 / hour but that is definitely not the kind of work that you could reasonably speaking book a whole years worth of unless you are the pet of some VC and involved in every deal in the pipeline).

Philip, if you can raise your rates, then how is there a maximum income? We raised our rates until supply balanced demand.

I have raised my rates again and again and I am still overworked. (Full disclosure: currently I am $800/hour).

The difference is that now I am working on much bigger deals for people who appreciate my value. I cannot tell you how important this is to my general sense of happiness.

That last is the killer - clients who are willing to pay more, turn out not to be fools but actually respect quality and don't waste your time.

How many hours do you book at $800 / hour?

Not too damn many, because of the pressing needs of running a business. If I can hit 100/month I am doing well.

That's still pretty damn good! Congratulations!

This article provides an entertaining economic theory based on getting paid as much as you can cleverly manipulate somebody to pay you: http://www.ribbonfarm.com/2013/01/31/stone-soup-for-the-capi...