The January 29 NYT ran an article with the captioned title (http://www.nytimes.com/2013/08/04/magazine/whats-an-idea-worth.html?emc=eta1&_r=0)
It presents the story of a blasphemous accountant who doesn't charge by the hour, but by ... something different: "he endeavored to help his clients make (and save) enough money that they would gladly pay a significant fee without asking about the hours it took him to figure out what to do". The NYT thinks this means he is charging based on what he thinks his "ideas are worth".
Well, wait a second.
There is lots of economics literature that discusses the basis upon which people are paid for their work. The classical distinction was "by the hour" or "by the piece". In the case of services, instead of "by the piece", we have the possibility of performance-based 'merit pay', or commissions.
Separate from that, there is a literature on how services are priced. The prevailing idea in the Marketing literature is that prices are based on one of these three: (1) cost (2) the customer's willingness to pay (3) what the market will bear, or the 'going price'. (I've always thought this Marketing literature was confusing, or confused: The market price is not some kind of third choice, but is orthogonal to the other two, i.e. each single firm might set a price as a function of either its costs and/or the client's value, but the absolute level of the price will be affected by competition). There is also the possibility of contingency fees (think Erin Brokovich's attorney), which sets the price as a percentage of whatever the service gains for the client.
In the current case, where the accountant works alone, there is a convergence of the two questions, i.e. how the person gets paid, and how the service gets priced. This maybe allows us to forgive the NYT for mixing two issues that are separate in the economics literature, by comparing the possibility of an hourly wage (a question of how people are paid) and the possibility of price reflecting value to the client (a question of how price is set). But still, there's actually quite a variety of ways in which the price for a service may be set, and it's not as if hourly rates have been a dominant approach, let alone the only approach, to pricing services.
With this background, we see that the idea of setting a price according to "what it's worth to the client", is not entirely new. But it comes in a few guises. A contingency fee, by definition, sets the price as a percentage of what it proves to be worth to the client. In addition, the Marketing idea of basing the price on a customer's willingness to pay, presumably reflects to a great extent the value of the item or service to the client. Is there anything new here?
To me, one interesting new question is the extent to which the service provider and/or the client can estimate in advance what the value to the customer is going to be. The NYT article writes: " He [the accountant] can only figure out what to charge his clients after spending a lot of (unbilled) time talking to them about their needs". Contingency fees reflect the value of the service to the client, so that aspect is not new per se. But contingency fees also always had a "contingent" component, on the grounds that it was impossible to know in advance what the value of a service would turn out to be. What is interesting in the NYT article, is the possibility of estimating the value to the client, in advance. For lawyers in litigation, it's never possible to know this in advance. But an accountant, who is not facing an adversary and a jury, but a Tax Code, can figure out the value of the service to the client in advance. As it turns out, though, estimating this is not easy -- due again to the tax Code, I'm sure.
So, for me, I assume that the value to the client enters into the price one way or another. But the interesting question for information products or services, is the degree to which the service provider and/or client can estimate in advance what the information's value to the client will turn out to be.
My colleague Daphne Raban and I have research in progress that explores how question-answering services are priced. In the particular setting we studied, the questioners would set ("offer", in finance terms) the price in advance. We found that we could characterize the price that was going to be offered, based on the type of question that they were asking, under a coarse question typology.
One more thought. The idea that the accountant can only figure out its value to the client after doing the work. This is fascinating. It's like an "experience good" on the production side! heh heh
