Pricing professional services, again

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I have written about this before, but in my other life as an owner of a coworking space. It's come up in Software Underground a couple of times recently, so I thought it might be time to revisit the crucial question for anyone offering services: what do I charge?

Unfortunately, it's not a simple answer. And before you read any further, you also need to understand that I am no business mastermind. So you should probably ignore everything I write. (And please feel free to set me straight!)

Here's a bit of the note I got recently from a blog reader:

I'm planning to start doing consulting and projects of seismic interpretation and prospect generations but I don't know what's a fair price to charge for services. I sure there're many of factors. I was wondering if you can share some tips on how to calculate/determine the cost of a seismic interpreter project? Is it by sq mi of data interpreted, maps of different formations, presentations, etc.?

Let's break the reply down into a few aspects:

Know the price you're aiming for and don't go below it. I've let myself get beaten down once or twice, and it's not a recipe for success: you may end up resenting the entire job. One opinion on Software Underground was to start with a high price, then concede to the client during negotiations. I tend to keep a fair price fixed from the start, and negotiate on other things (scope and deliverables). Do try not to get sucked into too much itemization though: it will squeeze your margins.

But what is the price you're aiming for? It depends on your fixed costs (how much do you need to get the work done and pay yourself what you need to live on?), time, complexity, your experience, how simple you want your pricing to be, and so on. All these things are difficult. I tend to go for simplicity, because I don't want the administrative overhead of many line items, keeping track of time, etc. Sometimes this bites me, sometimes (maybe) I come out ahead. 

Come on, be specific. If you've recently had a 'normal' job, then a good starting point is to know your "fully loaded cost" (i.e. what you really cost, with benefits, bonuses, cubicle, coffee, computer, and so on). This is typically about 2 to 2.5 times your salary(!). That's what you would like to make in about 200 days of work. You will quickly realize why consultants are apparently so expensive: people are expensive, especially people who are good at things.

If I ever feel embarrassed to ask for my fee, I remind myself that when I worked at Halliburton, my list price as a young consultant was USD 2400 per day. Clients would sign year-long contracts for me at that rate.

It's definitely a good idea to know what you're competing with. However, it can be very hard to find others' pricing information. If you have a good relationship with the client, they may even tell you what they are used to paying. Maybe you give them a better price, or maybe you're more expensive, because you're more awesome.

Remember your other bottom lines. Money is not everything. If we get paid for work on an open source project (open code or open content), we always discount the price, often by 50%. If we care deeply about the work, we ask for less than usual. Conversely, if the work comes with added stress or administration, we charge a bit more.

One thing's for sure: sometimes (often) you're leaving money on the table. Someone out there is charging (way) more for (much) lower quality. Conversely, someone is probably charging less and doing a better job. The lack of transparency around pricing and salaries in the industry doubtless contributes to this. In the end, I tend to be as open as possible with the client. Often, prices change for the next piece of work for the same client, because I have more information the second time.

Opinions wanted

There's no doubt, it's a difficult subject. The range of plausible prices is huge: $50 to $500 per hour, as someone on Software Underground put it. Nearer $50 to $100 for a routine programming job, $200 for professional input, $400 for more awesomeness than you can handle. But if there's a formula, I've yet to discover it. And maybe a fair formula is impossible, because providing critical insight isn't really something you can pay for on a 'per hour' kind of basis — or shouldn't be.

I'm very open to more opinions on this topic. I don't think I've heard the same advice yet from any two people. When I asked one friend about it he said: "Keep increasing your prices until someone says No."

Then again, he doesn't drive a Porsche either.

If you found this post useful, you might like the follow-up post too: Beyond pricing: the fine print.

Is subsurface software too pricey?

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Amy Fox of Enlighten Geoscience in Calgary wrote a LinkedIn post about software pricing a couple of weeks ago. I started typing a comment... and it turned into a blog post.

I have no idea if software is 'too' expensive. Some of it probably is. But I know one thing for sure: we subsurface professionals are the only ones who can do anything about the technology culture in our industry.

Certainly most technical software is expensive. As someone who makes software, I can see why it got that way: good software is really hard to make. The market is small, compared to consumer apps, games, etc. Good software takes awesome developers (who can name their price these days), and it takes testers, scientists, managers.

But all is not lost. There are alternatives to the expensive software. We — practitioners in industry — just do not fully explore them. OpendTect is a great seismic interpretation tool, but many people don't take it seriously because it's free. QGIS is an awesome GIS application, arguably better than ArcGIS and definitely easier to use.

