Why a 10% Drop in Consulting Fees Leaves You With 33% Less

Percentage-Drop-Consulting

Imagine offering a client a 10% discount to win the project only to find out you actually took a 33% hit. Ouch!

If you’re engaged in time based consulting work you may be surprised to learn that offering your buyer a modest discount can actually reduce your gross profit by a much greater margin.

I was reading Ori Weiner‘s book on Advanced Fee Negotiation the other day. And I found a great example that clearly illustrates how dangerous discounts can be.

This is an adapted summary of Ori’s explanation on page 26:

At first glance, this makes sense…

  • You’re a consultant that has just offering your client a 10% discount on your rate for the project.
  • You expect the project to be about 1000 hours at your rate of $500/hr.
  • If your costs on the project are $350, that leaves you with $150/hr profit (that’s a 30% gross margin).
  • Your total profit from this project would be $150,000.

Here comes the pain…

  • Your 10% discount would equal $50 off your regular rate.
  • That means your hourly rate drops to $450.
  • Your costs will remain the same ($350) unless you’ve negotiated otherwise (key point!).
  • That means your profit falls to $100/hr.
  • Your total profit is now down to $100,000 from $150,000.
  • That’s a decline of 33%, not the 10% you first bargained for!

Lessons and Considerations

  1. Be clear on why you’re offering a discount and if the discount makes sense.
  2. Understand that if you have an income goal and you’re offering discounts, you’ll have to work much more to reach it.
  3. If you’re going to offer discounts, consider adjusting your costs or making other arrangements so that your profit and margin don’t take such a beating.
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  • Jeff Griffiths, CMC

    Agree that discounts to “win the business” are (generally) a bad idea – but so is selling hours. There’s a sign I remember seeing once that went something like this: “buying consulting is a lot like buying oats… if you want nice, clean, fresh, high quality oats, you will have to pay a fair price. If, on the other hand, you can make do with oats that have already been through the horse… they come a little cheaper” .

    The point is, discounting hourly rates makes you a commodity, and as consultants that’s a great way to start circling the drain. We price projects at a flat fee, based on the value it generates for the client, and offer a discount for up front/advanced payment. This improves cash flow, with little risk.

    • http://www.consulting-business.com/ Michael Zipursky

      Jeff – thanks for the comment. Consultants should avoid charging hourly at every opportunity. I think Ori’s example here does provide a valuable lesson to those that haven’t transitioned out of using hourly fees yet.

      • anastacio

        I don’t do discounts and never work for hourly fees. I have never had a Client complain. On the contrary, I actually get more repeat business and recommendations. I do consulting for the Top 1000.

        • http://www.consulting-business.com/ Michael Zipursky

          Anastacio – what’s your area of focus? How do you help your clients?