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Why are Businesses Willing to Spend More for Software?
"I recently had a the chance to bid on a contract, which I didn't win because of my estimated project cost. The winner of the bid had an estimated cost of $15,000 whereas my estimated cost was around $5,000 for the same project. The contract was not a complex project: a system comprised of database-generated web pages, with file submission and minor document management features.
I had, in about 8 hours of preliminary work, 50% of the website and associated back-end completed and had the rest of the site roughed out for what they wanted. The work is simple and I think almost anyone who has done similar types of site designs would agree with me.
The reason I got for not winning the project was that my proposed bid was seen as too low.
Does this make any kind of sense to anyone? Why would a company prefer to spend $15,000 on a project instead of $5,000."
having evaluated bids like this a lot, i'll have to put "evaluated" in quotes. you don't have time to really go in depth and really check out each bid. if you get five bids, one is for $100,000, one if for $1,000, and the other three are for $10,000, that makes it an easy first cut down to the middle 3, because obviously the 100K people are insanely out of our budget, and the 1K people are obviously missing something.
this is how most government contracts work. ignore the high bidder, ignore the low bidder, and hope for the best when you pick one of the middles at near-random. you just don't have time to be thorough when you evaluate a bunch of bids.
MORTAR COMBAT!
I would imagine most places have a budget for how much they're allowed to spend for a certain project - I know my office follows this. The upside of this is, they can't go over that spending limit. The downside is, they have no incentive to save any of that money.
Of course, the ideal thing to do for the project manager is to get the most bang one can for the money available. But what you often see instead is the project manager going for the bid that comes closest to the company's estimate for how much it would cost them to do the work themselves.
!#@%*)anks for hanging up the phone, dear.
Possible reasons:
1) You appeared amatuerish. Cheap often *does* mean its a little bloke sitting alone in a room hacking out stuff. There no guarantee you might just get bored and fuck off.
2) Did they offer more? Putting in extra features, and charging for them, is commonplace.
3) Are you sure you actually lost on price? Was their bid of a higher quality, and you were fobbed off with the price as an excuse?
4) Did they offer support? Updates? Full IP/Copyright? Training? Sort of comes in with number 2..
Cheaper does not always mean 'the same thing at a lower price'. Theres a reason for the 'cheap and cheerful', and 'you get what you pay for' adages after all.
http://twitter.com/onion2k
Freud was asked a similar question as to why would he charge for therapy since his main focus was simply to help the patient. His reply was - to paraphrase- the therapy would not work as well because the patient needed to put something of value into it. Low or no cost software can and should work, but we will have to show a dollar value for it: Savings over current development plans might be just what the bean counters need to see.
Firstly, you assume that the client was honest with you when he told you that you lost the job because your price was too low. A lot of times clients will say that to small contractors in an attempt to avoid hurting their feelings when really, the reason is that they don't think you're good enough to do a good job, and THAT'S why you're charging too little. You have to know your market. If you went shopping for (say) a wedding ring, and some guy offered you a perfectly beautiful ring for 1/3 what they were selling elsewhere, what's the first thing you would do ? Run off and have it appraised, because YOU would be sitting there wondering what was wrong with it. Businesses are no different, except there is no appraiser for software.
There's also psychological data that shows that people tend to hold dear those things that they have invested more in. Social psychologists have demonstrated that an excellent way to increase someone's opinion of you is to get THEM to do something for YOU, and often times the more onerous the task, the higher the resulting opinion. One interpretation is that they internally conclude they must like you more, in order to explain to themselves why they would do something difficult for you. Conversely, if something comes easily, it won't be valued as much, and people know this at some level.
Your competitor is obviously smarter than you are: They know they can charge more!
My firm does Landscape Architecture, Land Planning, and Architectural Visualization. We run into the same thing all the time. Because we're much smaller and leaner, we can generally offer better service, better product, at a MUCH lower cost than larger firms.
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The catch-22 of the whole thing is that the client will bitch about how much money you're costing them . . . then you'll hear through back channels at the end of the project that they aren't happy because they don't think they paid enough for the high quality product they got.
I've got untold colleagues in other professions who have had essentially the same experience. I think it boils down to this - people want to feel violated. There's a mindset of "if it doesn't hurt, it can't be good" . .
just2cents.
anything i tell you will cloud your opinion.
I have had this happen to me the other way around. I bid the $15k and they took the $5k bid. The site never got built. No even close.
They told me it was a price based decision, I heard from back channels it was because the $5k bid came from a "friend".
Just remember that most sales are made based on the decision makers *feelings* about the project and about the bidders. If you never get a chance to talk to the decision maker directly about why you didn't get the contract, you can never know why he/she made that decision.
