Pricing your skills and services as a freelancer: Part 1, Negotiation Theory
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Pricing is the outcome of a negotiation between buyers and sellers on the value of a service to the buyer, versus the value of the service to the seller. It is a dialogue between the two parties with subtle value-cues and signaling, even if they never speak. While we are all innately wired to seek value for ourselves both as buyers and sellers, negotiation theory can be a powerful intellectual back-drop and help you understand what’s really going on in the process.
One of the hottest new trends in negotiation theory is “mutual problem solving” which has – to some extent – replaced the more basic bargaining-based approach. The key to mutual problem solving is looking for hidden benefits or creative possibilities for both parties when working together. The classic example is two parties asked to split a pie 50/50.
At first, it seems only a simple act of cutting the pie directly down the middle will be feasible. But mutual problem solving theory asks the parties to look further into their real needs beyond their primary sense of fairness. What if one person enjoys crust more than the other? What if the pie were to be cut in half but with one person receiving more crust and the other more middle; suddenly a volume not only equal but also more mutually beneficial outcome springs to life from the simple act of splitting a pie.
Great pricing negotiations manage to get to this level. Perhaps one job offers a higher and more appealing pay rate, but the client has a lower volume of work to offer. Do you need maximum income or maxim income per hour. Looking deeper, do you have unique skills fit specifically to the customer? What are the creative ways you can work together for maxim value beyond just a market based ‘fair wage’ settlement? Unique fit can create unique value for both parties in unexpected ways.
BATNA is another key concept in negotiation theory. Also known as the ‘best alternative to a negotiated agreement,’ BATNA drives the willingness of both parties to participate in problem solving together. If either party feels they can immediately walk away from the table to a well understood, solidly better offer, then the negotiation is over. Knowing both parties BATNA is fundamental. Many people start negotiations from a gut sense of what they are worth–but how deeply do you know the market for your offer? It could be both radically higher or lower than you suspect. Doing BATNA research and discovery is a key to taking the emotional part out of the negotiation.
Online labor marketplaces now routinely list hourly rates, skill levels, and feedback that fuels transparency into possible alternatives. Use it to your advantage. Don’t forget what you learned about mutual problem-solving when you do your research; if a competitor has lower pricing but also a far lower number of engagements, comments, and hours worked, they might not represent an alternative to your offer. What if you pursued a more specialized market where alternatives are thinner and walking away becomes more challenging for a buyer?
ZOPA is your intended destination. ZOPA is the ‘zone of potential agreement,’ the overlap between buyers’ and sellers’ agreeable terms. ZOPA theory focuses on wide and narrow zoned approaches to negotiation. Some skill buyers, such as large companies, have very very large ZOPAs and pay their workers vastly different salaries, while others have a very narrow range. Understanding your buyers’ ZOPA can be the key to pulling out additional value.
Before you split your next pie – or price a freelance job – brush up on a contemporary negotiation tactics. Know your BATNA, excel in joint problem solving, and score customers with a wide ZOPA. It never hurts to have powerful ideas behind your plans.
Valentin
July 1st, 2009 at 7:50 pm
Sorry, for this, but ‘ZOPA’ in Russian means ‘Ass’. In this way, phrase ‘ZOPA is your intended destination’ is very funny for Russian developers.
James
July 2nd, 2009 at 12:16 am
Valentin–
I had no idea. I am very glad you pointed it out as it made me laugh pretty hard.
Maybe some developers are laughing in Russia tonight.
James
Matt
July 4th, 2009 at 10:01 am
Valentin, thanks for the tidbit.
I think these sentences are the best: “Some skill buyers, such as large companies, have very very large ZOPAs and pay their workers vastly different salaries, while others have a very narrow range. Understanding your buyers’ ZOPA can be the key to pulling out additional value.”
MacDaddy Links of the Week - 7/5/09 | bkmacdaddy designs
July 5th, 2009 at 5:18 am
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James
July 5th, 2009 at 3:31 pm
MacDaddy-
Thx for the linking love!
Matt-
I’d agree with you, the other concepts are more abstract and useful more as a framework. ZOPA is immediately particle, but, also harder to determine without experience with the client.
Aspia Chodhury
July 7th, 2009 at 7:05 am
Thanks for this Bogs
I am a new freelancer and very much interest in this site. but till i didn’t get any job in this site. I am trying to get a job. I am also skill person. This blog may be help me ??
Aspia
Shamsuddin Ahmed
July 7th, 2009 at 7:14 am
Very Nice This Blog !!!!
I think ZOPA is a good idea for their calculation. I need more details idea about it. I tried to learn it. But understand very little.
Shamsuddin Ahmed
James
July 8th, 2009 at 10:50 am
Aspia, Shamsuddin–
Thanks much for the comments. I have another blog on pricing coming out soon this week so stay tuned. Look forward to your thoughts on it as well.
I will try to do a deeper dive on ZOPA the week after that as well!
James
Pricing Skills and Services as a Freelancer: Part 2, Tips and Quotes | Freelancing and Outsourcing Tips, Commentary, Analysis, and News from oDesk
July 13th, 2009 at 9:45 am
[...] Tips and Quotes’; reddit_newwindow=’1′; // Last week I began my series on pricing with some heavyweight current theory. I believe it’s almost always worth the time to become a better pricing and negotiation [...]
The Week In Freelance: July 20th | The Freelance Rant
July 24th, 2009 at 9:58 am
[...] oDesk on putting a price on your services: “One of the hottest new trends in negotiation theory is “mutual problem solving” which has – to some extent – replaced the more basic bargaining-based approach. The key to mutual problem solving is looking for hidden benefits or creative possibilities for both parties when working together.” In other words, get to know your client’s needs beyond the project scope and sell your specialized skills to maximize your earnings. Part 2 of this post is worth a read too. [...]
July 2009's Monthly Mother Lode of MacDaddy Links! | bkmacdaddy designs
August 3rd, 2009 at 6:54 am
[...] is Better? 11 Handy Tools for Websites Analysis Resources for Authenticity: Being vs. Understanding Pricing your skills and services as a freelancer: Part 1, Negotiation Theory 24 Most Ridiculously Thought Out Storefront Signs 13 Tips To Skyrocket Your Marketing Campaign 20 [...]