Great question Larry:
I too had a journey bringing me to my current structure. In summary,now 100% of my business is value-based and payable at full fee (and that is 500%+ above my previous 'market' rate. The only discount is offered for paying in full, in advance ) Referrals abound at that rate and only between colleagues who, like me, guarantee results in writing. That's right.
Previously, for years (decades actually), I frequently checked my competition and kept within 20% of the upper 'market' level, frequently discounting below it to 'earn' the business. And even with stellar results for 30+ years, referrals were at the same base 'market' levels.
Then about 5 years ago, something that was nagging me for years, was resolved ... if I am unique in my offering, then so should my entire focus. I redefined my niche and the rest is history ;-)
Let me know how I can be of further service.
You posted this 4 months ago Larry. Give us an update. Did you get your business off the ground? Did any/all the answers provided help you? In what ways? I wish you continued success.
For me it always worked when I approached the problem from two angles.
The first one is the cost associated with the project I am dealing with. I am trying to figure out what that means for my company (people costs, material cost, etc). This comes to a certain value.
Then I go to the benefits of what my consultancy will bring or is expected to bring to that particullar customer. From that, according to the competition that I have, I charge between 1%-5% of the benefit.
I add a 20% margin for the company and a negotiation margin of 5%.
From this recepy, the customer may take out during negotiation a maximum of 8%, no matter who he is. More than that would affect my credibility.
That is it.
For me, this started with development of my business plan, and was an evolutionary process.
Given that my company’s product is business development consulting, price is not the differentiating factor (unless way overboard), but credibility and relevance is.
I began with learning what I thought I needed to earn, given my process and cost expectations, on average, for development of sales.
At the same time, I examined what my competition’s fee structure was, to obtain an orientation to what pricing the market would bear, and examined how my company’s Unique Value Propositions compared to those of my competition.
I also obtained sales training, including education in pricing considerations. In my case I made use of my local S.C.O.R.E. office to reduce the cost of my training and education.
Then, as I developed my business practice, I played with special offers, bundled purchase prices, and, perhaps most importantly, developed no- and low-cost resources (in my case, primarily in the form of information), to encourage affirmative responding by my prospects and further opportunity for relationship building with them.
This has been my approach, in a nutshell.
The S.C.O.R.E. training concerning product or service pricing uncovered multiple considerations that can be entertained and methods for calculating your conclusion, based upon your assumptions. I recommend taking one of these free workshops to see what you need to consider. What I shared with you here were the major take-ways of relevance to me in my situation.
How does this compare to the approach you are considering?
Larry, there are several factors which may determine fee structure. Sometimes you can bill a retainer fee, if it's an ongoing project. Then there are project fees which are more appropriate for a very defined scope of work. Similarly you can charge an hourly fee for time involved. You must consider competitive rates and your value based upon annual income. For instance, if you are offering what would cost someone via a salaried position $100K annually, you can look at that as about $8400/month.
How I determined my rates was actually a really simple calculation.
1) Assess the competitive market. How many teams were offering my services (or similar) and what are their rates?
2) Honestly assess my weaknesses or failures compared to my competition.
3) Assess my strengths likewise
4) Assess market appetite for these services
5) throw in the oven and bake for 1h
Basically, #5 is just weighing the factors against each other and coming up with a number. Steps 2 and 3 are ALWAYS the hardest for someone to do on their own. Ego, frustration, and pride get in the way a lot. Still, that's pretty much how I did it.
What a trying be a business consultant for... ? what is your back ground, education, references, what was you pay scale, who would be a client, what are they paying now for consulting?
There is still a great many people working on a per diem or other time based "menu" which I would contest is flawed and unethical.
In my Book "5 Golden Secrets to Running a Fee Based Consultancy " on Amazon ref B00AP8F75K I explain this and have reproduced this below.
Establishing a fee per project
Entering into a professional charging structure of fees to ensure that your client proposition can be worthwhile of your effort, beneficial to your business and provide a real value service to your client. It sounds easy to work out but in actual fact there is a lot that needs to be considered. I will show you the folly of hourly or daily fees and why you need to manage your costs.
One of the biggest understandings about charging fees has to be that they should never be your prime mover, and they should not be dictated to by your clients or the competition.
There is nothing to prevent you from providing set fees for specific transactions, a range of fees for work where you confirm the final charge so that the client has the confirmation before any action is taken, or even a retainer rate for ongoing access to your services; as long as it is clear to the client. A lot of people make this area very complex by introducing price at this point and then there is some kind of menu which only provides a basis for negotiation downwards.
