The Four Components Of Pricing for Consulting Firms

Octavia Conner

By Octavia Conner

Tags: All, Cash Flow, Maximize Profits

Pricing can be one of the most challenging tasks as a consulting firm owner. If you set your prices too high, you can miss out on sales. If you set your prices too low, you miss out on revenue, resulting in negative cash flow and profits.

 

In today's episode, I will break down the four components of price, which will enable you to increase profitability and scalability.

 

 

 

 

There are dozens of pricing strategies that a consulting firm can implement. As a matter of fact, I have several pricing videos on my YouTube channel.

 

In this episode, I will provide you the four components of pricing so that you have more money and more profits consistently.

 

 

What you must understand is that pricing is the #1 way to say yes to profits in your firm. When you price for profits WITHOUT increasing your cost, you automatically add more money to your button line. And when your services are pricing correctly, it positions you to eliminate money worries. 

 

Therefore, let's break down the components of pricing:

 

Labor Cost  
Who do you need on your team or project? What is their hourly rate, and how many hours will it take for them to complete the project The cost of labor is the sum of all wages paid to employees or contractors and the cost of employee benefits and payroll taxes paid by you as their employer. The cost of labor includes two factors: direct and indirect (overhead) costs.


Direct Cost 
I call it OFP. OFP is the out-of-pocket cost you will incur to provide that service or product to your client. Keynote: The amount you pay in out-of-pocket cost is NOT the exact amount you will charge your client. You should ALWAYS include a mark-up percentage when billing your client for OFP. For example, if you offer website hosting and you $200 annual, your client should pay you $400 yearly or $34 monthly. 


Operating Percentage
Whether you have one client and one thousand clients, you will have operating costs. How do you expect to cover your operating expenses if you are not including these costs in your pricing? Operating costs include rent, telephone, accountant(hello), utilities (if you have a brick & motor), salaries, etc. When pricing your services or profitability and scalability, you want to add at least 10% towards operating cost.


Profit Margin Percentage
How do you expect to generate a profit if you are not clear on your desired profit margin? Now I believe in KISC – Keep It Simple Cutey. So let's say you desire 20% in Net Profit. When developing your pricing, you will add a 20% profit margin to your pricing formula.  Let me know in the comments how much of the revenue your company earns would you like to see remaining in the business.

 

Now that you have the four components of pricing, the next step is to add them together. 

 

The great thing about this simple but highly profitable pricing formula is that the profit margin % will also be the exact amount you save per client payment in your business savings account. 

 

If you have questions or comments about the four components, leave those below.

 

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