A few days ago I saw this comment on one of my LinkedIn posts:
For daily/hourly cost in this context where there are a lot of behemoths it’s hard to take into account the customer economic value, you are bound by the market price for most common roles e.g. developers / testers. You can get over the average market rate only on highly niched positions, e.g. Safety/ Cyber Engineers / Architects.
It’s worth answering this in detail, as it’s something I’ve heard many times: this notion that the market sets the rates and there is nothing you can do about it when you sell software services.
What is the market
Theoretically, the market for software services is truly global. Anyone with an internet connection can be both a client and a vendor in this market.
There are tens of thousands (if not hundreds of thousands) of companies that provide software development services somewhere in the world. And this number does not include individual freelancers and contractors.
This means that both the quality and prices will be measured on some very long intervals.
If we express quality on a scale from 0 to 100, with 100 being the best quality possible for a given project, we will find suppliers on every single level we can measure.
As for the price, using the hourly rate as the metric, it can be anywhere from 10 EUR/hour up to 400 EUR/hour, maybe even more for some specific roles and contexts.
If this is the reality we live in, what are market rates for any given project?
Are salaries the reference point for setting the market rate?
If you want to do this, it might still be very difficult to find a single price level that could be called the market rate.
Are you going to use the current salaries of the team? Or the ones after their increase in a few months?
What if you have to replace one project team member with a new employee, who has a significantly higher salary?
If you have employees in different cities doing the same job, with the same level of quality, but with different salaries, which one will you take into account?
What about the overhead costs?
You need to add to your calculation the salaries paid for anyone in HR, Office Administration and Accounting roles.
What about the cost of sales?
You might have a high marketing budget, salaries for the sales team and commissions paid to people, companies or platforms that bring you projects.
If we only look at these aspects, a UK-based company that is looking for a European team of 5 people for a 12-months project might receive quotes ranging from 30 to 150 EUR/hour.
Quality and requirements
When the client has a lot of experience and they know what they are looking for, they might filter the possible vendors based on criteria linked to expertise, delivery processes, past experience in their specific industry or with a given technology stack and seniority of the team involved.
Applying all these requirements, they might reduce the interval to something like 60 to 150 EUR/hour.
Or they might go in the other direction and filter based on price. In this case, their short-list of vendors might make offers somewhere in the 30 to 70 EUR/hour interval.
In either case, we are nowhere near a single price point that could be called the market rate.
Even if the client were to restrict their search to one country, one region or even a single city, if they have 3 offers, it’s almost certain that the prices in these offers will be an interval, not a single point.
And we have not even looked at all the other aspects that matter in a decision like this. We have only considered the unit price quoted by the vendors.
These unit prices come in a package that also has:
- Estimations – how long they expect to need to deliver the project or some given set of software functionality
- Risks – what are the risks that the work will not be completed in the time estimated? What if it’s completed, but with a level of quality that is not acceptable?
- Operational costs – are there other costs associated?
Adding all these to the mix will only make the budget intervals longer, not shorter.
WHAT THIS MEANS FOR YOU
There are no market rates.
There is no one out there to force you, limit you or stop you from charging any price you think is the optimum price for you.
Costs will determine your baseline.
You might need to take into account your competition on certain projects.
But Economic Value and the customer’s Willingness to Pay are the most important aspects in any project proposal you make for software development services.