Although this may sound simple, it can be very expensive for you if you;
Do not fully understand what is involved in the work;
Do not properly identify the scope of the work;
Get intimidated by the buyer into slashing your project fee; or
Not fully appreciating the elements of the work where your knowledge is limited and the costs involved of getting specialist help.
Initially what you need to do is to establish what the work is. Scope out the actual project. Never assume the client knows (or even understands) what they are asking for. As we shall show in the next part, there is a divide between want and need, and it is you job to build a (value) bridge between the two.
To do that work, how will we be recompensed? How will we create the fee that will make us acceptable to their budget or anticipated frame of costs? What if we charge them by the hour or day, that would be fair, and then if the job takes longer, they pay us more. Or if the scope creeps over other work, they have to pay us more as well.
From a fee based consultancy point of view, hourly or daily rates are actually immoral and can be unethical, not to mention extremely limiting in your business growth. That is why the best way to charge project fees is on a set budget.
For this to work, you have to reach a conceptual agreement which will mean we have confirmed;
Objectives: the precise business outcomes that are to be achieved
Metrics: the indicators that demonstrate the project progress and eventual delivery?
Real value: the actual and medium term impact on the client’s organisation of the agreed objectives?
Your value can be expressed as a return on investment based on the real value to the client over, say, a three or five year term. This can provide them with the opportunity to present it as a business case and also to justify their decision by having finite amounts agreed up-front.
The benefits to you are that the amounts are realistic; the amounts can vary proportionately between the different projects you get offered; you can increase the value as your skills and knowledge increase (i.e., you are more valuable) and you are not tied to specifically being on-site, full time and unable to do any other marketing or other work (pro-bono or paid).
Let me explain: If you consider that there are 365 days a year and your discretionary time (family time) is actually your wealth (reward for the work you do) then, if you charge on a daily basis, to actually increase your income you have to decrease your wealth!
If you take a partner/director in a practice, who may simplistically have 1,760 hours (220 days) to bill in a calendar year at £200 an hour, so their part of the turnover is £352,000 a year.
Assuming that there are 220 working days (after holidays both private and public as well as weekends etc.) a year and you use 30% of your time toward marketing, promotion, continuous professional development, study, pro bono or charity work, internal and external training and other non-direct revenue generating activities (sometimes more if you have staff). This leaves 154 days actual work to generate turnover for your business. Using the above "contribution" to profits as an example means that £352,000 turnover is not £200 per hour but actually over £285 per hour. Does this mean that you could be seriously undercharging or you are too expensive? Does it mean that you need to work longer, and if so, what flexibility is there except reducing the discretionary time?
Answer the following questions honestly;
Question: How do you grow your business?
Question: How do you increase your income in later years?
Question: How do you better your family’s lifestyle?
Hourly or daily rates are a legacy issue that has followed us since the very first lawyer charged per word on a contract, or an accountant charged for the amount of work on a client’s accounts. This limiting validation of time spent working has then extended to contractors and other consultants to the point that the whole system is based on this ridiculous charging structure. For the smaller business it is severely limiting and even counter-productive.
The folly of hourly rates is a fundamental flaw due to calculating your charges on time units that are based on these time limitations. No matter who you are, whether president or a floor cleaner, you are blessed with the same 24 hours every day. The key to success in life is what you do with these hours, each day, week, month and years over your lifetime. Success is easy – thinking is hard.
Now to take this further, lets assume that there is 25% of turnover left as profits or drawings for a Partner/Director then that is £88,000 before tax with no monies re-invested in the business for IT changes or other crystallising risks, which leads me onto the second point; costs.
Some companies have a good handle on their costs and risks, many do not. If you do not control your risks (and we don't mean just business risks here) and your costs increase, or you are hit with a large cost due to, i.e. new document management or back office system, high turnover of staff in a short period etc., you can find yourself in a negative situation and often very quickly. Without some form of Analysis and Risk Management practices you won’t realise what is going on, or why there isn’t enough money to go around. Without Analysis and Risk Management you will more than likely have to increase your fees and become non-competitive whilst losing your existing clients as the pressure is on to bring the money. If this happens in you may end up being forced to make decisions, i.e. unethical or immoral decisions, on the fees you charge. Ultimately you won't be earning less; you will lose your business because of poor strategy.