If I go out and charge $20/h to do consulting, I can't get any business, but if I go and charge $200/h, I can get a fair bit of businesness!
This is CRAZY!
What I get from customers is that those who charge more most have something more to deliver because they charge so much. It is the same stupidity that means a person in a three-piece well-fitting suit can open a bank account with obviously bogus ID, while a hippy with lots of good and valid ID gets the runarround.
If things look rich, then people, especially business people tend to trust them more than things that don't look rich. This is a major flaw in the only society I am familar with, North American Society.
ttyl
Farrell
CAN-CON 2019 - Ottawa's only book oriented Science Fiction Convention! October 18-20, Sheraton Hotel, Ottawa, Canada h
Then three reasons. The first as above.
2. Spending money is a useful way of avoiding paying taxes. 'Investment', it is called, and usually has tax breaks associated. If they get the software for nothing, then they are potentially missing out on those breaks. Counter-intuitive I know...
3. The CFO has to show a consistent pattern of profit each year; it is better to do 5% better for each of two years than it is to do 20% better last year than the year before, and 5% better this year. 'Better' from a market perspective where 'consistency' and 'stamina' count more than results. Free (or cheap) as in beer software is one less armament in providing that consistency.
There is some truth to this. Gartner Group has a law for their clients that goes something like "If a development job costs less than $10,000, you don't really need to do it." While I think that is silly, there are a few realities:
.pdf if delivered electronically - I hate adobe too but people expect it) Did you wear a suit to the pitch? Do you have a portfolio of other projects and comany names to drop? (my first client was a fortune 50 company that everyone knows well, and has opened countless doors). When clients call you do they get the same answering machine your friends get ("hey, it's Bob, leave a message after the beep" doesn't cut it.
;-)
1) Experienced, established companies know what they need to charge to be profitable.
2) Experienced, established companies can afford to charge premeium prices. It works that way for all services: Lawyers, Accountants, Maids, Restaurants - everything.
3) Big comanies don't want to make decisions on price alone. That gets you fired. Their thinking (and it is 100% correct) is that selecting experienced, established professionals is the safe way to go - you can't be blamed when things go wrong. Pick your neighbor's nephew and when things go awry no one will care how much money you would have saved if things were not fvked up. You said "Do you think that businesses might be better off if they took a risk and tried the lower end of the costs spectrum?" The answer is a resounding NO. There's many, many ways to save costs in a big company -- the amount of waster is incredible - but choosing lower-grade vendors is not one of them (please note that I make no statement about your ability to do the work).
4) Don't be bitter, go after different business. Yoy may disagree, but I promise you, with metaphysical certitude, that there were reasons other than price you didn't get the bid. If they thought you were the better choice they would have hired you happily.
Look at everything else. Do you have a good business card? A professional looking website? Was your proposal writting in a professional form printed on raised letterhead (or in
If you think those things shouldn't matter, you are right. If you think they dont matter, you could not be more wrong.
Also, you should charge market rates
How Robert Cialdini, who has thought more about this kind of question than all of Slashdot put together, might break down the problem, according to the six principles set forth in his remarkable book "Influence, the Psychology of Persuasion":
Authority - This software comes from the acknowleged leader in the field.
Reciprocity - We want people to pay us a ton of money for our own products.
Consistency - We paid millions for our network, we're not willing to pay six figures for the software?
Social Proof - Everybody else is buying this software, there must be a reason.
Scarcity - It's the only solution in its price range, must be unique and valuable.
Liking - They have the best (paid) salesmen.
I work at a recently profitable startup, and we had a very similar experience. Initially, we had a low cost package deal that covered what our clients needed. The problem was, they all thought it was "too good". Essentially, they mistrusted it because they thought we had to be cutting corners somewhere to provide it. So, we itemized everything, doubled the prices, and all of a sudden they all wanted to buy it. Not a damn thing changed from a technical perspective, but our customers found our pricing more acceptable.
Basically, because they can't do what we do, they want to believe it is valuable. Buisness people gauge value using economic measurements, like cost. It is important to recognize this, and not undervalue your own work (you don't hear about accountants cutting prices because it's easy for them).
When shit fucks up, whoever commissioned it wants to be able to use the excuse, "But, I paid good money for this!"
You can't pass the buck when there's no buck. Why do you think CTOs love MS and are scared of OS? Because you can't say that you spent top dollar unless you do spend top dollar. It divests the commissioning employer from having to be held accountable if your work sucks; if they went for your contract, the dude above him could easily say "Well, of course it fucked up, you didn't spend a shitload of money on it."
The fact that theres little correlation between price and quality has little to do with the fact that its way easier to be unaccountable for a project if you pay a premium price. Its totally backwards, but hey, so's this continent, so just think of it as being a neccessary bit of stupidity for consistancy's sake.
