Why we often price e-Commerce projects wrong

Written by Mark Forrester on September 10, 2013 WordPress tips & tricks.

ChrisLemaThis is a guest post by Chris Lema with some insight into how you could be pricing your e-commerce projects.

You can’t talk much about pricing strategies for web development projects without someone telling you that you need to think about value-based pricing.

This strategy, one I highly recommend, is not the one most used. Instead, the strategy most selected by people when pricing just about anything is called “cost plus” – which means you determine the cost of a project and then add a small “plus” factor that is your profit margin.

Value-based Pricing

Why don’t more people use value-based pricing? I can’t speak for everyone, but among the people I spend time with, the hardest thing seems to be figuring out exactly how valuable a project is.

There you are, sitting across from your prospect, when they ask you how much the project will cost. What do you say? How do you figure it out?

Let me tell you how not to do it.

Don’t calculate the very best scenario, where everything is perfect and goes smoothly, and then multiply those hours against your hourly rate, add 15% for unknowns and spit out a price. That’s only going to get you in trouble.

Here’s why – few projects (exactly none) go perfectly. So even though you may be an optimist, that’s not the best way to estimate anything, much less quote an e-commerce project.

Additionally, a small 15% margin for unknowns, particularly on e-commerce projects, isn’t nearly large enough to handle the kinds of complexities an e-commerce project could have.

What kinds of complexities do eCommerce project present?

  • Payment gateways
  • Shipping
  • Product variations
  • Discount pricing
  • Multi-language support
  • Multiple currency support

See what I’m talking about? If you’re solving these issues for someone, this isn’t the time to be an optimist.

I know what you’re thinking – “Big deal, he told me how NOT to price, but let’s see him tell me how to figure out the value-based approach on an e-commerce site!”

What I want to do is highlight for you the single biggest reason why people don’t use value-based pricing on e-commerce projects. Once you see it, and understand it, you should be ready to price more effectively.

As I get started, you’re going to notice something. You’re going to notice that I’m not writing about your costs. That’s not related (at all) to why people struggle with value-based pricing. Plus, like I said, cost plus is a poor strategy for pricing. So instead of thinking about you and your costs, I’m going to invite you to think about your customers and their values.

Some Insights

To do that best, I’m going to need to share with you some insights you may or may not already know.

For example, did you know that over 80% of the online retail stores today are powered by either homegrown or on-premise e-commerce platforms?

Why is that important? Well, if you don’t know the reality of what people are dealing with, you can’t possible know the pains they’re feeling, or the challenges they’re facing. And if you don’t know that, how can you articulate a value for what you might offer instead.

So if you know that almost every e-commerce site out there is either homegrown or running on an on-premise solution, what else do you know?

I’ll tell you three things I know:

1. In the case of on-premise solutions, one study found that 67% of online retailers were required (by contract) to pay more licensing fees when they reached higher thresholds of traffic. Over 75% of them said their contracts restricted them from entering new markets without paying more.

Pain: growing is costly (and restrictive)

2. One study found that online store owners struggled to find the number of technical resources dedicated to supporting their homegrown or on-premise solutions that they needed. Those with large yearly revenues (over $250 million) staffed up with over 40 engineers (with an average fully-burdened cost over $200,000).

Pain: maintenance costs are high

3. More than the cost of maintaining these systems, these companies valued business agility – the ability to add new features to their infrastructure that matched their business needs. Eighty percent of them feared that their current solutions wouldn’t be able to handle all of what they want to do.

Pain: features are hard to implement

Some people predict that online retail in the US (where I live) will continue to grow to ultimately $327 billion by 2016. So believe me when I tell you that more e-commerce projects are headed your way.

Given where you’re reading this post, you may think – “wait a second, what about hosted e-commerce solutions, like those powered by WooCommerce?”

The good news is that cloud-based solutions are getting invited to the table more and more – mostly because they’re cost-effective, have good performance, and can be updated regularly.

That’s what it’s all about, isn’t it? When we think about the pain that these companies feel, it boils down to the high cost of upgrades, the increasing costs of scaling or moving into new markets, and the increased flexibility that comes from newer platforms (in terms of features).

Whenever you’re sitting across the table from someone who’s asking you to price a project, you need to know what their pains are. And not just the pain, but the cost of that pain. Because that gives you the insights you need into determining value.

