What Are You Paying for with a Web Application?
As a programmer it's either funny or dispiriting if you look through some of the bids on sites like rent-a-coder. If people are wiling to try to build almost anything for $500, is it time to go back to school and get a law degree? No. Here is why. In my experience, development of websites are an example of a "budget based pricing" . . .
When a client asks for a quote, they may not give you a figure, but they have one. If they're looking to spend $10k-$15k on a project, if you bid $8k you *might* get the gig if you are incredibly capable and have a story as to why you're cheaper, and if they really care about quality and you build a great relationship they may spend $19.5k on your solution, but if you bid $5k or $25k you're probably not going to get the gig - no matter how good a job you might have been able to do.
The reason is that the client has a comfortable budget point and while they'd love a cheaper solution, they simply aren't comfortable with the potential risks. If I offered your business a cell phone plan for $1.50 a month, you'd love the savings, but in practice you'd be very unlikely to sign up until we had huge social proof in terms of satisfied customers. Saving $60 a month would be great, but it wouldn't be worth your employees being unable to communicate which is what you'd probably be scared of.
Budget based pricing is common for a number of professional services. Let's say you need a new logo for your business. There are online sites where you can pick from multiple designers offerings for a couple of hundred dollars. Working through a real creative process with a small, hungry agency in NYC might get you a logo for $1500-$2500, and if you want the full process with a big agency for a multi-national you'll be lucky to get change from $50k-$100k+. It's possible that the $200 logo from the website would have been quite as good as the $100k design, but it's more likely that the $100k project will better support your marketing objectives in the country/countries you plan to do business in.
I think that what clients are really paying for with web apps is to reduce the likelihood of failure and to increase the likelihood of success (no absolutes, more expensive vendors fail too!). Over time, as people do have success with cheaper projects there will be a general trend to lower pricing as a natural implication of the differences in the price of skilled labor in different countries and the lower costs of developing web apps as RAD frameworks continue to proliferate, but I think that it'll be a while before you'll regularly start losing bids on what would usually be a $25k project to someone bidding $5k - however good their pitch may be.
Also, of course, at $5k, the math doesn't add up to match your sales process, so if you put someone in the field to close deals in person, you're already putting a floor on the lowest bids you'll have to seriously compete against - probably somewhere around $15k-$20k if you run the numbers. Sure there is always someone trying to get their foot in the door who'll do a project at a loss, but who wants to buy from someone who is that desperate for business?!
What are your thoughts? Do you feel that most of your clients have a budget range for projects? Would they go substantially outside of them? If so, why? Have you ever successfully came in much lower/higher than the competition? What helped you win the deal?
Personally I have given up trying to compete with the likes of rent-a-coder or Elance. Lately I have tried to put a lot on emphasis on managing the client, i.e. making time for the primary business stake holders. This is part of the service, as I need to identify their true requirements and not only the ones they think they need. This has brought my differing amounts of success. For some clients they are very happy with the relationship and are prepared or comfortable with the higher rate, while others I find will still try to haggle after you have haggled.
Now all contract negotiations are handled by the "finance guy" who has the power to refuse the project. This seems to get the better paid deals - but less of them. In a nutshell - neither method really has the upper hand.
I am hoping to try my Kung Fu Panda skills in the next meeting and wil let you know how that goes :-)
If you hire a rent-a-coder will he be available when something goes wrong? Most of my business is cleaning up the cheap guys mess. You get what you pay for.
@Michael, I think it is more than just support - it can also be competence. We were brought in to PM a RAC project. We have spent so much more in billable PM time than we would have needed to if the outsourced vendor was competent that even at our onshore rates we could have built the entire app for less than the client paid in PM fees.
Now, I completely agree with the statement:
"I think that what clients are really paying for with web apps is to reduce the likelihood of failure and to increase the likelihood of success (no absolutes, more expensive vendors fail too!)."
....However....
Today, there is a ton of junk out there, and i wonder how hard it must be for clients to filter through the noise. Maybe thats where strong designers and coders come in. Anyone can buy cheap code, but I have always gone by the line: cheap input = cheap output. There are cost advantages to hiring creative designers, strong senior coders and outsourcing the bulk of coding, however, having a fully functional team working on offense and defense successfully (i.e. Football) can be hard to accomplish.
For me when working with clients or trying to obtain new ones, I focus on walking them through the noise, being their partner in crime each step of the way. Customers will pay more for a higher level of customer support and satisfaction.
...just a few pennies.... :)
Some great points. I mainly get projects through our design partners. We build up a relatrionship with them over time and because we can generate most of the apps, we can profitably provide a much lower price point than any other vendor with the same range of skills.
I can talk about technical topics from code generation to agile development, discuss business process re-engineering, make marketing and copywriting suggestions and often suggest where they may need to get some legal advice, and I find being able to offer that range on relatively inexpensive projects really gives us an edge.