You, the consultant, want to earn more money in your consulting practice.
You might be familiar with the principles of value-based pricing — but for whatever reason, you’re not applying the principles in your business.
Here’s the truth — you could be earning far more by implementing value-based pricing.
If you’re not charging based on value and the ROI you are delivering, chances are that you’re severely undercharging.
What’s holding you back?
“It won’t work for my business.”
“I don’t know how to do it.”
“I’m not sure I can deliver on the value.”
Many consultants are interested in value-based pricing, but they don’t know how to use it in their business.
(Most popular fee structures for consultants — data from our 2018 consulting fees study)
And if you don’t think it will work for your business, then there’s a good chance you don’t understand it well enough.
By the end of this article, you’ll understand what value-based pricing is, how expert consultants use it to determine their fees, and know how to implement a value-based pricing and fee strategy in your consulting business.
And by doing so, you’ll be able to charge (and earn) far more — all while creating more value for your clients.
- What Is Value-Based Pricing
- 10 Expert Fee Strategies
- Value-Based Pricing FAQ & Examples
- Learn To Implement a Value-Based Pricing Strategy
- Action Step
What is Value-Based Pricing?
Value-based pricing is a pricing strategy where the price you charge is determined by the value you create.
How is this different from other pricing strategies?
With an hourly fee, you charge by the hour.
You might charge $250/hour. Or, you might set your daily rate to $1500. It’s based on your time spent.
With a fixed fee, you charge by the project.
You might charge $50,000 for an 8-week engagement. It’s based on the project and is most often calculated by the number of hours and days the consulting project will require.
With value-based pricing, you charge based on the value and ROI you create for your client as a result of the project.
You might identify through deep conversation with a buyer that $1.5M in value will be created for them by solving the problem they are facing. Your value-based fee for that, you decide, is $300,000.
“OK, I get that…but how do you get to that $1.5M number? And how do you get the client to agree that $300,000 is fair compensation?”
How Value Based-Pricing Works
During your consulting value conversation, you ask the buyer a series of deep and meaningful consulting questions. Through these questions, your buyer shares with you that the value for their company as a result of solving the problem at hand will result in a gain of $1.5M over the next 12 to 18 months.
They agree that $1.5M is a conservative number. It’s based on their current production numbers, employee turnover rate, sales numbers (the list of examples keeps going).
The key here is that you’re not telling the buyer what that number is — you’re asking them questions so THEY are telling you what the value is and they agree to it.
Once the value has been established you’re able to communicate how the investment, your value-based price and fee, is a significant ROI for the buyer and their company.
Your fee is determined by the value you create ($1.5M) and what the buyer sees as a fair ROI . Where else can they achieve a 5X return on their investment?
A simple question to your buyer: “Would a 5X ROI be an acceptable yield for you?”
And if you encounter hesitation, ask: “Where else are you getting a 5X ROI in the company currently?”
The answer is likely to be nowhere!
You see, your compensation and fee are based on the value you create — not on the amount of time you spend on the project.
Of course, you want to consider how much time the project will take to ensure that the project will be profitable for you.
This is the essence of value-based pricing.
It is a pricing strategy favored by top-earning consultants — because it allows you to earn based on value instead of time or deliverables.
Not only is it profitable for you, but it’s also the most ethical pricing strategy for your clients. It forces you to discover, quantify, and agree on the value you’re going to create for them.
So why doesn’t every consultant use value-based pricing?
Because it’s challenging.
It requires a good mixture of skills in sales, negotiation, pricing, math, communication — and good old fashioned practice.
Value-Based Pricing vs Cost-Based Pricing
With value-based pricing, you start with the customer’s needs.
The actual service comes last — only once you’ve discovered the value your client wants and your ability to deliver on it.
Once you discover the value you can create for your client, you can price based on value.
With cost-based pricing, you start with the product. You price the product based on how much it costs to produce.
Cost-based pricing is not nearly as flexible. Since your product’s price is based on how much it costs to produce (and not the value it creates), you must convince buyers that it’s worth the price.