Did you know that on average, of over 150 online retailers studied by Forrester, the cost of supporting their e-commerce systems was 7% of their online revenues.

Now there was a wide range, from 3% to 10%, but think about it. If a company generates $1 Million from its e-commerce platform, it should expect to spend at least $30,000 in a year – to keep it well-tuned.

For many people, that’s not surprising at all. But in the WordPress community, I find that it’s very surprising to a lot of people. They completely disconnect the revenue being generated from a site, from the cost of building or maintaining it.

And in my opinion, I think that’s where most people make the limiting mistake that eliminates their chances of taking a value-based approach to pricing e-commerce projects.

In disconnecting the upside of a solution from its costs, people are also making it very difficult to think about value-based pricing. Why? Because they’ve walked away from the “value” part.

Understanding your value

If you want to embrace value-based pricing, you have to understand the value you bring to the table. You have to understand the value your approach and solution bring to the table.

But most importantly, you have to understand the pain your prospect is feeling and dealing with. Because that’s what helps you understand the value they’ll ascribe to a new approach – to using a hosted platform that can be easily updated, easily adjusted to have new features, and much more easily maintained.

cta-banner-10-product-page-v2_2x

44 Responses

  1. Leokoo
    September 10, 2013 at 7:20 pm #

    Thanks Chris, I don’t fully agree with you.

    While for smaller sites, perhaps we can consider Tictail, Shopify, BigCommerce, OpenCart or even Jigoshop. Tictail’s free for life, while Jigo’s license is lifetime =) but how about if we need certain functionalities?

    Not everyone can afford USD 30k/year. Not small mom and pop shops anyway. Then how do we even start going into launching an online store?

    And all the sudden, everyone wants to charge a premium yearly renewal fee for updates, which smaller shops like ours couldn’t afford it. Sigh.

    #blamelema

    • Chris Lema
      September 10, 2013 at 8:15 pm #

      Oh, let me be clear – I was not saying that every site should pay 30k/year. I was highlighting that many sites spend 7% a year. For a site doing $3,000 a month in revenue, that means planning on spending up to $3,000 in the year.

      • farrel
        September 13, 2013 at 6:25 am #

        “I was highlighting that many sites spend 7% a year.”

        Ok? You have found that a number spend 7%. Now please explain how you determined that 7% is the “correct” amount to charge everyone. What methodology did you use to determine that 7% is the right number?

        How do you know it shouldn’t be 15% in some cases, or maybe it should be lower and be 3% in some cases, not 7%.

        I’m really curious how you find a number and then somehow declare that it’s the correct amount for people to charge.

        Shouldn’t prices be based on what you personally are doing for the customer? Some customers require a lot of work, some require very little. You price a job based on what you believe will be involved. Then you tell the customer that if it exceeds that amount of hours you are quoting then they pay X more per hour.

        What’s wrong with that approach because that is the typical way jobs are priced?

        • farrel
          September 13, 2013 at 6:41 am #

          At the end of the day building an ecommerce site is no different to building any regular website. So why approach it differently?

          I could spend 3 times the time creating a website for a customer that just functions as a company site as I would have done on building an ecommerce site.

          If you are doing a complicated site for a company site that has a lot of backend database work then it could take a lot longer than throwing up a WooCommerce based store. What about value pricing there, since it’s not being used for ecommerce?

          See how flawed your theory is? It has nothing to do with how much money the site is going to make, if any. It has to do with your time involved. If you can’t accurately figure out your time frame for building a regular site then how can you figure it out for building an ecommerce site?

          All websites have hidden costs that could result in you losing money if you don’t know how to bid or charge correctly. That has nothing to do with what someone else charges for a different client.

          Trying to tie your costs in to the revenue a site makes is not the right way to price a job.

          • cflema
            September 13, 2013 at 6:52 am #

            I’m sorry but I don’t agree with you here. Building an e-commerce site is very different than building any regular website. So I’m guessing since I disagree with our assumptions, I’ll end up disagreeing with all your conclusions. Sorry.

        • cflema
          September 13, 2013 at 6:51 am #

          I didn’t declare it was the right number. I’m sorry I wasn’t clear. I was trying to highlight that most of the time most of us don’t even think about setting expectations for long-term costs (maintenance), and we rarely think of it in relation to the revenues of a site. We detach it from the value we’re providing and go with a cost-plus approach. I’m suggesting we could do things differently and better.

