Matt Homan of LexThink lets his customers decide how much to pay him. He calls it "You-Decide" invoicing and it is another real world example of pay-what-you-want pricing. In Matt's case, he found out he wasn't charging enough.
In the Q&A below, Matt and I go back and forth about how it started, how he explains this method to clients, and what it has meant for his business.
Todd: Tell folks, what you do for a living.
Matt: I'm a speaker, facilitator and consultant. Much of my work is with lawyers and law firms, though I also design and facilitate meetings for companies like Microsoft. My blog, the [non]billable hour, focuses on innovative ways lawyers (and other professionals) can serve clients better and make more money.
T: When did you first get the idea for client-decided pricing?
M: I've always hated time sheets, and kept experimenting with ways to price my services that weren't tied to the time it took me to provide them. Since my clients regularly told me that my prices were too low, and that I was giving them a bargain (but one they only recognized once I'd completed the work), I thought I'd let them take the pricing dilemma out of my hands and pay me what they thought I was worth -- after they'd received my services.
T: How specifically do you present it to the client (before and after the engagement)?
M: I always give clients the option to pay me what they think I'm worth at the conclusion of the engagement. I explain to them that once we've gotten to the pricing discussion, I trust them to treat me fairly. When they agree to my novel approach, they get my "You Decide" invoice that asks them to write in an amount for my fee and give me an explanation for why they paid what they did. And even when clients would rather pay me a quoted price, I still give them a money-back guarantee.
T: What benefit do you think you get for creating this kind of commercial relationship with your client?
M: I'm convinced that by trusting them first, they return the favor. I feel like I'm entering into a mutual trusting partnership with many of my clients very early into our relationship. And, because my price isn't set based upon anything other than the final result, we're both free to tweak the engagement (things like length of time, desired outcome, etc.) as we plan more. Finally, because I know the result is the ultimate measure of my compensation, I find myself motivated to deliver the best experience I can every time.
T: Can you give some quantitive indicator for how this fee structure has affected your business?
M: Since I've been doing this, my sense of the value I give my clients has increased. I've recognized that my clients don't care about the time I spend working for them, but rather the results they get from working with me. Quantitatively, my income has doubled in the past year, because clients pay me more on my blank invoices than I would have charged them. I've also increased my per-engagement price (when I'm asked to give one). I know charge roughly three times what I would have quoted before my pricing experiment began.
T: Most of the pay-what-you-want experiments have been in media specifically digital media. 60 to 80 percent of customer choose free in those cases. What do you think makes it work in a consulting services business.
M: My clients see me doing the work and they experience firsthand the fruits of my labor. In digital media, there's not such a direct correlation between the laborer and the final product. One other thing I've found is that because I often work with people who've put a value on their time (like lawyers, accountants, etc.), they're less apt to think my time has no worth.
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For some more thoughts on pricing, check out the ebook Fixed to Flexible.
Companies that grow achieve greater economies of scale. New, more efficient technologies are introduced. Lower-costs substitutes are found and integrated into the supply chain.
We can find similar examples in the non-profit world:
"We are much better at starting treatment projects for TB and HIV on the ground than we have ever been,” says Jim Yong Kim, a cofounder of the Bostin-based organization Partners in Health. “every time we do it, we’re more efficient and use resources much more effectively.” When Kim, Paul Farmer, and their colleguess at PIH’s Peruvian partner, Socios En Salud, began their first program attacking multi-drug resistant tuberculosis in Peru, the cost for just the medicines was roughly $25,000 per patient. By 2006, the organization had been able to cut the per-patient cost of medicines to as little as $1,500."1
The power of the experience curve comes in all shapes and size.
Chris lays out two points very clearly that perfectly to any discussion about pricing.
Set your price based on the value you provide - Chris is very quick to point out that his consulting clients gain 10 times that amount in money saved on bad advice and new ideas for business expansion
Create multiple price points for your customers - Versioning your intellectual property is the best way to appeal to the wide range of customers' interest. You also spread the risk of the IP development over a variety of products. Chris' versioning consists of:
Blog and Newsletter - Free
His books Trust Agents and Social Media 101 - Around $20
His new Third Tribe online community - $47/month
Live events where he speaks - $99-$500
Daily consulting rate - $22,000
And this doesn't just apply to consultants. I think there is a whole line of thinking that The Creative Class should employ when commercializing their work, whether you make jewelery, make music, or make pictures,
Check out Will Chapman and his company BrickArms. He gets a huge shout-out in the cover story of Wired this month (not online yet). Will makes weaponry for Legos figures and while you can buy individual pieces for around $1, he has weapon bundles as well as special edition pieces that sell for as much as $30. The pinnacle piece is a custom Lego figure named Mr. White (or his media given name "Osama Bin Lego") that goes for $70.
The natural reaction is to say, "Of course, those are toys. I have seen that before." But when was the last time you saw an author (not a publisher) launch at five book boxed set and sell out 800 sets in hours.
About 6% of books in America are now printed on toner-based or inkjet machines—a rough proxy for print-on-demand (POD)—as opposed to on offset presses, estimates InterQuest, a market-research firm. Over the next five years, it predicts, this figure will increase to 15%. In 2008, the latest year for which data are available, about 285,000 titles were printed on demand or in short runs—132% more than in 2007 and for the first time more than in the conventional way. Amazon, the world’s biggest online bookseller, uses POD machines, although it does not reveal how often.