Unlike value-based pricing, you cannot price the client with cost-based pricing.
Value-based pricing is a powerful pricing model for consultants because you’re working on custom projects for individual clients.
You can price each of your projects independently, based on the value it creates for your particular client.
10 Expert Consultant’s Thoughts on Value-Based Pricing & Fee Strategies
We asked 10 expert consultants for their advice on how consultants should structure their fees.
(Percentage of consultants who want to increase their fees — data from our 2018 consulting fees study)
The two questions we asked were:
1. “What is your best advice on how consultants and experts should structure their fees?”
2. “What do you wish you would have known about fees earlier on and what big mistakes do you see people make with their fees?”
The common pattern we noticed was that nearly all of them mentioned and referred to pricing based on value.
Here’s what they had to say…
Elliot’s advice for consultants on how to structure their fees:
“The number one thing is to avoid trading time for money. Focus on value and tie it to the desired outcome. You never want to be considered a cost, but rather should be viewed as an investment. I’ve found that taking a stakeholder role is also rewarding and exciting.”
What Elliot wishes he knew about fees — and the biggest mistakes consultants make with theirs:
“When I first started, I had no idea how to price. Therefore, selling my services was uncomfortable and difficult. Once I got clarity around my pricing and my model, selling my services became simple and enjoyable.”
Blair’s advice for consultants on how to structure their fees:
“The right answer is there’s no single right answer. Each client engagement should be viewed as a blank canvas with the freedom to structure the engagement how the consultant best sees fit, with an equally creative approach to the compensation plan. When you view your client engagements and their corresponding pricing schemes as a whole you should see many differences from engagement to engagement, with some high risk, high reward engagements and other lower risk/reward engagements. The mistake independent consultants tend to make is to quasi-productize their services and then get locked into a single pricing model. Of course, pricing based on value creation rather than inputs or outputs offers greater incentives to create value for the client and therefore greater reward for the consultant, but under the banner of value-based pricing there are innumerable ways to structure the compensation and each should be seen by the consultant as a unique and creative act. Don’t fall into the trap of thinking there is a single best way to price.”
What Blair wishes he knew about fees — and the biggest mistakes consultants make with theirs:
“I wish I had fully understood the win-win nature of value-based pricing. When you first consider pricing based on value creation you naively think it is simply a way to charge more, but the deeper truth is it forces you to structure your engagements to create value rather than deliver services. When done properly, everybody wins, and increased fees are simply a delightful consequence of putting your focus on the client and the question of how can you help create more value.”
Perry’s advice for consultants on how to structure their fees:
“The most important thing about fees is that 1/5 of the people will spend 4x the money. Then 1/5 of those people will spend 4x the money. So if you have 25 clients giving you $1,000, five of them will give you $4,000 and one will give you $16,000 which means if you’re only offering the $1,000 package you’re getting $25,000 but you’re leaving $32,000 on the table.”
What Perry wishes he knew about fees earlier on — and the biggest mistakes consultants make with theirs:
“Most people don’t know that the highest paying are usually the most courteous, respectful and pleasant. And the people that you have to sweet talk into doing the deal you have to keep sweet talking to keep them around. You pat yourself on the back convincing them but then you have to convince them over and over again. It’s not the game that any consultant should ever be trying to play.”
David’s advice for consultants on how to structure their fees:
“They should have sufficient IP to enable them to structure the deliverable as a package, which means that the time required to do the work has little correlation with the fee. In other words, package pricing can easily yield a pricing premium.”
What David wishes he knew about fees earlier on — and the biggest mistakes consultants make with theirs:
“Clients don’t take you seriously–and thus they don’t listen to you–unless you charge enough for them to notice. And when you set the price, it needs to be high enough to make you nervous that you won’t get it. Keep raising it until you’re nervous, and use round numbers, too ($20,000 and not $19,840).”
