Guest Post: How Consultants Should Set Their Fees

Today’s guest post is by Greg Gentschev of Brekiri, and covers some key pointers on how consultants should charge for their fees. Greg spent the past 10 years in consulting, working in areas including growth strategy, competitive analysis, and benchmarking, before moving on to found Brekiri. He also writes extensively about research and business analysis topics at the Brekiri blog.

Setting and maintaining consulting fees can be quite complex for any business, and it can be especially difficult when pricing consulting services because there’s so little publicly-available information on going rates.

Even once you set the base price for your services, dealing with price negotiations and discounts is often uncomfortable. Here are a few things to keep in mind to make your pricing decisions, especially those around discounting, more effective.

Ask for the budget
Too many people write a proposal for a project without having any real idea how much the client has allocated for the work. What’s the solution? Ask. Of course, not everyone will tell you their budget since they don’t want to miss out on a lower price. But if you explain that you want to correctly match the scope of the work with the resources available, many clients will at least give you an indication of the range they expect. Take the number with a grain of salt, but even if they’re low-balling you, it’s best to go into the proposal discussion with more knowledge rather than less.

Trade off scope for price
Negotiating pricing is uncomfortable, and there’s a natural urge to want to win all the work you propose on. It’s tempting to just cave into any pressure the client gives you on pricing, but don’t do it. By cutting scope as you cut the price, you’ll accomplish a couple of things. First, clients who value the bigger scope will often pay for it. Second, your work will be more profitable on average. Finally, you reinforce clients’ perception of the value of your work rather than sliding into a “discount” positioning. Of course, you won’t always get either a higher price or a smaller scope, but make them work for it.

Be creative with pricing negotiations
More generally, force the client to trade something off for price concessions, even if it’s not scope. Offer to lower the price in return for delegating more work to their staff (potentially even getting a client member on your team, although this can be a double-edged sword). Or tell them that you can do the work at a discount with a later deliverable date because it allows you to use your time more efficiently. In general, try to make them sacrifice something for a substantial discount, because otherwise they’ll just negotiate on pricing because they can, not because they are truly price sensitive.

Make first-time discounts explicit
Clients often push for a discount on the first project, claiming that it should be worth it because you’ll get more work from them down the road. Putting aside the larger question of whether you should discount to get the first project (it may make sense), be sure to make the discount explicit. List your “official” price in the proposal and exactly how much you are taking off for the first project. Otherwise, clients will have more leverage to use that price as the going rate for future projects. I’ve had clients refer back to an initial proposal years later and ask to get a matching price on those projects. Give yourself some negotiating leverage by showing a higher list price.

Don’t leave money on the table
If you never lose a prospect due to pricing, or get comments about being a bit expensive, you’re probably leaving a lot of money on the table. Just a couple of percentage points difference in your average price can make a huge difference in profits, so don’t get into the habit of underselling.

Regulate demand with pricing
Most large consulting firms shoot for about 75% utilization (meaning the share of staff time billable to clients). The remaining time is made up of business development, vacation, intellectual capital development, and other internal work. Try applying this metric to your own work. If you spend 90% of your time on client work, you may want to raise prices slightly and do less work more profitably. Protect your ability to take time off, develop new clients, and create unique knowledge capital. On the other hand, you may need to find more opportunities to offer discounts if you’re not getting enough work. Try to offer these through different channels or with strings attached so that you’re not just selling your existing work at a lower price, but rather getting incremental clients.

Track your results
Keep a simple spreadsheet tracking your projects over time, categorizing them (e.g., new clients versus returning ones), and listing the standard and actual price paid for each one. Set a regular time period, perhaps every six months, to review pricing trends. This approach will help you make sure you consciously manage your pricing and avoid falling into bad habits without thinking about the effects.

Entire books have been written on pricing professional services, so these tips clearly just scratch the surface. What approaches have you found useful in pricing your work?

Check out our fully updated Consulting Success System! Learn More and Buy Now.
  • http://www.consulting-business.com Michael Zipursky

    Greg – very helpful post. Many consultants don’t have a system for setting their fees. If they follow your advice here they’ll ahead of many of their peers.

  • Harry

    When I was a Texas Instruments consultant I charged by the hour, 25.00, How? First I obtained a contract through John T. a personnel manager and submitted a proposal that analyzed all the current turnover problems at the Attleboro, Mass site of 5,000 employees. With John I worked up a classroom approach to tackle all the foremen in the plant and placed them in small classes. I taught them how to review an employees performance without getting them angry or upsent. I taught them how to get their employee work groups to punch in on time and how to recognize them.

  • Harry

    At another company that manufactured computer chips called TRX, I went further and obtained a credit card for every foreman in every department and he took his teams out for lunch on specific Fridays to resolve in house problems I had trained them to resolve with committment communications techniques. This obtained a lot of praise from governmental inspectors who had given TI large governmental defense contracts. One presentation led to four years of consulting work in house. I moved upward to the middle managers and then to the vice president' and his team at the Attleboro site. This was a lot of fun and I was given several awards for the renewed performance of all the site managers at all levels which improved production and that dropped to the bottom line along with the improved attendence and happier employees al round TI.

  • Pingback: How Should Consultants Set Their Fees?()

  • Ruchi

    I am starting my own consulting firm for small businesses in India and I am unsure on structuring the fes. I would appreciate if you could help me with it. I have over 3 years of experience. Kindly reply on mallik.ruchi@gmail.com

    Thanks,
    Ruchi Mallik

  • tssstein

    Business Consulting in Technological fields such as Mechanical and or HVAC-Refrigeration run from $600.00/hr. as of several years ago. I have heard of purely business work going for asmuch as $1,000.00/hr. and up. Usuually these quotes come in packages. Check for education levels such as MBA or Doctorate in Bussiness as guidance.

  • http://www.invoicefactoringuk.com/ john walter

    Pricing decisions for business is undeniably a painstaking work, good thing I discovered your article. I couldn’t have known this guide list without you. Thank you.