I’ll always remember the first time I tried to charge a partner for a piece of Quantico work.
“So how much will that analysis set me back?” they asked.
I took a deep breath and tried not to look as nervous as I felt.
“Erm £12,000 please” I muttered
“What?! But it only took you two hours!”
Well yes, I explained, but I charge based on the value provided and in my opinion this work is worth at least that amount to your business.
Yep, I was an idiot.
I got to that point the same way as everyone else. In fact it’s what you get taught. Established back in the 90’s the concept of opaque, value-based pricing is still the accepted best-practice in finance.
In theory it’s great: You set prices as high as you possibly can, so that you can make as much money as possible.
But there is a dark side…
When you hide your costs you don’t have to be honest about them. Instead you push them as low as possible in order to make a profit.
The result? The people doing the work don’t get paid fairly for the value they create. The client gets overcharged, the team gets underpaid and greedy partners take all profits.
This zero sum game approach worked for the last generation and I know many old school firms still enjoy using it today.
But at Quantico we think we've found a better way. Let’s dive in.
For us the first step was switching from charging for outcomes to charging by the day. It sounds like a small change but it had a surprising impact on our relationships with the startups we work with.
When you charge per day you have to be fully transparent about where you spend that time. It forces you to align on priorities and to be flexible about where you allocate effort. In other words you go from being an outsourced service provider to becoming part of the team.
Pricing per day was a huge step for us, but if we wanted to create a genuine partnership we had to go further still. Why were the day rates set at that particular level? Was it based on our costs or what we thought people could afford to pay?
So we decided to do exactly the opposite of what the textbooks tell you: We’re going to publicly reveal our full cost base and use that to determine what we should charge.
We analysed all the costs and built them into an illustrative cost per day. Of course some of these figures are estimates and some change month by month, but it gives a really good overview.
This is what it looked like for our FinOps Manager:
Unsurprisingly, the biggest cost in the model was team reward. We share our salaries publicly and our team gets the opportunity to progress every three months so I'm sure seeing the cost here won't be a shock to anyone! We’d love to see some of our competitors match us on this.
Other substantial costs relate to recruitment and training, both of which are critical to our model and mission.
We bring the whole team together every Wednesday morning to train, collaborate and problem solve. It's expensive but it helps our people thrive and our partners benefit from the experience of the whole team.
One of our FinOps principles is ‘get clever, not bored’, all those apps and robots cost a few pounds but it’s worth it in time saved.
What’s left over is the contribution towards overheads (sales, marketing, rent etc) and our profit. Unlike most businesses we don’t have extractive shareholders demanding a return on their investment. All our owners work directly in the business and sign up to put the mission first.
We’re an organically funded startup so we also need to make sure we put money aside each month to fund our growth.
Going fully transparent forced us to see look at our own business model in a new light. With everything in the open we realised that the contribution we make varied significantly between levels.
Should we set a consistent margin on every level or does the market work best when we accept lower margins in some areas and higher in others?
In the end we decided to shift each rate to bring our margins closer to alignment. But we limited ourselves to an amount we felt wouldn’t be disruptive to our current partners.
Value based pricing and fixed fees have been around for decades and they work for plenty of firms. Especially those that want to maximise profits from the work of others.
But we think there is a better way of doing business - one that allocates reward fairly, and optimises long term partnerships over short term profit. Hopefully our small attempt will inspire others to think differently about their own pricing ❤️.