That game theoretical analysis is interesting, but it is only applicable to optimizing the pricing with one particular client. In practice, it's far more interesting to figure out how to optimize your interaction with the market as a whole.
If a good contractor is in a market where there are many clients who will pay a higher, more appropriate rate for certain work, why should that contractor absorb the risk of this technique? And that's even before considering the practical problems with doing spec work for a client without tying the requirements to cost. If you've ever done that with a real client, you probably know how painful it is.
Ultimately, part of your expertise as a professional is knowing how to put a value on your work. If you need to rely on laymen to do that, you probably need to take some time to learn about pricing. When you set a rate, you send a signal to the market about the value of your work. And, empirically, I've found that the quality of your client interaction is directly proportional to the value of your work. So: if you do good work, charge an appropriate rate, and only work with clients who are willing to pay for that quality. However you set your rate, you'll get the clients you deserve.
If you have no idea how to value your time, this method will improve your margins but it's far from optimal. Worse yet, it will increase your risk as well as the likelihood that you end up spinning your wheels with clients who have no respect for your time. That's no way to make a living.
I hear what you say, but my gut reaction is that there are clients who will pay a higher, more appropriate rate for certain work, but only if it's not demanded of them. My personal forays into the world of pricing, with informal A/B testing, is that customers will pay a higher rate if they suggest it, and not if I do.
YMMV, but your insistance on pricing "correctly" and not putting your livlihood at risk suggests to me that you are not getting the money you might, becuase you're not accepting the risks that make it possible.
As I say, I don't know your context, and your opinion adds a respectable cynicism to an otherwise exuberantly optimistic discussion, but my (limited) experience suggests it works.
I can respect your point of view entirely. And you may very well be right: I could be leaving money on the table by establishing a baseline risk above which I won't go.
That said, my cynicism is hard learned. I generally think the best of my fellow man, but I've been burned enough since striking out on my own to tend towards cynicism when it comes to client work.
For me, things have worked out best when I've set a fair price on my work, eschewed flat rates for time-based rates, and set hard boundaries on the client-contractor relationship.
There are better ways to create goodwill. Exceeding expectations or being a fun person to collaborate with, for example. And neither of those approaches put your livelihood in jeopardy by introducing unnecessary risk with a gimmick.
I'm starting to feel like the 37signals guys in this thread. There's something to be said for making a living by doing good work and charging a fair price for it.
Goodwill works when dealing with clients in small companies who have margin to offer goodwill.
Start dealing with a BigCorp and there is no goodwill to be had. In fact, this pricing mechanism may backfire because the person you are doing the work for isn't the person who signs off on the budget.
If a good contractor is in a market where there are many clients who will pay a higher, more appropriate rate for certain work, why should that contractor absorb the risk of this technique? And that's even before considering the practical problems with doing spec work for a client without tying the requirements to cost. If you've ever done that with a real client, you probably know how painful it is.
Ultimately, part of your expertise as a professional is knowing how to put a value on your work. If you need to rely on laymen to do that, you probably need to take some time to learn about pricing. When you set a rate, you send a signal to the market about the value of your work. And, empirically, I've found that the quality of your client interaction is directly proportional to the value of your work. So: if you do good work, charge an appropriate rate, and only work with clients who are willing to pay for that quality. However you set your rate, you'll get the clients you deserve.
If you have no idea how to value your time, this method will improve your margins but it's far from optimal. Worse yet, it will increase your risk as well as the likelihood that you end up spinning your wheels with clients who have no respect for your time. That's no way to make a living.