          • farrel
            September 13, 2013 at 7:31 am #

            “Building an e-commerce site is very different than building any regular website. ”

            Please explain how it’s different. I’ve been building sites for over 15 years. The approach is always the same for whatever site you are creating.

            It’s based on your time to design the layout of the site. The graphic design (if required), the functionality, and the required ongoing maintenance.

            You either use off the shelf software, or create your own, or use a combo of the two, ie customization of existing software.

            There is no difference at all with ecommerce, the process is the exact same. It’s just that the software you are using is different, but what you have to do to put it together, the process involved, is all the same.

            You can have a non-ecommerce site being much more involved to create than an ecommerce site.

          • farrel
            September 13, 2013 at 7:52 am #

            “we rarely think of it in relation to the revenues of a site.”

            So I assume then if you were advising Toyota on what to charge for their pickup trucks you would tell them not to charge based on what their costs are, and what their profit margins need to be.

            Rather, you would tell them to see how much the average person makes from using their trucks for doing business and then base the truck’s price on a percentage of that revenue?

  2. arseneau
    September 10, 2013 at 8:29 pm #

    I’ve started approaching the e-commerce discussion the same way with our clients recently:

    “Dear Client, you’re telling me that you expect the online store to generate 250k in additional sales, and given your industry (or because I’ve read your annual report), I expect you’ll be making a 15% net profit margin, so that tells me you’ve got 37.5k to spend on this project, if you’re looking for a 12-months ROI.”

    Of course, we also need to speak about yearly maintenance costs, but it gets the ball rolling elsewhere than an “hourly-based discussion”.

    It also lets us complete the project and do what needs to be done for it to be a success without having to report on hours burned.. (we do keep a tally, but for our own internal reporting).

    • John
      September 13, 2013 at 7:41 pm #

      I’d have to get pretty intimate with the client to be able to pull something like that, especially since “you’re telling me” starting off the email sounds like you have attitude and are starting a fight. I suppose it’s very different for a public company, but if I tried to pull that with a mom and pop they’d smack me.

  3. Devlin
    September 11, 2013 at 7:17 am #

    Is it advisable to charge clients depending on the prices of their products and the revenue they get per month? We are an outsourcing company here in the Philippines. Well I suppose $300 to $500, that includes SEO and web maintenance.

    • dotp
      September 17, 2013 at 2:33 pm #

      No, don’t charge based on their product prices and revenue. Figure out your cost and then add a percent for profit. Or charge a fixed fee plus changes.

  4. George
    September 11, 2013 at 8:24 am #

    Not sure I agree with your pricing strategy, but it was an interesting read.

    Thanks

  5. Xpean
    September 11, 2013 at 1:08 pm #

    Woocommerce is still a good replacement for Magento – a system where everything services and extensions are overpriced. Please checkout our latest post on this matter here:

    http://xpean.com.au/ecommerce/woocommerce-vs-magento/

    • Leokoo
      September 11, 2013 at 8:07 pm #

      Thanks. But the newest iteration of WooCommerce’s makes it a barrier of entry for newbies into WordPress and Ecommerce. Perhaps Woothemes can consider a bundle?

      Pushing the prices higher and higher would make it hard for anyone to buy anything. =(

      • Ryan Ray
        September 12, 2013 at 5:18 pm #

        Being that WooCommerce itself requires no extensions to setup a newbie shop, and that WooCommerce and WordPress itself are completely free seems like a really low barrier of entry to me for someone interested in ecommerce on WordPress. ๐Ÿ˜›

        You are of course also not locked in to only using our extensions for WooCommerce. With it being open source you can develop your own shipping extensions (for example) if you think ours are priced too high.

        I don’t think it’s ever been easier, or had as many options, when it comes to ecommerce. ๐Ÿ™‚

  6. Frank McClung
    September 11, 2013 at 5:57 pm #

    Thanks for this article Chris. I agree with you that cost plus isn’t always the best way to price websites, eCommerce or otherwise. I also agree that web development is greatly undervalued at this point.

    However, I can remember a time in the early 2000’s when well known agencies were building static, brochure type websites with Flash and a rudimentary CMS for hundreds of thousands — eCommerce websites were even more. Interestingly, the value of eCommerce sites in generating revenue for some businesses has increased exponentially, while the price of building them has reached new lows. Why?

