Should a Project’s Cost Depend on How Much it’s Worth to the Client?

I think for most freelancers, the rate we end up charging for any design or development project generally depends on, and is focused on, the work we do (i.e. we have an hourly rate, or a fixed price for a certain type of job).

True, we might change our prices in certain cases. For example, if we know we’re dealing with a high maintenance client, or we’re developing something for a non-profit.

But until I saw this tweet by Andy Rutledge, I’d never thought too much about factoring in the client’s potential financial gain from my work when deciding on what I would charge them. That tweet led to a very interesting discussion, which I’ve embedded below into an iframe, using the very useful Twitter Viewer by Aaron Swartz.

You can view the entire conversation on Twitter Viewer here and here is the original tweet.

(Click here to toggle the height of the iframe — inline JS FTW!)

Your Thoughts?

What are your thoughts? For example, what if you knew that a project you were designing or developing was going to net your client a million dollars in its first year, and increase in profit in successive years? Wouldn’t you be tempted to charge a lot more for that?

But, as I pointed out on Twitter, this seems to cross over the freelancers job into a sort of investment role. I’m not totally convinced this is the right way to go about things, but I do think it would be a shame if someone got the same amount of money for a charity website as they did for a startup that became the next Twitter.

What does everyone think of this?

Photo credit: Pile of cash from Bigstock

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16 Responses

  1. David:

    Hahaha, interesting article, and very interesting thoughts put across too. I’m with @nathan_ford on this one though – we’re not being paid to design the product, or even sell it (in the case of a website selling physical commodity products as opposed to services or web apps) – we’re being paid to design the site and/or branding around it. It’s a single cog in a large wheel I’ve found. With so many variables an unknowns in deciding whether a potential client is going to make money out of selling the product, based on a site you knock up for them, it would take weeks to decide on a pricing model this way… too much of a headache.

    @andyrutledge is being greedy, and clearly wants in on everyone else’s successes. The world doesn’t work that way unfortunately.

    • David i totally agree with your point of view.
      I have did lots of projects and some where hit for my clients but few where not so should i charge less for those who are earning profit quite less than others. Obviously No i should maintain few things before charging.
      And ya david @andyrutledge wants to do some thing perfect all time.

      Well quite a good and interactive article.

    • Joelle:

      A perspective from Design Management:
      I think you may charge higher based on the profile of the client, for instance a corporation vs a small business. But the project value to the client is not your area of interest. My stand: I provide the tools, you do the business. So i should only gain what I did for the tools, not what you do with my tools. So… there. :)

      Thanks, this is fun.

  2. Jared:

    I’m trying to come up with an example of something similar in another field and am having a hard time. Here’s the best I can think of: does a lawyer for a high-profile case charge more for his time than he would for any other case? I’m not sure of the answer, but it would stand to reason that his gains that come from exposure would be plenty of extra compensation if the price were the same. We, as web developers and designers, in my opinion, get less of this exposure than a lawyer would.

    Anyone have a better example of the @andyrutledge dream?

  3. I agree that my bid should be inclusive of intangibles such as the “needy client” who will feel that they do not wish to purchase a maintenance contract but nonetheless constantly calls with “just a little question.” A bid to a real estate company/property management company to bring their existing terrible website into this century with dynamic pages, online customer service and electronic invoicing is a great example – I just bid one of these businesses and during our pre-presentation discussions it was clear that they will end up with one less employee just by taking my suggestion to automate office procedures and keep tenants from coming in the office to pay rent, and cut back phone calls to tenants and property owners alike by using an online help desk system. Why should I not consider the outcome of this project providing currently intangible benefits but will alter the very manner in which they transact business and use new technology to save money?

    This is a great subject – great discussion. Thanks alot!

  4. A lot of the freelancers that I know personally are already doing this, to some extent, in their work. If they’re doing a web site for a small, local start-up, they will charge them less than if it were for a large company with a large footprint in the industry and lots of money to throw around. They may believe that they’re doing it for their own self-interest, or that they do it because they can “get away with it” (which are both true, of course), but there is an underlying premise that many of them don’t see… the larger company will pay you more because, to them, your design/expertise is worth more than it would be to the small, local start-up (in terms of potential revenue).

  5. Adam:

    It’s pretty simple.

    Imagine this. You are the only web developer in the world. If you do a job for a client, your client will benefit with billions of dollars in profits. Do you negotiate solely based on your time and effort? I hope not! If you said you wouldn’t do the job for less than a million dollars, do you think your client is going to forego the billions in profits he’d net and turn you down?

    In reality, you aren’t the only web developer in the world, and your job probably won’t lead to billions in profits. However, the principle is the same: what your client is willing to pay depends on how valuable it is to him. Think about it, wouldn’t you pay more for something that you think is essential and will lead to big profits, and pay less for something that may help a little but isn’t really necessary?