They also report print-on-demand has been a boon for niche publishers like Cambridge University Press. About 10% of the publisher's sales now come from POD books, up from 3% five years. Books that were taken out of print because demand was too low can now continue to be sold.
The industry's scorecard:
All this makes it difficult to predict POD’s impact on publishing’s supply chain, which is already in upheaval, mainly because of the internet. Readers should benefit from the greater variety. More authors will get published, for instance, but there will also be more competition. Publishers may save money, but they may also lose their role as gatekeepers. The losers are easier to determine: used-book sellers, logistics firms and, of course, the makers of offset-printing equipment.
This article doesn't provide any costs, but one copy of a 200-page, 6"x9" paperback costs $8.50 at Lulu. Using offset printing, the same book would cost $1.50 but the production run would need to be a couple thousand units. POD costs are going to continue to drop making it more attractive for larger quantities, allowing publishers to reduce waste and better match supply to demand.
"The strategy of pricing involves acknowledging that customers have different pricing needs and then making efforts to profit from these differences. Customer different in three primary ways"
Desire a different pricing plan -> Pick-a Plan
Have unique product needs -> Versioning
Value a product differently -> Differential Pricing"
-The 1% Windfall, p28-29
The bulk of the interview is around those three pricing strategies and how business can expanded their views about how to use pricing to improve profits.
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The 1% Windfall is one of the books I recommend in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download the ebook here.
"So certain is the plummet of prices that economists have mapped the curve of their fall. The cost of making something--whether it is steel, light bulbs, airplanes, flower pots, insurance policies, or bread--will drop over time as a function of the cumulative number of units produced. The more an industry makes, the better it learns how to make them, the more the cost drops. The downward price curve, propelled by organizational learning, is sometimes called the learning curve. Although it varies slightly in each industry, generally doubling the total output of something will reduce the unit cost on average by 20%.
Smart companies will anticipate this learning curve. Very smart companies will accelerate it by increasing volumes, one way or another. Since increasing returns can exponentially expand the demand of items--doubling their totals in months--network effects speed the steep fall of prices."
"Costs Go Down" is the first section of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
We have been talking about pay-what-you-want as one of the options that gives creates more commercial flexibility. Content producers are understandably nervous about the possibility that customer could choose to pay nothing.
Smashwords, a company based in SiliconValley, creates and distributes ebooks for self-published authors and small publishers. With only a Microsoft Word file, their publishing engine can convert the document into nine different ebook formats and in recent months, they have built distribution relationships with more retail outlets including Barnes and Noble.
Smashwords CEO Mark Coker published some interesting data last week. When an author publishes work on the site, they have the option of choosing a fixed price or pay-what-you-want. Coker pulled a sample of 353 purchases made with pay-what-you-want pricing and here is what he found:
85% of customers choose to download their purchase for free. That is not a huge surprise. The comScore data from Radiohead's In Rainbows experiment put free downloads at 62% of the total. This data is spread out across multiple titles and authors with, I think safe to say, weaker brands.
I summarized the paid data in the chart below:
The sample set of 54 points is on the smallish size to draw conclusions, but we can say customers favored a price point under $4 with that accounting for two-thirds of the purchases. The sub-$4 price point account for 44% of In Rainbows paid purchases.
The total revenue for 353 purchases was $173. This again shows business models involving free require a high volume of prospects and customers to generate meaningful revenue.
I wonder if the pay-what-you-want model needs an anchor. The In Rainbows experiment was able to generate higher chosen price pointsin response to past Radiohead purchases and the established pricing from the iTunes music store. The publishing industry is still in the process of establishing their ebook pricing and that could have a positive effect on these pricing schemes over the long run.
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You'll find more detail about Radiohead's In Rainbows pricing experiment on page 18 of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download ithere.
Many media formats have active used markets. Visit any college campus during the first week of classes and you'll find a used textbook swap. Amazon has created an active marketplace for pre-owned hardcovers and paperbacks.
The videogame industry is no different with retail chain GameStop leading the way as market maker. Wall Street analysts estimate the size of the second-hand market to be $2 billion a year and accounting for 1/3 of the games sold in the U.S.
Leading game publisher Electronic Arts (EA) is rolling out a program to try and recapture some of that lost revenue. Included inside new copies of their games is a one-time code which unlocks new characters, weapons, and gaming levels. Anyone who buys the game on the used market will pay money (currently $3-$10) to gain access to this additional downloadable content (DLC). These codes act as both reward to purchases of new product and new revenue source from the secondary market.
DLC is growing source of additional revenue for software companies. EA is going to offer Tiger Woods Golf for free online with club upgrades available at a cost. Hipstamatic, a camera application for the iPhone, allows customers to buy lens, film, and flashes to creates a variety of vintage effects. Social gaming sites for kids like Club Penguin and Moshi Monsters use a philosophy of free membership with additional features added with a paid subscription.
So, the question is: what's your downloadable content that could create another revenue stream and give you more options?
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"You Have Options" is the final section of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