Dorie’s advice for consultants on how to structure their fees:
“When you’re first starting your business, it’s important to validate your concept by focusing on a limited number of offerings – typically higher priced consulting or coaching engagements. But over time, I recommend building up a range of products and services at different price points. That’s because some people may really want to work with you but only have a limited budget, and they can be a viable audience if you have (for instance) a book or low-priced online course. Meanwhile, others may have the funds to hire you for more significant engagements, but want to ‘try before they buy.’ Reading your $20 book or taking your $200 course enables them to feel confident enough in your abilities to pay you $10,000 or $50,000 for more intensive work.”
What she wishes she knew about fees earlier on — and the biggest mistakes consultants make with theirs:
“I underpriced my services because I didn’t have a good network of fellow practitioners that would have enabled me to understand going rates. Networking is extraordinarily important for many reasons, but fee-setting is one I didn’t realize until later.”
Anthony’s advice for consultants on how to structure their fees:
“Fees should be structured around the outcomes you are generating and their value to the client.”
What Anthony wishes he knew about fees earlier on — and the biggest mistakes consultants make with theirs:
“Hourly fees don’t tend to reflect the true value being created.”
Andrew’s advice for consultants on how to structure their fees:
“Focus on the result and not the time you spend. Avoid billing hourly – this always puts the client in the “time-spent” mindset as opposed to looking at their ROI.”
What Andrew wishes he knew about fees earlier on — and the biggest mistakes consultants make with theirs:
“Trying to be “competitive” by offering “competitive” rates. You don’t want to be perceived as a “consultant on sale”. You want to be perceived as best-in-class. Act and price accordingly.”
Ian’s advice for consultants on how to structure their fees:
“If you’re working on a large project where it’s possible to quantify the results a client will get then I’d always try to use value-based fees where the fee is calculated based on the projected value to the client (rather than being based on your time). I like to use a 10:1 ratio where the client is getting annualised benefits of at least 10x my fee.
For smaller projects and especially where it’s difficult to quantify the results I like to keep things simple and just use a fixed fee. The challenge, of course, is how high to set that fee and you’ve always got that worry about whether you’re setting it too low and losing revenue or too high and losing potential clients.
For me, the simplest approach ended up being to set my fee level at what seemed a reasonable rate at the time and where I was happy it was easily meeting the need to hit my income target. What I then did was let the market decide what the right level was by increasing my fee by 10-20% (to the nearest round number) after every 3-5 projects.
Using that method took all the agonising and worry out of it. I just kept mechanically increasing my fee for new clients regularly until I hit significant “resistance” – then I knew I’d hit the right level for the value I was adding.
(In practice, I never hit that level. I was still increasing my fees when I stopped doing one-off consulting work and moved to doing online programs instead).”
What Ian wishes he knew about fees earlier on — and the biggest mistakes consultants make with theirs:
“I see two big and contrasting errors with fees.
On the one hand I see hugely experienced and in-demand consultants undercharging because they just base their fees on a kind of “reasonable rate” when in fact they’re adding amazing value to clients who would be happy to pay a lot more.
And I also see new consultants trying to charge premium fees before they’ve built a reputation because the gurus tell them they should be charging premium fees. Early on, it’s more important to build references and a track record to allow you to charge premium fees later.”
John’s advice for consultants on how to structure their fees:
“Create retainers with set deliverables and then structure additional work in the same fashion.”
What John wishes he knew about fees earlier on — and the biggest mistakes consultants make with theirs:
“Charge what you’re worth but prove your worth.”
Advice for consultants on how to structure their fees:
“When clients sign on with me, they can choose to hire me on a retainer basis or for a stand-alone project. The retainer is better value for money, but sometimes the client needs proof that you are worth the investment, so I’m happy to provide that option as I know they will come back for more. I will recommend a stand-alone project if I know that the issue is concentrated in a particular area.
For most clients, I recommend they start with an SEO Audit. This can be delivered as a stand-alone project or as part of a retainer package. The SEO Audit is a thorough analysis of the client’s site. At the end of the Audit, I present them with a comprehensive list of all the problems I’ve uncovered along with specific recommendations on how to solve them. They can then choose to continue with me on a retainer or engage me to help them tackle specific projects.”
