[thelist] development time cost on new functionality

Chris Dorer cdorer at gmail.com
Tue Jul 19 10:35:15 CDT 2011

Look here:

Let's just say... an inefficiency in a business is costing $50,000 a year.

$50,000 / yr for 5 years = $250,000

You offer a tool or implementation that will streamline the process now
costs the company to , $5,000 a year.

$5,000 / yr for 5 years = $25,000

You just saved the company $225,000!! That's one hell of a ROI!

A smart rule of thumb is to charge the cost of the first year of the
inefficiency $50,000 for each company. They're still saving a hell of a lot
money even you're keeping the cost the same for each customer.

$50,000 + ( $5,000/yr * 5 ) = $75,000 is the total client's cost.

Why can't you capitalize on their saving money?  Why do you feel bad on
charging high for fewer hours when you just saved a crap ton of money for
the client?  The client is worried about the money for the long haul, they
just need an answer that will help them get there.


On Tue, Jul 19, 2011 at 11:20 AM, Matt Warden <mwarden at gmail.com> wrote:

> Ken,
> On Tue, Jul 19, 2011 at 10:47 AM, Ken Schaefer <Ken at adopenstatic.com>
> wrote:
> > It seems you are being overly sensitive.
> Do not misinterpret my tone. I am "sensitive" to a misconception that
> leads people in this community to leave money on the table and
> undervalue their own work. You are furthering that misconception.
> > If we want to go down the Ford route, then one would look at how many
> expected sales you would have. You're selling a software product in that
> case (like Microsoft Windows or whatever). In that case, amortise the R&D
> over the expected sales of the product.
> >
> For what purpose? You are not answering this question. You are
> confusing accounting models with pricing.
> Again, I ask you a very simple question: why would I ever charge a
> customer less than they are willing to pay for what I'm offering?
> Did you see in that question any reference to amortizing costs? No,
> because it is not relevant.
> > Or, these is time & materials billing. And there's nothing wrong with
> that either. If that means the first customer pays 100x and the second
> customer pay 1x, then that's just the way that T&M works.
> This is precisely what I am "sensitive" against. What you outline here
> is something I can describe as nothing more than a foolish mistake by
> the person who chose T&M and did not charge a separate fixed line-item
> for their product/solution. And yet you are advocating it!
> That's just the way T&M works? The way T&M works is to leave money on
> the table? It undervalues your offering? Does that really sound right
> to you? Am I the only one who thinks this is all ludicrous?
> > Having worked for many years at "reassuring expensive" consulting
> companies (in particular a big one beginning with "A"), I'm pretty familiar
> with all these models. And it's certainly not driven by "emotion" - ACN
> is/was not in the business of being emotional or being poor.
> >
> Despite your call to authority, the bottom line is that the only thing
> that matters when you price something is what your customer is willing
> to pay. When you publicly cloud the issue with irrelevant and
> illogical strains of thought (like implying that R&D costs influence
> prices), you are doing a disservice to a population of people whose
> entire experience as $/hr services folks already makes it difficult
> for them to recognize this.
> Finally, let's settle this Ford issue. You have twice kinda sorta
> implied a little bit (without directly saying it) that Ford sets its
> prices based on a calculation of amortized fixed costs and estimated
> units sold. THIS COULD NOT BE MORE WRONG. Ford sets its prices based
> on a study of what potential customers are willing to pay relative to
> that product's alternatives. Did you see anything in there about
> costs? No, because they are not relevant.
> What you are talking about is only a CONSTRAINT. Including the cost of
> goods sold allows them to estimate profit, and they will make a BINARY
> decision of whether to move forward based on this. For example, if
> costs exceed projected revenue, obviously they will can the project.
> But you are implying that they would just raise the price of the car,
> and that flies in the face of economics 101.
> You do not set the price for your product. Your customers do. In the
> case of Ford, that means a CONSTRAINT where you can't build things
> people don't want enough enough to cover your costs. In the case of
> this thread, it means you should not leave money on the table, even if
> you could and still make a profit.
> Bottom line: why would you sell your software for less than your
> customer is willing to pay? Because that's just the way T&M is? Come
> on.
> --
> Matt Warden
> http://mattwarden.com
> This email proudly and graciously contributes to entropy.
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