    Profit seeking negotiators take this into account. It’s really a matter of supply and demand though. Imagine the first scenario where your help will undoubtedly net your client billions in profits. However, this time imagine that there are millions of web developers in the world capable of doing the same thing that you do. Although the client is willing to pay millions/billions for your help if he had to, this doesn’t matter, because he doesn’t have to. In this scenario, the price is determined by who is willing to do the job for the least amount of money. For example, start off by assuming that all the developers ask for a million dollars. Being the savvy negotiator that you are, you realize that if you offer to do it for 500,000 dollars, you could make a quick (big) buck. Unfortunately, you aren’t the only one who thinks like this. Eventually, someone else will offer to do it for 200,000 dollars, and then someone else will offer to do it for 100,000 dollars, and eventually someone will offer something based only on the amount of time and effort it takes them.

    The previous scenario is one of low demand (only one firm that is offering a job, and it will benefit with billions in profit), and high supply (millions of capable developers). In real life, demand and supply are more reasonable, and they will determine negotiations (or so the theory goes).

    In real life, I think there are times when you could milk your client for more money if your client needs you badly. For example, say your all the people in your clients business are turning to the web and making websites. If your client doesn’t do so, he’ll go out of business. Furthermore, it’s important to do so asap because if he’s too late, the market will gravitate towards it’s competitors, and name recognition will prevent them from going to his website when he gets around to making it. So, say the job is worth one million dollars to him. He needs you, and he needs you now, because if you say no, he’ll have to take the time to search for someone else, and by then it’ll be too late. How would you negotiate?

    • Adam:

      To be clear:

      People should negotiate based on supply and demand. Supply being the supply of developers, and demand being the demand for developers. If you’re a company you’ll choose the cheaper developer (all else equal). If you’re a developer, you’ll choose the better paying client (all else equal).

      Consider a single developer. There are really two questions:
      1) what other options do you have? your time is limited (you can’t do two jobs at the same time), so (if you have multiple job offers), you’ll choose the one that pays best (all else equal)
      2) what is the client thinking? how valuable is the job to them, and what other options do they have?

      The second question is where people are justified for having dissenting opinions.

      You should accept your incomplete information, and negotiate based on some rough expected value. For example, say that if you negotiate hard, you think you have a 40% chance at making $100,000, but a 60% chance at making nothing. And if you negotiate easy, you have a 100% chance at making $10,000. In this case, you would choose to negotiate hard because the expected value of doing so (100,000*.4 + 0*.6 = 40,000) > the expected value of negotiating easy (10,000*1).

      You are justified in having different opinions as to the expected benefits and their likelihoods. When you say that you think you shouldn’t negotiate hard because you don’t know the clients perceived value, and you don’t want to be risky, what you’re really saying is that the expected value of negotiating easy is higher than the expected value of negotiating hard because you aren’t confident in your estimations of the benefits or likelihood of success of negotiating hard, and because you are risk averse (you’d take a guaranteed 100 dollars over a 10 percent change of getting 1000 dollars; risk aversiveness impacts how money translates to utility).

  6. Kristine:

    This is interesting stuff, I myself am a freelancer and I’m on a few sites like oDesk. I also use a software called Bitrix24 to manage my jobs and time, this makes it easier to see how and why I made certain profits on certain jobs. Very useful tool because I find more and more clients are hiring based solely on cheapest bid.

  7. Very interesting discussion. I’m not a freelancer but my opinion is as follow. I do believe that within reason you could charge more to a “wealthy” client than you would to a client with less budget. It’s in the grey zone of ethics, but we all know this is how the world works.

    Having said that, I foresee the following challenges if you would charge based on value rather than costs:

    - You can’t have it both ways. By charging on value, you also have to accept that if that value is not realized or only partially, you don’t get paid or you get paid less. Even if you are not the root cause of the success not being delivered. You see, value is an unpredictable variable, and it is the responsibility of investers to carry that risk, and to yield the returns if the outcome is successful. If you want to be part of benefiting from this value, you also need to be part of the risk.

    - The discussion seems to be based on the merit of delivering unique value that directly contributes to the overall success of the greater whole. Meaning, the service delivered is not a commodity service, it is truly unique. From a business perspective, I beg to differ. I very much realize there are some awesome design agencies that can make the difference, but even still…there are many agencies like that. And that means that for a business, it is somewhat of a commodity. The practical implication is that you play in a competitive field, and that you simple cannot charge (a lot) more. Another design agency that charges by the hour will outbid you.

    Despite my reservations, I do think it is an interesting idea. I can see it work in some highly specific cases. Just thinking out loud:

    “We will redesign your website, and will promise to increase the conversion rate by 30% within 3 months. We will charge a base fee for the work, and expect a 10% share on the increased return for the first year”.

