Pricing consulting services can be confusing. You know you can create profitable change in a client’s business and secure huge wins for them. How do you put a price on that? At the same time, your rates also have to appear reasonable to seal the deal.
It’s a balancing act, and the solution may be finding the right pricing model.
This post will dive into three common consulting pricing models – fixed price, hourly and value-based pricing. We’ll explore the pros, cons and how to implement each model. We’ll even cover the best way to change your existing model.
What Is Hourly Pricing?
Hourly pricing does what it says on the tin. You set an hourly rate for your services and bill the client for your time.
Consultants often start with hourly rates. It’s good practice, in the beginning, to understand how long the average project takes you.
How to Implement Hourly Pricing
This section will likely apply to newer consultants – feel free to skip ahead if you’re already well-versed in hourly pricing. 😉
Step 1: Calculate Your Full-Time Salary
If a client worked full-time in your role, how much would you expect to make?
Alternatively, write down what you’d like to be earning. If you’re just starting out, be careful of aiming too high – you run the risk of scaring off potential clients.
Step 2: Convert Salary To An Hourly Rate
There are plenty of salary-to-hourly calculators online that will help you do this.
Keep in mind that you’ll want to calculate your hourly rate on the number of billable hours you have available in your schedule. If you use an hour per day for upskilling, you’ll only have 7 to bill. Another hour spent looking for new clients is minus one more. Keep this in mind when calculating your rate, and you’ll be fine.
Once you have your hourly rate, it’s time to close clients and start billing. 😁
Pros & Cons Of Hourly Pricing
- Setting hourly consulting fees encourages diligent time-tracking. This is excellent for figuring out how long each individual task takes you.
- If a project ends up running longer, you still get compensated for your time – which is often not the case with other pricing models (if you’re not meticulous in setting up the scope of the project and defining what constitutes additional work).
- Clients are often wary of the variable nature of hourly rates. You may book fewer clients because they’re afraid an hourly approach will take them over budget. (It often will!)
- Hourly pricing isn’t great for your budgeting, either. For example, clients can stop a project halfway through. Hence, you can’t accurately predict the final amount you’ll receive from the contract. Not ideal when it comes to cash flow!
What Is Fixed Price Billing?
Fixed-price billing is when you create a set price for the specific project you’re working on. Hourly limits go by the wayside, and you offer a single price for the entirety of the contract, project or task.
Retainer amounts are a good example of fixed-price billing, where you’re available to the client for a monthly fee to complete specific tasks agreed upon in your contract.
How To Implement Fixed Price Billing
Fixed-price contracts still have some connection to time. That said, if you pride yourself on high efficiency and get more done in less time, this could be your go-to pricing model.
Step 1: Be Meticulous In Setting The Scope
Firstly, find and suggest actionable tasks to help your client reach their goal. Based on this, work with the client to build out a proper scope. Make sure to specify that anything beyond the initial scope will be billed for separately, to ensure you get fair compensation for your work.
Step 2: Work Out The Time Required For Each Task
Looking at the project as a whole is a recipe for failure. That’s how consultants end up undercharging for their services. Consider each line item separately.
How much time would it take to complete each task? What is the complexity of each line on the scope?
Price each item appropriately and according to the scope. Be as detailed as possible.
Step 3: Calculate An Uplift
When we consider the amount of time a task may take, we almost always underestimate – to some degree (even the experienced among us).
To counteract this, you can add an uplift in price to cover the extra hours you may need.
The actual amount will depend primarily on you – times the price by 1.25-2. Play around and see what you’re most comfortable with.
Step 4: Use Bracketing For Pre-Defined Projects
Bracketing is when you have three separate packages that you offer a client at different pricing tiers.
The cheapest package can include the basics of your standard service. It’s the basic cheeseburger.
The middle package is slightly higher with more inclusions – the regular meal.
Your most expensive consulting package is the deluxe experience. Lobster, anyone?
Most clients will naturally gravitate towards the middle package because it looks like a good deal (when sandwiched between the other two). It’s also good practice to add some form of fanfare to the middle option. For example, many firms add a tag of some form to draw attention – like “most popular,” “best value,” etc.
Pros & Cons Of Fixed Price Billing
- Clients have budgets – and when your fixed price quote does fit in their budget, they love this pricing model. They can hire you with confidence that their budget will remain in tact.
- Fixed-price billing is better for your bottom line. You know exactly how much you’ll make from the project before it commences. And if there are additions to the scope, you’ll make even more. 😜
- Everything takes longer than you think it will. Even calculating the uplift is tricky to do. At least with hourly billing, you are always compensated for your extra time.
