"As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website."
Exactly. Leaving aside the sleight of hand of comparing hypothetical/perceived benefit with actual cost, what you've really got here is a consultant offering you $60,000 of benefit this year. If another consultant can do the same job but only charge you $20,000, then they have offered you $80,000 of benefit this year. Assuming both are being honest about the expected benefit and can do work of a similar quality within their quoted budgets, so one really is just pricing higher arbitrarily, who are you going to choose?
Value-based pricing is interesting to discuss, and it's certainly a more rational and business-like way of handling engagements than billing your time out hourly in something not so far from an employment relationship. However, the value added is benefit minus cost. Unless you really are the only game in town, you can't just raise your rates until they are 99% of the value you claim to generate for your client and argue that it's still a good deal for them because they're 1% better off if they use you than if they hadn't. That ignores the third option of using someone else.
That third option is a possibility for almost every client of almost every consultant. If you as a consultant have the sales and marketing skills to find clients who will believe that they don't have that option and convince them that you really are the only sensible choice and they should pay your inflated rates accordingly, then good for you. However, please don't pretend that winning jobs at those inflated rates has anything to do with some natural value proposition rather than simply being better at sales and marketing.
Exactly. The only way I can see this working with a non-naive person is if its accurately measurable, and if you don't achieve the 100k, you don't pay the 40k. THEN, I can see it working. If that isn't how it works, then I can't understand how you think you are righteous in selling these services at a much higher place - put your money where your mouth is.
FWIW, I don't think righteousness is really the issue here. All consultancy is ultimately based on selling valuable information and/or judgement that the client doesn't have but the consultant does, so in a sense it's always based on the consultant charging money because of the client's ignorance. It's hard to find any objective standard for reasonable pricing other than "what the market is willing to pay".
Maybe it becomes more ethically dubious when the consultant is taking advantage not of the client's ignorance in the field where they're paying for advice but of their ignorance of the consulting market itself in that field. Even then, it's the natural position that a new customer doesn't know the sellers' market, and a large chunk of sales and marketing is based on trying to convince uncertain prospective customers to buy from you and not someone else, so again it's hard to find any objective standard for what is fair and what is unfairly taking advantage. (This is a major argument for licensing practitioners in industries where bad advice can be particularly damaging, such as healthcare, law and accountancy.)
One thing that is very clear is that the value-based pricing approach only works if you can find some credible and quantifiable means to demonstrate the value you might offer to a client. If you work in a field like conversion optimisation, that's easy enough. If you (or your consultancy including colleagues/subs) are building an entire system that will have concrete benefits for the business, you can probably do it too. If you build software in general, maybe as part of a wider team or making incremental functional changes to an existing system as many freelancers/contractors do, then it's not the same situation.
This is why it sometimes irritates me when a handful of HN celebrities post repeatedly about raising rates and changing the basis for charging as if everyone can do it, even in response to someone who would obviously have to fundamentally change the kind of work they do before the advice would make sense for them. It sets false expectations, and potentially damages the careers of people who go out to customers/clients with unrealistic expectations and wind up missing out on reasonably profitable work. Worse, it could tarnish their reputation and leave unhappy clients behind, because even though they did what they said they'd do, the client later discovered they'd paid well over the odds and felt ripped off. It's never happened to me, because I choose not to work that way, but I've seen it happen to others and the results are never pretty.
"when a handful of HN celebrities post repeatedly about raising rates"
Exactly. An similar example might be me. While not an HN celebrity I do get referrals for what I do from people who are celebrities (could do an entire post on how that went down actually). I do it because it's a) fun (it's not the main way I make money - very time consuming) and b) I do it to plant seeds for future things (contacts with important people) as well.
Consequently I am able to say "I want $x for a strategy and research fee and $y upon successful completion of the task". So far I've had no kickback from anyone so I just have to evaluate and try to maximize x and y perhaps and raise to make more iic. The "research/strategy" though appears to work even w/o the celebrity connections because of my other obvious qualifications and what I do.
There are lessons to be learned from how I operate but they would probably be more centered around how I got to that place rather than "here is how you can charge what I charge". Otoh if I wanted to become an HN celebrity (I don't at least not now for sure) I could spin this any way I want. I could make anything the "thing" that should be paid attention to.
There are lessons to be learned from all of this of course but I fear that someone just starting out may have a much harder time seeing the 50% they should pay attention to and the 50% they should not.
I don't know if you tried it but when I offered pricing on the basis of perfectly measurable metrics everyone rejected. They all said they can't budget for possibly outstanding results. Based on this interlude I got the impression that there is a certain amount they _want_ to pay, and they are looking for an offer similar to their idea of a budget.
"As an example, if I was proposing to build a website capable of creating an additional $100,000 of profit annually, I would ask the client to make an investment of $40,000 in their website."
Exactly. Leaving aside the sleight of hand of comparing hypothetical/perceived benefit with actual cost, what you've really got here is a consultant offering you $60,000 of benefit this year. If another consultant can do the same job but only charge you $20,000, then they have offered you $80,000 of benefit this year. Assuming both are being honest about the expected benefit and can do work of a similar quality within their quoted budgets, so one really is just pricing higher arbitrarily, who are you going to choose?
Value-based pricing is interesting to discuss, and it's certainly a more rational and business-like way of handling engagements than billing your time out hourly in something not so far from an employment relationship. However, the value added is benefit minus cost. Unless you really are the only game in town, you can't just raise your rates until they are 99% of the value you claim to generate for your client and argue that it's still a good deal for them because they're 1% better off if they use you than if they hadn't. That ignores the third option of using someone else.
That third option is a possibility for almost every client of almost every consultant. If you as a consultant have the sales and marketing skills to find clients who will believe that they don't have that option and convince them that you really are the only sensible choice and they should pay your inflated rates accordingly, then good for you. However, please don't pretend that winning jobs at those inflated rates has anything to do with some natural value proposition rather than simply being better at sales and marketing.