    It isn’t because we’re not pricing things based on the revenue the site will generate or that cost plus is a inaccurate pricing model. Market forces like increased competition, global markets, new technology (WordPress, WooCommerce for example), larger skilled labor pool, access to pricing information, etc. have driven the price down to where it is today. We can try to value eCommerce sites based on potential revenue generation, but the market won’t bear it out. You may be able to use value based pricing for a short while (as Woo has hinted at to explain their price increases), but it won’t last long.

    I can’t really think of another free market sector that’s as mature as the ecommerce sector where value based pricing works. I’m not going to pay the architect for my new office building more because I’ll eventually be making more out of my new building. Though, I may pay him more if his design, quality of work, creativity and craftsmanship are greater than those architects he’s competing against for my project. I think the same is true for eCommerce and web development in general at this stage of the game. Prices are only going to get lower in this arena because it is becoming more mature and competitive.

    • Leokoo
      September 11, 2013 at 8:10 pm #

      Indeed. Forcing the prices up won’t help as cheaper alternatives to ecommerce and plugins come into play.

      • cflema
        September 12, 2013 at 9:46 pm #

        I’m not against cheaper alternatives -but when those cheaper alternatives have hidden costs (costs to upgrade, costs to scale, liability costs), we don’t do anyone a service telling them they can run an online store cheap.

        • dotp
          September 12, 2013 at 10:44 pm #

          No argument here that we do clients a disservice not discussing the true price of website ownership over time, ecommerce or not. I just have a problem linking pricing to how much revenue the site will generate for the client over time.

          • farrel
            September 13, 2013 at 9:26 am #

            ” I just have a problem linking pricing to how much revenue the site will generate for the client over time.”

            I fully agree. It’s a morally unethical way to do business. It’s like the car dealer estimating your monthly maintenance costs not based on what kind of service you will need, but on how much money he thinks you will earn driving your car to work and back each day.

            What moral right has a car dealer got to get a percentage of your salary just because he provided the means for you to get to work on time?

            Good luck using this approach with customers because people are not stupid and after shopping around they will soon realize you are trying to rip them off.

            Charge fair prices based on what work you do, not on how much you think you can suck out of your customer.

            “Value pricing” reminds me a lot of people who feel that they are entitled to a share of whatever money someone else generates through their own hard work.

      • farrel
        September 13, 2013 at 6:01 am #

        I agree LeoKoo. The people who try and push up prices for their plugins and services will only see their market share decrease as cheaper alternatives become available.

        I think comparing a WordPress based ecommerce site with one of these high-end ecommerce software packages is ridiculous. It seems like Chris Lema wants to lump a mom and pop size store with a limited budget in with Amazon just because they both operate an online store.

        Does the corner merchant who owns the local hardware store spend the same on his store as Home Depot does? Can he afford to have as many people working in various different departments as Home Depot does? Of course he can’t, so creating an across the board comparison with massive online retailers is stupid.

        This just shows a lack of understanding of the marketplace in my opinion.

        • dotp
          September 13, 2013 at 2:14 pm #

          Interestingly, this value based pricing model recently crept into Woo’s thinking when they decided to hike up their prices. Here is the example they gave in the now infamous price increase anncouncement post (http://woocommerce.com/2013/08/a-sustainable-woothemes/):

          “If you are earning $1000 from a Canvas installation, it makes sense for us to earn a chunk of that, because Canvas has saved you a bucketload of time and effort. ”

          And we all know how well this type of thinking was received by Woo customers.

          • farrel
            September 13, 2013 at 9:38 pm #

            Well stated dotp!! This is obviously a flawed way of thinking, and was a complete failure for Woo when they tried it.

            It’s strange to see the same flawed way of thinking now being promoted to Woo’s customers as a model for them to follow with their own customers.

            It’s a bad mindset to have in business, to feel that you are somehow entitled to a portion of your customers business because they paid you to do some work for them.

            When you have this mindset that your customers “owe you” something you change your whole way of doing business and it turns off your customers.

          • farrel
            September 13, 2013 at 10:19 pm #

            The bottom line here is if you are in business and don’t know how to correctly quote for a job then it’s not an issue of “value pricing”.

            It just shows you are not knowledgeable about what you are doing because before undertaking any job you should know how long things take and how much you need to charge to cover your costs and make a profit. You should also know the going rate for that kind of work so you can be competitive in the marketplace.

