Transparent Pricing

I heard a great episode the Tim Ferriss podcast with a Nick Kokonas - a startup/tech guy who started a restaurant. He brought a number of seemingly simple but important innovations to the standard model that restaurants run on.

One of them being that they charge for reservations. Typical restaurants allow anyone to call in and book a reservation without any real commitment on their end, and because of that there is a standard no-show rate for most restaurants. Because of that, restaurants overbook and you normally have to wait a while even if you do book a reservation and get there on time.

And the other thing unique thing they did is around variable pricing–the price to go there on a Tuesday afternoon is different from the price on a Saturday evening. Pretty simple and makes sense, but not something that most people in the restaurant industry are used to, so many people told him he was crazy.

Turns out it worked incredibly well–of course it doesn’t hurt that his partner is an amazing chef. But they are booked out some insanely long period of time into the future–all bookings are done online. It’s pretty cool.

I was talking to a buddy recently about pricing discounts for their agency, and it made me draw some analogies to this.

In the same way that variable restaurant pricing is obvious and at the same time unusual, the same is true for development agencies. They all charge different rates in different situations:

  • Grandfathered-in customers on lower rates
  • Lower rates during times when they have excess capacity on their team
  • Discounted rates for bigger or more prestigious clients

My hunch tells me that in the same way the transparent pricing was frowned upon but ultimately successful in the restaurant industry, the same would be true of transparent, variable pricing in the dev industry.

First off, everyone understands that rates can vary as your capacity waxes and wanes. It’s not a sign of weakness unless your are perpetually under-capacity, which may mean your rates need adjusting anyways.

I believe you should change the framing on a decreased rate - instead of it meaning that clients are getting a permanent discount on your services, it just simply means that due to some lucky timing they were able to snatch a temporary discount. It’s a good thing for everyone but there’s no reason that it should mean your rates are permanently discounted.

It’s common to have older clients grandfathered in at very discounted rates. People have a hard time increasing rates on their long-time customers. On the one hand, it’s great to reward loyalty and if you can do it sustainably, more power to you. But many times these grandfathered clients end up getting de-prioritized by larger more profitable clients.

It’s not that anyone is doing anything unethical, it’s simply economics that higher paying customers are going to be more highly prioritized. So perhaps again you can systematize this situation - if someone wants to be on a lower rate with a lower SLA and that’s something you want to offer, then great. Make it clear what they’re paying for and what they’re getting.