(BTW, this is why its so hard to break into new markets using price as a differentiator. Yet another example of how classical free market economics don't exactly model the real world. When you are a newcomer to an industry, its hard to undercut the competition using price because people don't want to be left in a situation where they have to explain to their senior manager that the reason shit fucked up was that they went for a bargain.)
"Old man yells at systemd"
You are using the term "cognitive dissonance" incorrectly.
The idea is that people want to have a consistent view of themselves. They want to believe that they are rational or whatever. So, whenever something happens that they wouldn't normally expect themselves to do, they change their ideas about themselves. The reason they do this is (theoretically) to avoid cognitive dissonance. It is believed that cognitive dissonance is actually a physically uncomfortable condition or emotion.
So an example would be if, for example, you helped a girl with her car, you might think she was better looking then if you hadn't.
"cognitive dissonance" does not refer to the conclusion you draw, nor the theory.
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The other odd thing is that tmark even brought it up at all. Is he saying the manager or whoever took a social psych class and wants to pay people more because he believes that if he pays more money, then people are going to work harder for him and thus like him more? Does he want to pay people more so that he can manipulate his own emotions and make himself like the contractor more?
Either way, it's a pretty bizarre conclusion.
autopr0n is like, down and stuff.
...people are sometimes looking to spend more money so they use up their whole budget (otherwise they get less money next year).
From what I've seen, they just like to spend lots of money no matter what time of year.
$200,000 of software on a 2-CPU server for a *very* low-volume website? Yup, because they can use all the buzzwords and brand names in their reports, they like the important feeling when signing big purchase orders, and they forget that they are flushing public money that could be spent on painting lines on roads and buying books for school libraries.
I think truly realistic contract bids clash with the egos of those choosing the contractors. I think many people prefer saying "I'm in charge of a $3 million contract" rather than saying "I saved the city/state/country $1.7 million dollars by making conscientious purchasing decisions."
Healthcare article at Kuro5hin
But look at accountability in another light.
If a company is charging top dollar for their product, _regardless_ of whether or not it's the best product on the market, they are percieved as having the financial backing to settle in litigation should their product fail to meet the requirements of the contract. Little companies just don't have enough cash to go after in the case where their product causes your company to shut down for a few days due to a bug.
Quite some time ago now a company a friend worked for needed a small system writing. It was a mid-sized company, still 10's of $millions turnover.
:)
I wrote a demo, spec, etc. and put a bid in. They thought it was good so I had a meeting with the IT Director. He was happy with what I was planning but he questioned how much I was charging - at the time I thought it was a bit expensive, however, I was shocked when he said he thought it was too low! In fact I ended up charging 400% of my original estimate! They paid up, I was happy
Why, I don't know. Maybe my outsourced development was making their in house development and IT work seem overly expensive. Happy to take the wonga though.
Paul Everitt (Zope/Digital Creations) spoke in Colorado about 2 years ago at a Linux conference. Zope Corporations was preparing to bid on a large contract for a national news organization, and they ran their proposal past one of the board members who was a VC and familiar with the market and with Zope Corp's abilities. He told them it was all fine but they needed to double their bid price in order to be taken seriously. Paul told him they would be making a nice profit at the bid price they had settled on, and the VC told him that they would never get the contract if they didn't double their bid price, because the client wouldn't take them seriously. They doubled the bid price and still came in under all almost all the other bidders and got the contract.
this is getting old and so are you
blog
While I will willingly concur that there are lots of software developers who will overstate the complexity, I have found that it is far (at least 8x) more common for software developers to be "heroic" and grossly understate the complexity of a task. I've been in meetings where I've watched gunslingers low ball each other, each trying to show their eliteness by the speed with which they can supposedly perform tasks. The flip side, though, is that they never (and I mean NEVER) actually hit these low ball targets: There is always some exceptional reason, perhaps it's that damn Microsoft, or a quirk in Apache, or Jimmy the guy in the other department who doesn't reply to emails quickly enough, that justifies why they overshoot their mark by many multiples. That's why I'm wary of anyone who makes outside-of-the-norm claims (especially when the "norm" is a highly skilled group of individuals).
You comment regarding a "15 year old doing the same in half the time" is just ridiculous. The gap between working, full scale, well designed systems, and the beginnings of a test site that a kid put together, are the difference between shooting off a model rocket and then claiming that you can go to the moon for half the cost of NASA: Cheap words. I've worked with so many clients that have a pot pourri of absolute garbage systems put together by people with just such an attitude.
I was with a company where they paid big money to a consultant who came in and told us we had to adopt practices that had been abandoned less than a year ago. We could have told them the same stuff for just the cost of our regular salary, but we weren't charging them $100,000 for a month's work.