The rules are changing, the environment has changed and those professional advisers who don't take the time to understand what they have and where they are going, will most likely become statistical references. As Albert Einstein said; "The significant problems we have cannot be solved at the same level of thinking with which we created them."
There are answers. There are solutions. Those who look for the answers and provide the solutions will be leading the pack in the next few years. The rest will be following some way behind or get lost in their wake. Where do you want to be?
Working out fees on a project basis is dependant on you reaching a full, thorough and robust understanding on a collaborative basis with the buyer, the exact scope of that work. Some excellent work can be found written by Alan Weiss of Summit Consulting who can explain the conceptual selling operation exceptionally well, get his “Consulting Bible” work from Amazon.
A mentor of mine gave me the following advice which has served me well. Pick the highest rate (if you are charging by time) you have no problem justifying in you mind. Then add 20% to it. That extra, assuming you are a person of integrity, will keep you at the top of your game and beyond to really serve the client. Raise your rates as it becomes easy to speak your current rate and keep the 20% beyond comfort. Practice speaking your rate to yourself in the mirror.
BTW, I prefer to bill on value, often fixed price, rather than by the hour (which leads to a prospect's search for the lowest per hour rate rather than the best value). Sometimes I say, yes my per hour rate is higher because I generate more value per hour, and because of that, results take fewer hours both of my and your time.
Wow, a lot of people are ducking this question. The correct answer of course is "whatever the market will bear." The great thing about being a consultant like this is that you can test the market on each new engagement. I had a VP of business development reporting to me once who taught me that everything is a negotiation, and if your product is valued, putting an unreasonable price on the table will not end a conversation in and of itself. Rather, if your price is beyond what the customer can/expects to pay then they will counter.
That said, starting off without a track record, one approach you could take is to turn your last wage into a "per day" amount + what your old employer would have covered on FICA and put that out there. Next time add 20%. etc. until someone balks, or negotiates you down. While the work is sparse, any income is better than none. If/when you get so in demand that you have to pick and choose, your negotiating leverage goes up remarkably.
Ultimately your clients will determine your fee structure, but you do need to start somewhere. With the ability to shop around instantaneously for almost anything now, you need to be aware of what other consultants in your field of expertise charge. For instance, sites such as Freelancer, Elance, and oDesk allow clients to search for and receive bids from consultants and contractors from all over the world. Even larger companies are starting to use these sites.
I would recommend finding out what rates (both hourly and flat-fee) are typically charged in your field of expertise and then determine what additional value you can provide to clients (do you have a certain niche or so many years of relevant expertise, etc.). If you can position yourself with certain clients as someone that can provide additional value, then you can charge a premium above the going rate as long as you can convince the client that you do indeed bring additional value to the table.
In the end, because you are just starting out, it will be trial-and-error and you need to find your sweet spot where clients will be willing to pay for the expertise you can provide. I recommend being flexible and work with your clients on the best arrangement that suits both of your needs.
Key to pricing consulting is selling the value to the client. Rates vary by type of client and projects and work undertaken. I would suggest you have a ballpark number and range and before offering the number ask your client what his budget is for the service and what KPIs - key performance metrics can you provide.
Larry, very interesting question and great answers from everybody. I agree with most of comments posted here.
Here is what has worked for me in my first two years: if business owner approaches for a consultation/evaluation then I go with an hourly rate but if during the problem discovery interview there is a potential savings/cost reduction opportunity or profit margin increase then I go with a % of the benefits after customer experience results.
Most Customers go with option # 2 and they end up referring new business for me.
Keep it simple at the beginning and adjust accordingly as business grow.
First and foremost you have to have something to offer that is valuable - then determine what you honestly think it is worth. If you simply look around you for benchmarks, you get led down a path of worrying about what the market can afford, not what you are worth. This also brings serious questions into your own realm as to what you offer.
If you are offering nothing truly unique or in high demand, you should go less than market (to start). But sometimes, if you have unique, mind blowing propositions to offer, don't be afraid to apply a top-tier price - but then deliver accordingly! Why do you think people pay $60 for a haircut downtown, when the same thing is $16 at Supercuts? It's all about image, but unfortunately in consulting, all you have is image, so while you can and should aim high, you need to live up to your promises.
Once I established my consulting and software business by being competitive (not cheap), I made sure I overdelivered in terms of service, product, support, and quality. Once I was unmatched, I ramped up prices accordingly and didn't lose a single customer, but made sure I had a reputation and track record to prove my value, and kept improving all the time. Worked for me but took 7 years.
