May 19, 2016
Posted by: Peter Marcum
I do a lot of reading and thinking on the weekends. This weekend I was thinking about the swings that our business has in capacity yields. Capacity yields represent the available billable resources against the number of billing projects currently being worked on. In the technology world, it is considered outstanding if you are running billable resources at 80% or better. It is pretty much the same in the consulting world.
Then I began to think about how it could be run at 80% or better-- 80% of the time. If we could operate at this rate, we’d optimize profitability, resource utilization, and cash flow, among other benefits. I began to wonder—is this a pipe dream or is it possible?
If you called five different developers in Nashville and asked them to give you a price on building technology with unique specification, the pricing you’d get would be all over the place. The scope of the project doesn’t matter—whether that is something as simple as building a business presence web site or as complex as creating a SaaS platform for servicing your customers. The pricing of technology is either based on a per project rate or an hourly rate.
When a supplier quotes you a total project cost, they are assuming the risk of staying within that budget. This also means managing the scope of the project. When they quote you an hourly rate, they usually provide total estimated hours and still must stay within scope. The risk of cost over runs the risk carried by both parties. So, the range in pricing from the development community of suppliers in Nashville is anywhere from $40 per hour to $150 per hour. Those who charge $150 an hour claim much higher quality, better performance, and a slew of other benefits. The true fact, though, is that they are simply selling higher overhead and painting it with a story called “Quality.”
What If Nashville Had an Arbitrage Meter for Tech Prices?
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance with the profit being the difference between the market prices. Another type of pricing method is called Dynamic Pricing which is also referred to as surge pricing. This method is a pricing strategy in which businesses set flexible prices for products or services based on current market demands. Business are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market. Dynamic Pricing is a common practice in several industries such as hospitality, travel, entertainment, and retail. Each industry takes a slightly different approach to repricing based on its needs and the demand for the product.
This is "surge pricing" - raising prices when demand is strong and lowering prices when demand is weak. Uber commonly practices surge pricing. After a late night out you reach for your smartphone to hail an Uber home, only to find—disaster—that the fare will be three times the normal rate.
Tech buying is driven by a few influential factors. When buyers look for tech suppliers, they consider a firm’s history, reputation, client base and competency. Then, and this is not always last, the suppliers rate for development work. So let’s just say the first four issues were relatively equal, then price still matters and the cost of tech development is going down no matter how you measure it.
So, I was wondering both for the entire Nashville Tech supplier marketplace and for our own firm, what if we published a weekly arbitrage meter which illustrated our current capacity for each type of development—whether that includes iPhone apps, Android Apps, PHP Development, .Net, Database Builds, SaaS Projects, or any of our other services. Let’s say that if any one of these was less than 60%, we would potentially drop our rates for a period of time, say a week, by 30% for anyone interested in taking advantage of that capacity. This is arbitraging our marketplace. What if we built an entire marketplace of suppliers interested in doing the same?
The suppliers win, the customers win and the entire marketplace wins. The more I reflect on this, I realize that it would take cooperation—which is difficult in business. But oh well, maybe we should just do it on our own and let those who want to join us come along—what do you say?
June 1, 2016
Interesting thoughts about arbitrage pricing.. Could be a win for all stakeholders.