            Trying to tie it to an arbitrary percentage of revenue actually proves you know nothing about what you are doing because one site may work with being 7% and another may need to be 27% of revenue and yet another may be OK with 3%.

            The revenue a site generates has nothing to do with what it costs to build or maintain it. If Zappos spends 5% of their revenues on something it does not mean that a small shop should be spending the same percentage because they are not doing $1 billion in sales a year.

    • John
      September 12, 2013 at 7:30 pm #

      I agree with this angle as well, although I see it from both sides. On the one hand it depends how aware the client is of the comparable costs in the market. I’m not saying for one second that we should charge a client more just because they don’t know if it’s a good price or not, but I’m wondering how much the average client knows about a project.

      It would be nice to hear some hard numbers, if anyone knows of any resources that compare agency/developer prices for sites to know if I’m charging about right that would be great.

      For example, if I’m building an artisinal tea company for a client in Los Angeles and I live in Los Angeles (based on cost of living) and I’m an intermediate WordPress developer what’s a good price? Considering they use a stock Woocommerce Theme from Themeforest with 15 hours of customization, have only 20 products with no special pricing but 2 different size packages of tea, shipping to the US, taxes on merchandise but not tea, what is the range to charge? $3,000/$5,000/$10,000? It’s hard to know what’s a good deal for both parties! Would love feedback…

      • dotp
        September 12, 2013 at 10:53 pm #

        I wouldn’t touch an ecommerce site for under $5K even starting with a WooTheme and WooCommerce. When you start customizing themes that are responsive, they now have to be retested and rethought for mobile and that means more time/money. I also don’t think you can factor in your cost of living because the guy in Montana could do it cheaper and the fellow in New Delhi cheaper than him. Same goes with your experience not being a factor. You have to be able to translate your experience into value added to the client that they can’t get anywhere else, then you can justify higher prices as long as you can communicate that value to them. They do shop around and they will find someone cheaper. You have to convince them why you/your ideas/your designs are better. That said, I think that most ecommerce sites with customization should start at $10K with and average $15K for a medium sized site. That’s my two cents.

        • John
          September 13, 2013 at 7:32 pm #

          Thanks for the feedback dotp, I’ll really just have to get comfortable with charging more and the fact that if I propose a $5,000-$10,000 site and it’s too much for them I’ll have to show them a few alternatives or just walk away. The last site I did I charged only $2,500 and this had 30 products with 3-8 custom variable per product – needless to say I spent way too much time for what I charged and watched my rate plummet to $20 instead of the $80+ I was targeting (even though I shouldn’t compare it to hourly right?)

          • farrel
            September 14, 2013 at 1:11 am #

            I agree with the numbers dotp put out. I think 5k is the bare minimum to charge based on the time it takes to put an eCommerce site together.

            But I personally would divide the project into two parts. The site creation and then the cost to add products if required, content creation.

            From my experience most people new to this game don’t think it takes a long time to enter and update products when it can be very time consuming. Always make sure that your customer is aware that there are two parts to the project, site creation and content creation.

            Also, make sure that things like the product data and images are ready to go, otherwise you will have to charge even more to prep them so they can be added to the site.

            Some people just hand you some printed catalogs and expect you to type up the descriptions and create the images for them as part of the site.

          • dotp
            September 17, 2013 at 2:43 pm #

            John, farrel’s point about site creation vs content creation should be noted, especially with eCommerce sites.

            I always note how many hours I spent versus what I quoted (if fixed fee). This tells me if my estimates are accurate. Usually my estimates are too low and like you my internal hourly rate plummets.

        • George
          September 16, 2013 at 8:53 pm #

          Interesting thoughts here. I am curious for my own pricing practices, when you quote a price for an eCommerce solution, what does the price include? Do I get free support from you for some amount of time after the site launches? Do i get domain registration and/or hosting included? Etc.

          I have always had a problem pricing my eCommerce sites because quite frankly, the people I deal with would look at me like I had 2 heads if I quoted them $10k for a eCommerce solution. Now granted, some of these folks have the type of businesses which could be out of business within the year, so they are reluctant to part with that kind of cash.

          As horrible as this sounds, I often need to “adjust” my pricing based on the client. A profitable law firm will have less issue with a higher price than some small start-up business who could be gone tomorrow.