- Fixed-price billing is ripe for undercharging. Because you’re only factoring in the time per task, you’re missing out on the real value which is the results.
What Is Value-Based Pricing?
Finally, we have value-based pricing. This is the most complex pricing structure covered in this article. Instead of calculating the amount of time it takes to complete the job, you focus on the value of transformative results for your clients.
This can often be the most lucrative pricing model, but it’s also locked behind at least a few years of sound experience.
How To Implement Value-Based Pricing
This is a tough one. It requires sound knowledge of your client’s businesses and just how much value they stand to gain. If you want to make more money, it’s essential to learn to apply this model.
Step 1: Identify The Pain Points For Your Client
Your client is coming to you because they’re in a bind of some sort. Maybe they’re struggling to get their processes running efficiently. It could be that they need a better handle on safety incident reporting – perhaps they need to rid their business of paper.
Whatever the issue is, they’ve reached out or responded to you because they’re unable to fix the problem on their own.
Depending on the issue at hand, they’re now facing several possible situations (all bad).
Potential lawsuits or fines without proper safety procedures is a risk. Lost tenders, even. Maybe they’re running below production targets consistently. They could even be hamstrung by old thinking in a pandemic-influenced world.
Write your individual client’s pain points down.
Step 2: Find Your “Golden Number”
Take those pain points and connect them to a value. There are two great ways to do this.
- The value of business the company has lost because of the issue you’ve been tasked to solve?
- If there isn’t a clear loss of clientele, how much new business does the company aim to gain? What is your actionable target for the project?
Since implementation consultants cover such a wide range of potential projects, these points are by no means comprehensive. For example, in safety, how many lawsuits may be avoided? How much will Workmen’s Compensation possibly cost a client?
Going deeper, how do you even begin to put a price on a human life? While saving lives is invaluable, it’s all about the client’s perception of what value they stand to gain (or lose if unaddressed). That’s your golden number.
Step 3: The ROI Formula
Let’s say the golden number is $100,000 – the expected return on investment (ROI) for your client. Now determine what percentage of the ROI the client is willing to invest to get at this value.
Experiment with rates. Let’s imagine using a bracketed system that looks something like this:
5% = $5000 for your base proposal
10% = $10,000 for your core proposal
20% = $20,000 for your premium proposal
Alternatively, you could set an unchanging figure – for example, 25%, period.
That way, whether your client stands to make $100k or $20k off your efforts, you’ll be fairly compensated across the board, making $25k or $5k, respectively.
Pros & Cons of Value-Based Pricing
- You can charge higher rates if you have a value-based approach. The client can see the real tangible value of what you do and are more willing to pay it.
- The amount of time you work doesn’t really matter when you can create transformative results for your clients. Moving away from time-for-pay approaches help you make that mindset shift.
- Not all clients will appreciate this approach – it’s most suitable to serious business and probably won’t apply to many small businesses.
- It’s not an exact science! Hourly rates are easy to set up and quantify. So is the fixed pricing method. Value-based pricing is far more subjective and the quest to find that “golden number” is a lot of work on its own.
How to Change Consulting Pricing Models When You Have Consistent Clients
Setting your prices as a new consultant is straightforward.
What if you have an established consultancy service with regular clients?
Can you change the way you charge? Yes, but carefully. Here are some golden rules:
- If a client has booked you on an hourly rate, it’s best to not renegotiate pricing within the duration of the scope. Finish the work as promised and you can introduce a new format of pricing on the next project.
- You want to introduce a change in the pricing model as a benefit to the client. For example: “I’ve decided to change my pricing structure to a more budget-friendly, fixed-pricemodel. This means we can agree on a fee from the beginning, and I can tailor my services to your exact needs.”
- Clients are less bothered by incremental price increases or structure changes than you might think. The clients who would push back at your evolution are not your ideal clients anyway, right? As long as you give your clients enough notice, you’re within your rights to change your fees at regular intervals (once or twice per year – don’t go overboard).
- Remember, you don’t have to use the same pricing model across all clients and all projects. You can tailor your pricing to the client you’re working with and the scope of the project (the magic of value-based thinking).
The Final Verdict: Which Consulting Service Pricing Model Is Best?
Plot twist: it’s entirely up to you!
Consulting fees are specific to the niche you’re in, the clientele you serve and the competition within your field. Perhaps the industry standard for your market is the hourly pricing model. In this case, make sure it covers your expenses and time adequately, and you’re good to go.
If you want a more stable income and trusted expert consulting brand, fixed-price billing combined with value-based thinking works wonders. The shift to prioritising your client’s pain points equals better results for them and better compensation for you.
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