Alok's post on the Formula of Success inspired me to pen-down a Formula that I have been following myself for a couple of years now, on how to estimate if a Services Quotation is Fair or Inflated.. I hope it comes handy to my fellow Rodinhooders too..
An Entrepreneur is often faced with a situation where he / she has to avail the services of an External Agency to execute a certain part of the Project.. And more often than not, an Entrepreneur is also faced with the dilemma of deciding if a Quotation that they have been offered is actually Fair or should it be further negotiated or should they find some other Vendor and will that impact the quality of Service and so on..
I have devised a formula that gives a rough idea on whether the quote is Fair enough.. The formula is,
Q = (MH x CH) x (PM x CL)
Q = Quotation
MH = Man Hours required to execute the Job (part of a Service Contract)
CH = Cost per Hour (one can research this on Elance.com for the Task concerned)
PM = Profit Margin
CL = Clients
Profit Margin Factor
- 1.25 for Companies who have been in business for 1 to 3 years.
- 1.75 for Companies who have been in business for 4 to 6 years.
- 2.50 for Companies who have been in business for 7 to 9 years.
- 3.50 for Companies who have been in business for 10 & above years.
- 0.70 for relatively Unknown Clients like ABCD & Company, XYZ Corporation etc..
- 0.90 for relatively Known Clients like Meru Cabs, Zomato, Burrp etc..
- 1.10 for Large Clients like Flipkart, MakeMyTrip, Games2Win etc..
- 1.30 for Giant Clients like Pepsi, Infosys, Tata etc..
(You can use the names of Client companies that apply to your Sector)
To explain it, lets take the example of Software Development.. Suppose you want to get a website designed by a Web Development Company and following is the Data available,
MH = 200 hours
CH = $15 per hour
PM = 1.75 (supposing the Company has been in business for 4 to 6 years)
CL = 1.10 (supposing they have provided their services to Games2Win)
Q = (200 x $15) x (1.75 x 1.10) == ($3000 x 1.925)
Q = $5775 or INR 3,21,263
On the contrary, if we change the PM to 2.50 (for a 7 to 9 year old company) and the CL to 1.30 (having serviced Giant Clients), the equation would become as follows,
Q = (200 x $15) x (2.50 x 1.30) == ($3000 x 3.25)
Q = $9750 or INR 5,42,295 for the same Task..
I would love to hear any Comments / Inputs that anybody would have on the same..
Vijay the algo is fine as far as it goes but in my observation real world pricing is more a function of demand and supply and quality. For example if you hire a generic web development company that charges $15/hour and they give you a quote of 200 hours for the job, you could shop around and find one that does it for $13 for the same level of quality or you could press them on the point. But if you go to a boutique firm with coder ninjas they might charge you $50/hr but deliver it in 100 hours.
Also, there is no "fair" or "inflated" pricing. The pricing is what the market will bear. What you need to decide is whether you are dealing with a guy who will deliver an acceptable level of quality within a time frame that will work for you. I remember from my working stiff days we used to partner with Polaris (the software company) on some projects. The Polaris logo was designed at the cost of a few lakhs and they had a 50 odd page document that described the logo in detail. Things like the exact shade of yellow to use, the typography, and what not. Crazy!
It all depends on how much money you have to blow.
I'd say find the best provider for the work you need done and then negotiate the hell out with them. It's all about relationships. Alok has a piece on negotiation somewhere, you could use some of those tactics.
I have the other problem, I negotiate too hard on quality and I scare 'em away. :)