          • dotp
            September 17, 2013 at 2:47 pm #

            Everyone’s different and it changes on what their prices include. I don’t offer free support after site launch. I don’t offer domain registration and hosting for free. I do offer training on the site (up to 1 hour on the phone) but I include that cost in the contract. I also will fix anything broken on the site (as long as they didn’t break it) for the first 30 days.

  7. michaelstrauss1
    September 13, 2013 at 8:10 pm #

    I love this article and agree with some points and not others, but I really like everyones conversation here…and an FYI, I totally agree with you dotp, even a small sized store starts at 10k.

  8. Chris Cook
    September 14, 2013 at 12:47 am #

    Chris, I definitely agree with your approach to pricing where e-commerce is concerned. I think too many people are getting stuck on the numbers rather than the intent of the post.

    I believe if you feel that you can’t charge a client “thaaat muuuch”, it is very possible that you have yet to realize the value you offer. Therein lies problem number one.

  9. Jay
    September 16, 2013 at 3:46 pm #

    Great post Chris – the founder of Freshbooks recently published an ebook about this very topic: Breaking the Time Barrier: http://breakingthetimebarrier.freshbooks.com/

    It’s free and a great read for those struggling to see the value in value pricing.

    • dotp
      September 17, 2013 at 3:36 pm #

      Where this value based model breaks down (besides market forces like competition, increased supply, etc. pushing prices down) is when you have a client that wants and complex website but will only be generating a very small amount of revenue from it. If you use the value based pricing model, you would simply charge a percent of what they expect to make which would be less than what it would cost you in terms of time to develop it.

      Additionally, what if their initial estimate of revenue generated from the site is wrong? Maybe they estimate $100K for the site revenue generation but after a year of the site being live they made $200K. Do you then go back and ask them for more money because the site you developed was more “valuable” to them than originally thought? Woo tried this when they discovered that a customer could buy a $50 Woo template and customize it for $5K for a client who could then turn around and make $50K from their business site. They increased theme prices and openly stated they should get a “chunk” of the developer’s revenue. We know how that story ended.

      Value is added as a product or service moves up the chain of “refinement”. It would be argued that the lower you are on that chain, the lower the price you’ll be able to charge for the product/service. A diamond miner earns next to nothing. As the diamond moves through the process of refinement the people working on it earn more and the value of the diamond goes up. The same can be said of website development. A company like Woo can make a lot of money providing rough “diamonds” or themes for others to polish and set and eventually sell to customers. They can raise prices on their “diamonds”/themes at will as long as there isn’t much competition or the market is new or their product is superior. Once the market matures (more competition, products of equal value), your prices will be set by those forces.

      • farrel
        September 17, 2013 at 10:59 pm #

        Besides the points you make the entire premise of this article makes no sense.

        It says: “Those with large yearly revenues (over $250 million) staffed up with over 40 engineers (with an average fully-burdened cost over $200,000).”

        Then it purports to offer WooCommerce as the solution.

        “Given where youโ€™re reading this post, you may think โ€“ โ€œwait a second, what about hosted e-commerce solutions, like those powered by WooCommerce?โ€

        Seriously, how can a company who has 40 engineers on staff need the skills of a web developer who is recommending WooCommerce to them? Do you think they don’t have the knowledge themselves to know what their options are?

        How can you show “value” to a customer when you are in so over your head you think you can replace a custom built high-end system with WooCommerce? It makes no sense, there is no way in the world you can take a massive custom built system and convert it to a hosted WooCommerce solution.

        That’s like trying to convince a company that sends semis cross-country that they’re better off using Ford Economy vans to transport their goods from LA to NY.

        Why would anyone even think WooCommerce is a solution for a company with 40 engineers on staff?

  10. Nils van der Knaap
    September 19, 2013 at 5:01 pm #

    I noticed that it is very hard to predict the costs (mostly time) of an e-commerce project. The client always has different needs and those needs are not always clear in the beginning.

    I also started to think about value based pricing, in stead of Cost Plus pricing. You don;t have to be the cheapest developer, because sometimes that attracts the “wrong” kind of customer.

  11. orgspring
    September 19, 2013 at 6:20 pm #

    I don’t approach pricing from the value standpoint, ever. I’m not saying it’s wrong, I just don’t like that approach – it seems too opportunistic, which, I feel, gives off a vibe that profit is more important than giving a good product/service.

    Before pricing anything, seminar, training, service, etc – I sit down and do a calculation on what I think the project will take me to complete including time and materials. I put a number on that time, and markup the materials by a certain amount of margin – usually between 10-15%.

