Jul 182011
 

"Rational people" think at the margin...

It’s Monday, and that means I take another crack at an economic principle and apply it to software development and IT. (Here is a link to the series so far.)

This week we are on principle #3 which goes something like this:

Rational people think at the margin.

I am going to put aside questions about whether (or which) people are “rational”, or whether I would be qualified to make the assessment in the first place.

Instead, I want to focus on the “margin”. (Perhaps that makes me “rational”, after all.)

In this context, the “margin” relates to an economics principle called “Marginal Utility“.

A summary of the concept (for our purposes, anyway) is that people will value two otherwise equivalent items against each other based on their “marginal” (or incremental) differences, positive or negative.

So we might pay more for one car based on its gas mileage or on its performance characteristics, all other attributes being pretty much the same.

Fundamentally, the market of buyers and sellers converges on a certain price at which a commodity might be bought or sold.

As long as a surplus of buyers or a shortage of supply exists, prices may rise… and the converse also holds.

Designing for marginal utility

Now, if a company wants to sell its products at a premium, you may have heard that it needs to “differentiate” them in the market.

More specifically, the company needs to name, find or design a marginal utility for its offers… an incremental change that drives a disproportionate increase in assessments of value (price).

Don't quit your day job!

My business teacher, Toby, used an analogy like this (the following numbers are illustrative only, and may not be accurate):

  • A “good” college basketball player, scoring 26 points per game, has no chance of becoming a professional…
  • A “great” player, routinely scoring 30 points per game, might get drafted at a league minimum salary…

While…

  • The “elite” player who always scores 34+ points per game might get a starting salary ten times higher (not to mention endorsement deals and other additions to income)

Looking at it that way, you could say that the difference between getting into the pros and not is 2 baskets per game.

You could also say that the elite player gets 90% of their income from the extra 2 baskets they make every game.

Bringing the topic back to IT

Since I thought it would be good to set up what marginal utility is and offer an illustration, it seems to me that we can spend a couple of weeks on this subject. We can speak about designing marginal utility at the individual, team and organizational levels.

So while we have the notion of salaries fresh in our minds, let’s start with you and me, shall we?

First, let me make my intentions really clear: I accept that people say money isn’t everything. People don’t have to slave and toil to get paid more. There is nothing morally ‘right’ or ‘wrong’ about wanting higher pay or not.
Remember that the topic is marginal utility in the domains of software and IT. So I am just speaking of the topic about how much we get paid. That’s all – I have no judgments and am not making any recommendations – “I’m just sayin’.”

I have nothing particularly witty to write this time - this is a piggy bank on a pile of money.

In the basketball analogy, good players don’t become professionals. There is nothing wrong with them – they’re good… just not valued highly enough to get in at that level of competition.

In my career, most of the IT people I’ve met are good.

They get paid what the market bears for their roles, which our industry declares clearly and consistently in job descriptions from one company to the next.

A Java developer is a Java developer, and they make a certain amount of money. They make a little more as a consultant, generally speaking.

A “senior” Java developer wants to get paid more, but the standard for assessing what “senior” means is not well established.

And don’t get me started on what an “architect” really is in all its various derivations… except they also expect to get paid more, and have higher expectations to live up to.

The point is: as long as what defines your capabilities and accomplishments is the same as everyone else, the market sets your rate pretty clearly.

In this situation, your income fluctuates with the market, and you are a commodity, in a sense. A business may see you as replaceable, you may struggle to find your next role and you may feel trapped in roles, feeling underpaid and undervalued.

On the other hand, when you find those strengths that you bring to bear – those things that makes you incrementally more valuable than someone else in your role – that could be marginal utility (your “2 baskets more“) for which you compel other to pay a premium.

Just be careful in thinking that what you value about yourself is what they value, and that you deliver enough that they will feel your premium is worth it.

  5 Responses to “Does your IT salary depend on what makes you different?”

  1. […] week I wrote about the implications of this principle on the value of our work (and our salaries). As an illustration, I suggested the difference between the professional basketball player’s […]

  2. […] for our users that what they are looking at actually isn’t what they already know, that perhaps it has some marginal utility. We can spark curiosity and wonder, and we can engage them in new and different […]

  3. […] for our users that what they are looking at actually isn’t what they already know, that perhaps it has some marginal utility. We can spark curiosity and wonder, and we can engage them in new and different […]

  4. […] week I wrote about the implications of this principle on the value of our work (and our salaries). As an illustration, I suggested the difference between the professional basketball player’s […]

  5. […] you may not be as highly valued, I am not saying you will not be valued. In my earlier post, “Does your IT salary depend on what makes you different?” I related personal income to the value you produce in your career. We value team members in […]

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