    That right there is a rock hard commitment with a win-win setup.

    • “The practical implication is that you play in a competitive field, and that you simple cannot charge (a lot) more. Another design agency that charges by the hour will outbid you.”

      I disagree. Someone will *always* be able to charge less. A business can find an agency in India or Malaysia which will charge a fraction of a European or American agency. Competing on price is a mug’s game. You have to compete on quality and service. Obviously that doesn’t mean you can charge millions for a basic website, but it does mean you should charge a healthy amount. Your real competitors will be doing the same. A client who just wants the cheapest is probably a client worth avoiding.

      I’ve been in charge of hiring web designers and developers before, and it’s clear that some charge far too much for what they are offering (you can tell these from the 50-page bid documents full of crap that they send you), and that some are charging so little they are just going to provide some generic template that takes no account of your business. In the middle are the agencies or freelancers that are worthwhile, and you choose those by the quality of their work, their understanding of your sector, and what they are offering, rather than solely their price.

  8. Before I was doing design, I used to work at costing out projects (not web projects but education courses), and one of the principles I always had to hammer into people was that cost is not the same as price. They’re not even that closely related.

    Cost is, simply, how much it will cost you to do the job. Your time, your overheads, your materials and so on.

    Price is how much you charge the client. It is based on the value to the client, the client’s ability to pay, and how much you personally value doing the work.

    Sometimes that means that the price is actually lower than the cost. For example, if I was trying to put a price to training teachers in a third world country, I would consider charging far less than the cost, because it is a worthwhile job in itself. (Assuming this wouldn’t cause my organisation to go bust.) On the other hand, ‘professional development’ for vastly highly paid executives would be priced at several multiples of the cost, at the very least. Particularly if it was crappy work doing it. But you absolutely have to know your cost before you come up with your price, if you want to stay in business.

    Web design and development is no different. I would do work for a charity I really supported for a low price, even for free, if I could afford to. I do work for writers at cost price, because I like writers (and am one myself). Work for a corporate that I had no connection to and which was going to make plenty of money out of my work would attract a higher price.

    This should not be controversial. It’s how many (maybe most) businesses work. Even massive corporate entities will charge significantly less to a ‘good cause’, although that’s often just for the PR.

  9. Interesting points. The microeconomics of a given market should reach an equilibrium over a given period of time (all else being equal). However the real world doesn’t always work this way…. raising prices for existing customers is always a tricky process which has to be handled with extreme care and planning.

  10. John:

    Really interesting subject. I usually charged my clients according with how much it cost me to produce the result. Working hours, licenses, etc. But there are two different aspects of the pricing in my opinion. When you are talking about small and medium businesses or average individuals or if your are talking about high value clients or brands.
    An for a very simple reason. When developing a website for a high rated client, you must provide a bit more that just your word that your project will have the impact demanded by the client or is as stable as needed for high number of visitors. Different types of warranty come with different prices in my opinion. This is why I charge different for similar projects.

  11. If I know a client has a large budget and the website will be of great value to them ie a eCommerce website for a business who only plans to sell online then I will up my rate per hour. At the end of the day it’s what it’s worth to the client, I think a lot of freelancers undersell their services.

  12. Ed:

    For example, what if you knew that a project you were designing or developing was going to net your client a million dollars in its first year, and increase in profit in successive years? Wouldn’t you be tempted to charge a lot more for that?

    You’re creating a website, design… code, make it look good and functional…on that premise alone you can’t forecast the client will stand to make a million dollars, and as a website design/coder your input is not the driving force of the product value that the client is offering to their demographics.

    Your service as a webdesigner can thus not be held in relation to the profit the client is stand to make once they are in the position to get to market with their product or service…up to this point your work has no relevance to their profit potential, UNLESS…

    If you know the client has something in the works, they have something of value to a specific demographic and you can bring forward more then just a webdesign and associated markup/code, then your service extends beyond website design/coding and you can discuss your fees accordingly based on that extended service.

    You will then of course step into the realm of conversion optimization or [ insert type of ] consultation and you can price your fees/bonuses according as is custom in that industry.

    Question: Will your service extend beyond creating a website design and coding it up and if so to what magnitude, is it that groundbreaking that your input would remove any barriers for the projected million dollars the client would stand to make once their site is live?

    If your answer is Yes: Then discuss with the client and convince them and negotiate a deal based on your work.

    You are now extending your services beyond website design and if your input makes the difference then your compensation is well earned.

    If your answer is No: Then don’t be under the illusion you are a unique force responsible making the client these profits, you don’t do anything special nobody else can do for the client.

    In conclusion: You’re providing the presence…not the product nor the service the client provides…and providing an online presence alone as a website designer/developer is simply not a valuable service enough to justify your increased costs industry wise (Web design) in order to realize the projected profits for the client.

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