    I quote that as a project based quote, and always leave a little room to expand taking into account scope creep. I rarely quote hourly fees. If I can’t get something done in the time I think it should be done, that’s a lesson for me to scope a project better – and once you make that mistake you rarely make it twice.

    At the end of the day I sleep well knowing I quoted a project I feel good doing, and am being compensating exactly what I feel is right. I don’t worry if I left $200 on the table with my pricing.

    Now, if my project quote is $5,000 less than a competitor, I might go back an analyze why I’m so far off the mark and consider raising my prices, but if I don’t feel a service is worth that high price, regardless of value in the market, I’m not going to change.

    In terms of recurring product sales, like in the case of woo, or services like support and maintenance (which I offer too with my client sites) , you MUST look at analytics. You need to know time spent per customer per request on average, and the number of requests per product sale, and be able to work that into your pricing. In some ways, that becomes a third element to consider in addition to time to develop/create and materials.

    If you’re starting new, there’s nothing wrong with offering deals, but you must be prepared to lose money or not get as high of a return if you are pricing too low just to generate traffic.

    Just my two cents, and that’s all it’s worth!

    • farrel
      September 19, 2013 at 9:58 pm #

      Good post and I agree. As soon as you show interest in how much your client is going to make you come off as being an opportunist.

      That’s problem #1.

      Problem #2 is that WooCommerce is not the perfect fit for every eCommerce solution.

      If all you know is WooCommerce how do you think it will look if your client asks you for a review on his 5 alternatives with the pros and cons of each and all you know is WooCommerce?

      Where is the value you are bringing to the table then? A highly-skilled developer works with many different tools depending on the need and circumstance. He/she has experience working with many different platforms.

      If all you have is one tool in your toolbox, how can you pass yourself off as an expert who is worthy of getting a percentage of your client’s business?

      That’s why this article makes no sense to me. If you are already a highly-skilled developer with lots of experience you are not going to be underbidding on a project because you have learned from past experience over the years how much to charge.

      But if you are not then how can you legitimately expect to get top dollar given your lack of experience developing in eCommerce?

  12. Phil
    September 29, 2013 at 3:05 pm #

    Platform aside, industry aside & customer aside, the pricing model Chris has described here is how businesses operate. The hourly rate model is simply how freelancers operate.

    If an agency was to operate on the hourly rate model how is it ever going to expand? In the ‘real world’ (I mean outside of building sites – & meant in a non derogatory manner) of course you take into consideration the client, their market and their financial circumstances. it’s business, you’re in it to make money. If you didn’t take those things into consideration you’d be doing yourself a disservice.

    as for the Toyota analogy, well that’s simply wrong. what you’re saying is that market forces don’t play a part in Toyota’s pricing strategy. so how do they know if their truck is over priced or under priced for their target market? if it’s over priced then nobody buys it, if it’s underpriced it devalues their brand. they don’t just work out cost, add a margin and that’s the sale price.

    at the end of the day there is nothing really wrong with the hourly rate model. but sticking with it, you’ll stay as a freelancer – which is fine if that’s what you want to do. if you want to expand, start an agency, make more money then you need to, at least, consider Chris’ pricing model.

    FWIW, I’m a small time freelancer so I DO charge by the hour (it won’t always be this way). However, having worked in the corporate software industry for end user sites, consultancies and software houses I’ve seen Chris’ pricing model in action & know it well.

  13. headless_monkeyman
    November 4, 2013 at 2:00 am #

    Yet another sad sign of the direction Woo is going. Once a company that once had a corner on a market because they gave away the cart and made it easy to buy a premium theme and plugins needed to go with it without having to work too hard to sell your customers on the expenses. Now the prices have doubled, either you or your sometimes computer illiterate customers are responsible to pay an annual tax just to keep the security patches coming, God knows what would happen if your business should move or be sold etc.

    And now we are being advised to suck as much blood out of customers as we can. I’ve contemplated my reaction to Woo’s new licensing and prices, particularly when I was doing a job I had flat bid and Woo decided to try that retroactive license change stunt. I don’t treat my customers like that and never will. My customers are people. Some of the websites for smaller retail stores are “just because their customers like it” propositions on items that retail with a mere 10% markup. I’m not going to try and guess the size of a man’s wallet by the quality of his shoes so that I can get my share of what I think he can afford to pay. If people want to pay more for a better product they should, but it should be a premium offering and not the same old thing but with a new, shorter license to keep me fat in my old age and a higher sticker price than the same old code sold for four years ago.