The general comments about being in the expected budget range are right on the money. As one who spent over a decade in software and network consulting, we worked hard to be sure that we were priced a high as we could be and still stay under the decision-maker's signing authority.
There is also a definite effect related to the famous Giffen Good, defined as "a special type of inferior good that's quantity demanded rises when price rises". http://www.cr1.dircon.co.uk/TB/1/giffen.htm
Although this was first proposed in the 19th century related to economics of poverty, it has a very real effect in other contexts. The most obvious is in goods sold to the rich, where they want to have spent more for X (so as to be perceived as being rich enough to afford it). This effect is also clearly present in the business environment, but more related to the perceived secuiryt and accountability related to higher prices.
The account was short, but you probably need to talk more closely to your customer. If your price is low (or high), they need to be sold on WHY it is low or high. If you have a cost advantage that can be passed on to them (pre-developed libraries, low overhead, etc.), let them know, otherwise, they may assume that you are just cutting corners. If your price is high, but you are taking extra care in certain areas that will benefit them, again let them know or they will make other assumptions.
Mostly, don't just throw a big cold wet fish on their desk. Explain to them how great it will taste with your expert preparation and why the price is right.
Cheers,
J!
Look at from a different perspective. Apple users are quite content to pay what some would call extremely high prices for what could be seen as a somewhat anemic system. (I, personally love Macs, but I'll leave that out of this for now.) If you put the Macintosh and a WinTel clone up against each other, it's always a game of catch up on both sides. WinTel boxes can do almost everything a Mac can, and vice-versa. So... why do Mac users pay so much for boxes that won't have support from Apple in a shorter period of time than a cheaper WinTel box? There are a few complicated answers:
1. Style. Like it or not, The Macintosh still beats a WinTel box (especially cheaper, no name boxes) when it comes to style. They have nicer looking hardware out of the box. The user interfaces is simple and streamlined. Although Mac OS X adds a little more complexity, but not as bad as Windows.
2. Psychological Security. "It costs me more, but it's got to be better just because of that reason." This is an extension of the "you get what you pay for" concept.
3. A known quantity vs. fear of the unknown. If you are familiar with a system, why change? Even if the alternative is cheaper, there is a learning curve. A Mac user is already comfortable with their knowledge of the Mac OS. If they've never worked with a WinTel box before, and have a little fear of doing so, they probably are not going to change, even if it can save them some money.
4. "Added value". There are some things that a WinTel box just can't do that a Macintosh can. Although they are very specific niches, they still require a Macintosh. (*Professional* Audio Production is a prime example. Not the "multimedia" crap or Semi-pro stuff that a WinTel box is well suited for.) Yes... there are some pro packages for Windows, but look at answer three to see why a Mac user is more likely to stick with a Mac.
Getting back to the original post: Who's to say that the company that got the bid at $15,000 didn't have a previous relationship with the company who requested the bids? Where I work, we pay out the nose for some things that we could get elsewhere a lot cheaper. But the added cost to us is worth it because we have a very close relationship with our vendors/consultants, etc... Those close relationships allow us to get our work done faster, instead of working with someone new and cheaper who may not be interested in fostering a long term relationship with us. It's unfair and in-efficient IMO, but I don't make those decisions. Whenever the subject of a cheaper alternative has been discussed, those that do make the decisions deride the lower cost by asying that there isn't any security in that since the cheaper company is an unknown quantity.
Another factor that doesn't workk with the Mac analogy, is "Bigger ass to whip if something doesn't work." The company that charges $15,000 for their work rather than $5000 is likely to have larger coffers to raid in the event of a lwa suit. That ALWAYS makes suits feel more secure. If the only assets that a company that charges less for their work has are a car and a house, "litigation happy corp" isn't going to get much in reparation even if they sue for millions.
An aside "rant" (those who aren't interested in my politics can skip this part):
This always brings me back to my conclusion that captalism is failing. (You can call me a troll at this point if you wish, but that doesn't change things.) I am not saying that communism or some other system is better. But, I AM saying that another system is destined to replace it for better or worse. Jump off the sinking ship while you still can and work on developing your own approach to "coding for food". Just keep in mind that the two failings in humanity (fear and greed) are any system's stumbling blocks. Oddly enough they are also responsible for getting us where we are today, both good an bad. Think about it for a bit... Hiroshima. Why? Fear. Gulf War. Why? Greed. Discovery of fire. Why? Fear? End of communism. Why? Greed. Even more interesting is the inextricable link between competition, greed and the advancement of civilization.
Just give it some thought if it interests you. I think we are seeing capitalism fail for the same exact reasons that communism did. Enron? Greed. etc...
-"...bad old ideas look confusingly fresh when they are packaged as technology" - Jaron Lanier (Digital Maoism on Edge.o