What he wishes he know about fees earlier on — and the biggest mistakes consultants make with theirs:
“I see a lot of consultants who don’t make enough on their fees alone and develop other products so they can generate additional passive income. This is fine, but as Greg Hickman argues, I think there is something to be said for simply charging what you know you’re worth, even it seems like a lot of money to potential clients. There will be sticker shock with this approach for sure. The key is only working with clients who understand the real value of your services and for whom you are a good fit. If someone approaches you and you know it’s not a good fit, pass on them. Otherwise, you’ll be in for a headache.
Consultants can pre-qualify their clients via their website. This is a trick I learned from Marcus Sheridan. Simply create a page called “Who we are NOT a good fit for” and list the types of clients or projects that your skills are unsuited to. People will be impressed by your honesty, and you’ll be wasting less of your time and your prospects’ time. And, the clients you do get will be more qualified and more open to paying what you’re really worth.”
Value-Based Pricing FAQ & Examples
Now, you’re excited about implementing value-based pricing in your consulting business.
But, like most consultants, you have questions or concerns regarding how it would work for your business.
Here are two of the most common concerns we hear from consultants interested in value-based pricing:
“I’m not sure how to approach it — or how to communicate the value”
If you don’t know how to approach it in your business, then chances are you aren’t comfortable having a conversation about value.
You can’t communicate the true value to the buyer if you haven’t had a deep and meaningful conversation about it with them. You must discuss the economic value of the project with the client during sales conversations.
I often hear consultants say…
“Michael, but my consulting work doesn’t increase sales, it’s not that easy for me to quantify value for my buyer.”
While it may not be as straightforward for some consultants, if you peel a few layers back on the onion you’ll find that almost every industry and consultant is involved in value creation.
The key is to keep asking questions and dig deeper to identify the true source of value.
It’s through this discussion that you communicate the value to your client.
The Value Conversation: A Framework You Can Use
When you’ve got a prospect interested in your service, what do you talk about?
Most importantly, what are you asking them?
Are you asking them the right questions?
One of my favorite questions to ask consulting clients is this:
“What is the value of this to you (your company)?”
You cannot price based on value unless you’ve determined and agreed upon the metrics for success.
The metrics for success must be quantified because your fee will be a percentage of this metric.
Will this help the company make an extra $5M, will they save tens-of-thousands of dollars each month, will they get a promotion, will they see less employee turnover (and because of that have lower hiring and training costs?)?
When you and the buyer understand what’s at stake and the value that will be created, you are able to position your offering and structure your proposal so that it aligns with the value you are delivering.
When you’re new to this approach it’s not always an easy conversation to have with your client. But it’s one you must have if you want to implement value-based pricing.
But remember this: with this value conversation, your intent is more important than the technique.
The fact that you’re talking with the client about the value they care most about and that you’ll deliver will come as a breath of fresh air to them.
Instead of talking about hours or inputs, you’re talking about what they will get out of this engagement.
Once you quantify and agree on the metrics of success, you now have the basis to set your value-based fee.
In most cases aiming for 5-6X ROI is a sweetspot. Some people recommend 3-10X.
(Average project engagement value for consultants — data from our 2018 consulting fees study)
Your success with value-based pricing is based on this conversation.
If you’re not having success with value-based pricing fees currently, analyze your current sales conversations.
What questions are you asking?
Are you quantifying what success means to them?
Are you asking about the acceptable level of yield and ROI for them?
That brings us to another common question and concern…
“I’m worried that I won’t be able to deliver the value.”
This is another major factor holding consultants back from implementing value-based pricing in their business.
It’s a good thing that you’re concerned about this. It shows that you’re concerned about actually providing value for your client.
First, to quote Peter Drucker:
“All profit is derived from risk.”
In any consulting engagement, you and your client are both taking on some financial risk.
The other day I was speaking with a new coaching client and he had this concern – could he really charge a value-based fee?
The conversation went like this:
“How many projects have you worked on in your career where you had a leadership role?” I asked.