    Great cart, safe quality themes, plugins that worked. Now you’ve already made it so that I have to detail out with a spreadsheet what it is going to cost the customer to even make the site secure and have it continue to run as WordPress updates, which will run into hundreds of dollars. Most of the companies I work with tend to think in one time purchases usually as part of quarterly budgets. You are just getting me laughed out the door any more and I don’t like being made to look the fool, so I guess what I’m trying to say is that it has been a good few years, and I have the log in info from one heck of a lot of what were happy customers who’s sites I have been maintaining after building them, but I’m going to have to break up with you. Irreconcilable differences I’m afraid.

    There once was a boy who’s father made him a set of wax and feather wings, and together they flew like the birds, but failing to heed the advice of his father the boy flew too high and the sun made his wax melt and he began to fall. And on his way down he saw on their way up a grinning young group of open source replacements soaring, profiting from the work grown around their carts, but not trying to pick the bones of their customers. Better to be a soaring eagle feeling good about what you do than a falling vulture.

    KF, Nov ’13

  14. headless_monkeyman
    November 4, 2013 at 2:29 am #

    Oh, I should really add something positive to the conversation before wandering off,

    I’ve both programmed and produced inside of agencies and general software shops for well over twenty years. Bits about agencies, at least the ones I have worked at and the one I was a partner in: Best practices include making a contract to work with the potential client on a production plan which you will attach a bid to. Never work for free. At the end of the process if they don’t like the price you offered at least they now have been educated in the finer details of what costs will be, and can shop the plan around looking for anyone less expensive (and understand why nobody wants to go lower on price or how they got cheated if someone makes unrealistic promises and fails to deliver). Very few who go through this process leave the table after phase one without signing a contract for phase 2.

    Another key point is that agencies are not by definition helped by an economy of scale. As a result you usually see producers grind things down to at least an hourly plan for each feature for programmers and sometimes a half hour level for the design team. We have to have you making money while you are at that desk, and have to compensate (eat money) for the times that life keeps you away. As a freelance you have no idea how much of what would otherwise be your personal life you use to compensate for your inaccuracies and life’s little surprises. The only other people who make such sacrifices are generally the entrepreneurs. If you had a friend make a documentary about you you would find that you are making use of a great deal of flexibility and don’t realize it.

    Don’t forget to factor in your continuing professional education and R&D time. I’ve been lucky enough to be the R&D guy at a game company (what? I get to do nothing but sit at a desk and poke at things until I come up with something we should sell a customer? And you’ll PAY me? No shit?). Don’t be leaving money that is yours on the table because you don’t recognize your expenses and the benefit to the customer.

    My best long term relationships with e-commerce customers have been when I kept them close to me. So close that they will always show me the next thing they are thinking about first. And the best way to do that if you have IT skills or have a partner that does is to provide hosting. Some people sell white label hosting to their clients with their brand slapped on it, but that is putting lipstick on a pig and sending it on a date with your best customers. Get redundant cloud servers at a quality service like DigitalOcean (or Rackspace or Google etc) and provide service they don’t have to think about. It has been so profitable just in continuing business I am able to _give hosting away for free_ to customers. I often combine it with a phone/email support contract which they do pay for, the secret of which is that the number of hours of support is monthly and does not roll over. First couple of months after product launch unless they are a pain I even let them go over a little, and then they learn their system and quiet down making the contract 95% profit. You just apply patches.

    Thankfully I’ve left WP behind me again for now and am moving into some SaaS offerings for the finance world. But I’m putting a cart together for myself, and I’m afraid the best value proposition I can put on the table and slide it across for me to look at is going to have at the bottom line a new line item. I always preferred developing with it anyway, it was just too much software for small jobs.

    That new line item will be ZenCart.

  15. Roger
    June 20, 2018 at 11:09 am #

    Looking back on this post five years on, I think the debate is still strong on what business model to follow for e-commerce. In my opinion both value and cost-plus pricing have their strengths, but we might already be at a time when a new model should be introduced. Changing environments and all that. What do you guys think?

Leave a Reply

WooCommerce - the most customizable eCommerce platform for building your online business.

  • 30 day money back guarantee
  • Support teams across the world
  • Safe & Secure online payment