Pricing consulting services is one of the most challenging task a consulting firm owner face. Would you agree?
Do you price by the hour, package, based on value?
This episode will break down the pricing position, formula, and structure for consulting firms.
As a CFO, I am often asked how consulting firms price their services to cover their cost and generate a profit. When a client begins working with us, we first examine and improve their pricing structure.
Why is pricing so important? It is one of the top methods to ensure that you say yes to profits in business. The truth is, if your services are not priced for profit, you will FOREVER experience cash flow challenges.
So let's get into it how to price your consulting services like a genius.
To determine your prices, you first must identify how you would like to position your firm.
There are two primary ways to position your firm.
- Low Volume – meaning you desire to have a low volume of clients; therefore, you charge a high rate for your services.
- High Volume – meaning you have a large number of clients, and your services are priced at a low amount.
Once you have determined your pricing position, you can then use the pricing formula below to discover an ideal service/product cost.
Once you have the formula, you must then determine the pricing structure you will use.
I have broken down the five pricing structures below:
Hourly – Your services will be based on the hours it takes to complete the service. There is a ceiling cap with hourly billing where you can only work a certain amount of hours. Your clients may also hesitate to contact you because they know that they are on the clock.
Daily – With daily billing, you are taking your hourly rate and multiplying it by the number of hours you will work on the project for a set number of days. Again because there are only a certain amount of hours and a certain number of days per month, the daily billing will also reach the money earning ceiling.
Project – is when you determine the total amount you will charge for that project and break the payments down over time. With project billing, you can receive a large amount of money upfront or at one time, which can be great as far as cash flow. The caution with project-based billing is that you, as the consultant, must be crystal clear with the client upfront on what services are included to avoid dealing with a scope creeper.
A scope creeper client is when they repeatedly add new tasks or services to your project, but you're not getting paid for it. With project base pricing, I HIGHLY recommend using "Change Orders" This is where you can immediately change a project based on new tasks or services and charge accordingly.
Retainer – Retainer pricing allows you to receive a certain amount of money pre-determine over a set period. With retainer billing, you will bill the client in advance for work completed in the future. The challenge with retainer pricing is that once the service stops, the retainer also stops. And all of the money stops as well. Now many believe that retainer pricing is an alternative to fixed pricing.
Value-Based/ROI Pricing – This is where you base your price on the estimated or perceived return that the client will receive. With Value/ROI pricing, you and the client must focus on the potential outcome.
I recommend that as a consultant, you are crystal clear on three levels of outcome a client can receive. Your pricing structure could be, for example, 30% of ROI with 5% paid upfront. If the estimated ROI is $50,000, then $2,500 is paid upfront, and $47,500 is paid once the project concludes.
Those are the five ways to price your services, the top two pricing positions, and the pricing for profit formula.
Please understand that there is no right or wrong way to price your consulting services. Most consultants we work with use the retainer method.
Drop me a comment and let me know which pricing structure do you use in your consulting firm?
If you need a virtual CFO to help you price for profit, so that you have more cash and profits in your firm, schedule a Discovery Session below.