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The value of our work (was: Contracting moral dilemma)
Subject:The value of our work (was: Contracting moral dilemma) From:Ken Jones <KJones -at- ALPHABLOX -dot- COM> Date:Thu, 6 Feb 1997 11:34:25 -0800
I would recommend not refunding any portion of the contracted payments.
People on this list have already made several good arguments in favor of
this position, so I won't rehash them. However, this situation is an
excellent opportunity for us to examine the *value* of our work as
I suspect that most of us who negotiate for contracts arrive at our bids
through a cost-based approach. For example, we calculate the number of
hours we expect to spend on the project and multiply that by a "standard
rate." The "standard rate" is simply the cost of our time, which we
might determine by some nebulous "market rate."
But I suspect that few of us set a contract price by the *value* that
the company will receive from our service. This is ironic because a
customer's concern isn't the cost you incur to provide a product or
service, but the value received. For example, if you expect to gain
$50,000 by purchasing a product or service from me, you have no
incentive to pay more than $50,000 for it. The fact that my cost to
provide that product or service is $100,000 is irrelevant to you.
On the other hand, if I had a product or service that I could make
available to you that would generate a profit of $1,000,000 for you,
it's very likely that you'd be extremely happy to pay me $100,000 for
it. But if my cost of providing that product or service is only $1,000,
I might end up charging only $2,000 (or less!) using a cost-based
approach. What is a "fair" price in this case? I would argue that
$100,000 is (at least). You are willing to pay this price and will
receive a benefit far exceeding the price. Even at $100,000, my product
or service is very valuable to you. For those who might argue that my
99% profit is "unfair," I would counter by asking whether it would be
"fair" for a customer to gain increased value by paying me less than
what my product or service is worth. A "fair market value" is simply
that price at which a buyer and seller agree to execute a transaction,
each presumably expecting to receive some benefit.
So why don't we all use value-based pricing? Well admittedly, there are
very few cases where the cost, value, and benefit are as extreme as I
have presented. And more importantly, it can be very difficult to
determine the dollar-value benefit a customer receives. Given the
difficulty of determining the value of our work to a customer, it's
usually easiest for us to fall back on the cost-based approach.
In your case, David, you were very lucky. You found out that the value
of your service to the customer was a lot more than it's going to cost
you to provide it. Don't feel guilty. Remember that your customer thinks
that it's worth it. If you want to give something "extra" to you
customer in return, complete the project ahead of schedule (but not so
far ahead of schedule that your customer will expect you *always* to
deliver ahead of schedule!).
As for the rest of us, this is a good reminder to consider what our
customers will gain from purchasing our services. If I can determine
that by providing a well-written document, I can save a client $100,000
in training costs over the next year, the fair-market value of my
service might be $50,000, even if the cost of my time using "market
rates" is only $40,000. I would then need to determine, based on my
knowledge of the competitive environment, whether to charge $40,000,
$50,000, or something in between. The challenge to me is to understand
the needs of my customer and to try to translate the benefit they will
receive into a dollar value. Not an easy task, I'll admit.
- Ken Jones