“20 or 25 I’d say”
“And how many of those were successful?” I continued with my questions.
“All of them” he replied.
“If you select to work with a new client and they meet your criteria as an ideal client, what are the chances of them receiving a positive outcome and result?”
“They definitely would” he replied.
“Well then, it doesn’t look like you have to be worried about delivering value for your clients…”
Another reason consultants are worried about value-based pricing is that they won’t have the time or resources to invest what it would take to deliver that value.
Is that because you’re investing too much time and resources, and they aren’t investing enough?
This is a somewhat common scenario with fixed-price engagements — where “scope creep” kicks in.
The solution here is to offer pricing options.
Value-Based Pricing Options
With multiple pricing options, you give the client the choice on how much risk they are willing to take on with the project.
Your highest price option should provide the least amount of risk to them.
Let’s demonstrate this with an example.
You’re the principal of a branding consultancy, and you’re working with a client on a brand overhaul.
During your value conversation, you discover that getting the branding right would result in 20% increase in sales — worth $150K to your particular client.
(Notice how we’ve quantified the successful outcome of the project.)
You offer pricing options like this:
- Design themes research
- Competing design analysis
- Presentation of results
- Design themes research
- Competing design analysis
- Presentation of results
- 4 logo options
- 1 design theme applied to business card and print materials
- Design themes research
- Competing design analysis
- Presentation of results
- 4 logo options
- 1 design theme applied to business card and print materials
- Complete website redesign with new brand identity
- Application of new identity to 3 web ads and 3 print ads
As you can see, the more the client pays, the more value and certainty they get.
With your highest price options, you build more certainty and value into your offer. How you do so depends on your client, the solution, and the value you might create.
You’re giving your client the choice on how much risk they want to take on. Risk being how much they will do themselves vs. how much you will do for (or help) them.
The less risk they want to take on the more involved you will be. And the higher compensation you will command.
Value-Based Pricing Confidence
That said, you could be suffering from something far less technical than this — a lack of confidence.
Despite being a consultant and having created value for your clients before, thinking about value-pricing makes you hesitant.
If you’re suffering from a confidence issue, remember that for value-based pricing — the first sale has to be to yourself.
“If you can’t articulate your own value, you can’t very well suggest value-based fees. Look in the mirror, and practice on the toughest buyer of all. The first sale is to yourself.”
If you don’t believe in yourself, you can’t expect your clients to.
Your confidence will come with practice.
Commit yourself to your craft and focus on creating economic value.
Consistently practice the value conversation and your confidence will grow.
Focus on delivering real, tangible value for your clients — and you’ll do exactly that.
Learn to Implement a Value-Based Pricing Strategy In Your Consulting Business
When you first try value-based pricing, you will struggle.
Maybe you’ve been pricing hourly for the last few years.
Maybe you’re not sure how to implement it in your business with your specific offering.
Maybe you’re just uncomfortable talking about money — money you thought you’d never be able to charge a client with a straight face (but fees you should be charging).
We get it — we’ve been there ourselves. And the members of our coaching community have to.
In our coaching for consultants program, we teach consultants the nuances of value-based pricing — and to implement a strategy that works for your unique service and situation.
Whether you’re struggling to conceptualize how it would work with your consulting service, are stuck on the value conversation, or you want to develop the rock-solid pricing confidence of top-performing consultants — we can help.
That’s what our coaching program is designed for.
If you’re interested in coaching that will help you implement value-based pricing smoothly in your consulting business, we invite you to apply for the Clarity Coaching Program for Consultants.
You’ve read this article and the 10 actionable tips and strategies for pricing your fees.
If you want to price your services based on the value you create, start with the value conversation.
For your next consulting opportunity, have the value conversation with your prospective client.
Ask questions to determine and agree upon the value of success.
If you can do that, you’re well on your way to implementing value-based pricing in your business.
Which expert’s answer resonated with you the most? Why?
What has your experience been with value-based pricing?
Leave a comment and join the discussion in the comments below!