$5,000 to $100,000: Pricing Divergence In The Web Design Business

By Pete Czech

$5,000 to $100,000: Pricing Divergence In The Web Design BusinessNew Possibilities Group

We were recently included in a New York Times blog story detailing the search of a business owner for a web development firm.  While I appreciate all publicity, I found the comments to be interesting as they brought about two discussions - one being the difference in opinions about platforms, a topic we've covered before at length - and the other being the divergence in pricing between bidders.

First, have a look at the story. Then, observe the comments:

"You have a wonderful business. But look what you can get for $1000.

www.ishtayogaeurope.com"

A few comments later, "Ralph" contributes:

"$23K seems something between low and reasonable for the work involved when one considers the overall value and functionality of this site, its probable position in the firm's marketing plan, and the complexity that must be engendered in integrating with a back-end that has required $100K of mere customization! If it has to integrate with Quickbooks as well, this site is far more than a simple billboard on the Web - it is taking the place of at least one and probably two or three staff members. If it is to be mobile compliant as well, $23K seems low for a complete revision."

And then, from "Kurt":

"You should be able to find an independent that will do a decent site for 1/3 of the $23,000. My site cost me $6500, lots of pages, navigation, a downloadable library, a blog, etc."

Why this is fascinating is because it illustrates one of the biggest problems in the professional web development industry - a complete misunderstanding of value.  Client's typically are uneducated about what they are buying, and bidders are selling completely different things.  When we bid projects, we typically bid against a wide range of competition - each often with a completely different business structure.  Let's say we have a hypothetical project that we will use as an example for this exercise.  A simple spec: a user registration and login system with a subscription-based e-commerce component, tied together by a content management system (for you techies, we'll assume Wordpress).  Let's say we will quote at $30,000. Chances are, we probably are competing against one firm bidding $5,000, another for $15,000 and yet another bidding $100,000.  Client's often ask: "how can the discrepancy can be so wide?  The answer has a variety of variables, two of the biggest being the provider and the product.  For the sake of this article, we've already assumed that the product is the same, so we can focus on the differences in providers.

Web design and development agencies for the most part fall into four buckets.  The service, quality and output of each will vary dramatically.

The Independent

Take Kurt's comment above.  He indicated that an independent can do a site for significantly cheaper than hiring a group.  He's right - it will cost less.  But you have to realize a couple of things about this scenario.  First, the independent is not really independent.  Typically, they have a job full-time that supports them.  If by chance they don't, then they have either one or two clients that provide the majority of their income.  This would make good financial sense - no one would want to have their lifestyle non-secured - surviving on new projects every month or two isn't consistent.  But for you, as a client, it should set off alarm bells.  The independent has trouble serving many masters at once.  How important is your one-off project versus their other benefactors?  If they have a full-time job, what level of commitment do they have to your project?  Will they tell you who their employer is?  What is the level of transparency?  In our hypothetical project, this person would probably bid on the low range, in the area of $5,000 - $7,500.  This is because of their relatively non-existant overhead and because it isn't their main source of income.  Typically, they won't even base it on hours, but on an amount of money they wish to receive (maybe, they need a new car, who knows.), not on a formula of hours or such.  Be wary!

The Outsourcer

This will be either a company 100% located overseas, or perhaps with an individual in your own country overseeing this offshore team.  The total cost would typically be somewhere in between the independent and a boutique, but based on hours.  These agencies will make many promises throughout the process and speak highly of their dedicated development team.  What is important to realize in this case is that the workflow will be time consuming and often frustrating.  First, you will in most cases be communicating with someone in a foreign country.  Now, in theory, I'm a big supporter of globalization, and our clients know we engage in it.  But also, the creative end of our business is local - we are of a similar culture and that is essential for product development (I don't suppose many of us could develop successful applications for the Malaysian market).  The outsourcer won't have that in common with you.  A project manager in China or India simply isn't living in your world.  There are other concerns that are more subtle.  Indian outsource firms behave in a way very similar to their culture - there is a real motivation to keep their clients well-pleased.  I remember being stuck in a taxi in Agra, India, with a flat tire - the driver said more than a few times that it was "no problem".  I assure you, it was!

From a budget perspective, our above project would be priced between $12,500 and $15,000 - this is because the staff is being paid low wages, with low overhead.  Even with a lower skillset, the time they put in is still profitable.

The Boutique

(In full disclosure, we are a boutique firm.  So obviously, I'm going to tell you the positives of this scenario!  Of course, that doesn't mean if you are shopping around, that you have to  work with us…  But you should!)  The boutique agency is a group that typically is staffed with 10-15 people, depending on size and time of year (i.e., how busy they are).  You'll most likely be dealing with a set of product-centric, entrepreneurial founders or partners, and then a staff that is centered around their philosophy.  It's important to note, that a boutique agency thrives on one thing: referrals.  Simply put, boutique agencies can't afford to screw up.  If they do, one branch on their customer tree dies, and that can mean many clients in the future.  So the stakes are higher for a boutique than for any of the other provider types.  IE, the large agency will always have a seat at the table to pitch, the outsourcer will rely on a variety of more aggressive marketing options, and the independent will seek out work in places like Craigslist.  The stakes for a boutique are high.  We can't make many mistakes - customer service is priority #1.

That said, let's get into how we arrive at pricing: a formula.  We have a formula for what goes into a project for design, development, quality assurance, deployment.  It's a complex process that goes into each and every quote.  What determines our hourly rate?  Labor costs, overhead costs, customer acquisition and marketing, taxes, etc.  The overhead for a boutique is higher than that of an independent or an outsourcer (the latter who is just spamming you anyway), but much lower than that of the agency.  At the boutique, you will deal with an experienced team and have a much higher chance of success - at a reasonable cost.

The Agency

The agency is a very interesting case.  From the perspective of a boutique owner, they are terrifying.  They have instant credibility, while we spend significant time in the sales process building that trust.  However, the trust is something that can easily be lost because they are not capable of equivalent customer service.  The main reason being, while they do have highly skilled talent, you often will only deal with them during the sales process.  The system is to have senior staff make the sale, and then get the work to junior staff and repeat the process.  Junior staff at these agencies have clout - they were clearly smart enough to be hired by the agency - so why not trust them?  However, those junior staff are being billed at typically double the rate of the boutique and have half the practical experience - not a customer-friendly formula.

And the problems just start there.  Agencies survive on egregious levels of billing.  So they will invent new parts of the process to increase those billings.  Additional "discovery" meetings, conference calls, fancy furniture and cool office space - everything is part of the equation.  So our job quoted at $100,000 is actually quite a steal.  Now, those billable hours all have to actually happen, right?  Of course!  And that results in your project taking FOREVER.  And, a day.

Does it all come back to boutiques?

Again, from the perspective of a boutique owner, I am skewed.  There are certainly places where boutiques can't compete.  Larger, Fortune 100 companies will always choose a large agency.  They have the resouces to handle the relationship and the scale to fulfill all requests.  Once in a while, the boutique can grab work there - but not often.  However even in this case, as mentioned earlier, the boutique can be brought in to actually assist on the project without the client even knowing.

But the case of small to mid-level businesses and start-up groups, those that chose to go with an outsourcer or independent often end up with a boutique anyway.  It's simply because the latter two aren't focused on product development or entrepreneurship enough to help.  Unfortunately, as a boutique agency we are often left to deal with half-completed projects or restricted budgets because money was already spent and wasted trying to take the more economical approach.

So, if you are still determining what direction to take, consider doing a cost-benefit analysis, and of course do your research on the various bidders!

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