Sure, there are open source tools we have embraced, like Linux and MediaWiki. But on balance I think this community is overly skeptical of open source software. As evidence of this, how many oil and gas companies donate money to open source projects they use? There's just no culture for supporting Linux, MediaWiki, Apache, Python, etc. Why is that?

If we want awesome tools, someone, somewhere, has to pay the people who made them, somehow.

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So why is software expensive and what can we do about it?

I used to sell Landmark's GeoProbe software in Calgary. At the time, it was USD140k per seat, plus 18% annual maintenance. A lot, in other words. It was hard to sell. It needed a sales team, dinners, and golf.  A sale of a few seats might take a year. There was a lot of overhead just managing licenses and test installations. Of course it was expensive!

In response, on the customer side, the corporate immune system kicked in, spawning machine lockdowns, software spending freezes, and software selection committees. These were (well, are) secret organizations of non-users that did (do) difficult and/or pointless things like workflow mapping and software feature comparisons. They have to be secret because there's a bazillion dollars and a 5-year contract on the line.

Catch 22. Even if an ordinary professional would like to try some cheaper and/or better software, there is no process for this. Hands have been tied. Decisions have been made. It's not approved. It can't be done.

Well, it can be done. I call it the 'computational geophysics manoeuver', because that lot have known about it for years. There is an easy way to reclaim your professional right to the tools of the trade, to rediscover the creativity and fun of doing new things:

Bring or buy your own technology, install whatever the heck you want on it, and get on with your work.

If you don't think that's a possibility for you right now, then consider it a medium term goal.

To free, or not to free?

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Yesterday, Evan and I published our fourth mobile app for geoscientists. It's called AVO*, it does reflectivity modeling, and it costs $2. 

Two bucks?? What's the point? Why isn't it free? Well, it went something like this...

- So, this new app: is it free?
- Well, all our apps are free. I guess it's free.
- Yeah, we don't want to stop it from spreading. If it wants to spread, that is...
- But does free look... worthless? I mean, 'you get what you pay for', right? Look at all the awesome stuff we pay for: Amazon web services, Squarespace web hosting, Hover domain hosting, awesome computers,...
- So what would we charge?
- What do other people charge? 
- There are no 'other people'... But there are technical apps for oil and gas out there. Most of them cost $1.99, some are $4.99, one or two are $9.99. Who knows how many downloads they get? 
- I bet the total revenue is constant: if you charge $1 and get 1000 downloads, then you'll get 100 at $10. But that's an experiment you can never do—once you've charged some amount, you can't really go up. Or down.
- How do other people decide what to charge?
- I guess traditionally you might use a cost-plus model: the cost of production, plus a profit margin.
- What's our cost of production?
- Well, a few days of time... let's call it $5000. If we wanted to make $10 000, and only expect 500 people to even be in the market... It doesn't work. No-one will pay $20 for a cell phone widget.
- Won't they just expense it?
- Maybe... I don't think the industry is quite there yet.
- Hmm... I downloaded an app for $20 once [a seismograph]. And another for $10 [a banjo tuner]. I don't even think about paying $1 or $2. That amount is basically free. $1 is free.
- But a buck... isn't it just a pain to even get your credit card out?
- Well, once you're set up in Google Checkout, or iTunes or whatever, it's essentially one click. And then we get a sense of the real user base. The hard core!
- Yeah... right now about 50% of people who install an app nuke it a few days later.
- At least if it's under $5 we probably won't have to deal with refunds and other nonsense.
- Arrgghhhh... why is this so hard? 
- Let's make it $2. 
- Let's make it free.
- But this app is awesome. Awesome shouldn't be free. Awesome is never free. Awesome costs. 
- But isn't this really just a thing that says "Agile is awesome, check us out, hire us"? It's marketing.
- Maybe... but it's useful too. It works. It does something. It has Science Inside™. People will get $1-worth out of it every time they use it. If this was a <insert energy software empire> app it would cost $10 000.
- Can we ask people to pay what they want? Like what Radiohead did with In Rainbows?
- No because they're already huge. They invoke mass hysteria in grown men. We don't invoke mass hysteria. Among anyboy.
- Damn. OK. Let's make it nearly free. As-good-as-free. Free-ish. Pseudo-free. Free*.
- $2?
- $2.

So the app costs a toonie, and we promise you won't regret it for a second. If you can't afford it, email us and we'll send you a free one. If you really hate it, email us and we'll send you $3.