Remember that price is a signal to the market. If you charge too little your perceived value to a client will be diminished and that could lose you business, rather than win it. Clients know that if you pay a little, there is a danger you will get a little and they know what good people are worth.
The simplest way to determine your rate is to start from what you believe you are worth in terms of a salary, were you to be employed in a company doing what you do. Take £50,000 per year as an example. (Or just decide what you think you are worth, or you might be in a consultancy field where you can earn more because the market will bear a higher income.)
Then work out how many chargeable days per week you would be working for clients. Remember, you will need to set aside time during every week for business development and at least one day per week for general administration that you are not going to get paid for. I think the most you could work being paid a daily rate by a client would be three days, and actually I think two chargeable days per week is about normal for an established consultancy with a reasonable pipeline of work coming in. You'd be doing well (and working hard) if it were three.
At, say, two days per week and given that you might take, say, six weeks holiday per year (i.e. 46 working weeks), you would then be working and billing 48 x 2 i.e. 96 days per year. Call it 100 for round numbers. Therefore £50,000 salary divided by 100 is £500 per day.
Now, you may be able to get more per day from some clients or types of work and there may be some work you choose to take at a lower daily rate. That is your choice. It will affect your annual earnings and you can decide about that.
You should also factor in quiet times and seasonable demand fluctuations that may mean you don't have any chargeable work for several weeks a year (especially during the start up period), so flex your daily rate upwards to accommodate that. It's a bit of a black art but at least using the above formula, you have a good place to start.
Hope that helps.
Long gone are the days of tripling your last salary to work out the hourly rate for consultancy.
I would strongly suggest that you have to establish your own rate for our skills relative to the others operating in your area and geography
As an early practitioner, the onus is on you to prove your worth
Good luck, it is a fun and rewarding sector but feast and famine should be expected until you are established; proven and in demand
Depends a little on the scope of the engagement and the size and industry of the client. Also need to consider your reputation or track record. if you can leverage prior success than it reinforces your rate or comp. If not you may have to price below market to early stage clients. If the scope of the project includes a strategic / sales organization and coaching component (sales management), then you might want to consider a hourly rate for base cash compensation (or maybe fix a certain number of hours/ weeks to set up the structure and practices) similar to what it would cost the organization to staff the role internally. In this process you'll want to determine what your time is worth and price it accordingly? If the engagement also covers actual business development pursuit and sales conversion (execution) then you might also consider a sales commission that would provide extra incentive to drive strong results. This might be an opportunity for you to reduce the base in exchange for higher success fees. That said, I would be very hesitant to defer too much on success. A mix is always best for both parties. I would also be careful about giving away services for free. I would discount your rate but not give away anything for free.
If the client is a smaller company or start up, they will have less cash so, you'll want to consider trading off cash comp/base for higher commission/bonus upon reaching targeted thresholds. Equity might also be a consideration if there is no cash available you'll need to assess the likelihood for conversation within the competitive landscape.
Larry: I think the answer depends on the industry that you are trying to serve. While I agree with many of Mr. Pallotta's points, I respectfully disagree with others. I agree that BD consulting is not a scalable business if you try and work on an hourly rate. I also agree that you can't charge Big 4 prices (I used to charge $275 per hour when I worked as a Sr. Manager for KPMG in the early 1990's). If your objective is to be help a client grow through business development activities you should consider being paid a percentage of the deals you close. This is a very scalable model and can provide you with a lucrative living (it also eliminates the question of company size because any size company can pay you out of incremental dollars that you generate). You may also be able to negotiate a monthly retainer for your representation services (to normalize your cash flow) and then use this retainer as a "draw" against your future payments when the deals you are working on actually close. The percentage you can charge varies widely with the low end of the range being in the 10-15% of Gross and the higher end of the range being 50%+. You will need to be able to quantify the value of the deals that you work on to use this model. If for example you are working on media deals, it is very easy to identify the CPM value of an ad buy and the number of impressions or the RPM value of traffic to sections of a website, it is a lot harder to quantify the value of an ERP implementation on a business (unless you just take a percentage of a licensing fee).
I hope this adds an additional perspective to your thinking in this area.
1. what is your expertise
2.what problem can you solve
3.what metrics are you going to use
4. how fast can you fix a problem
This is a very tough business to get into as an individual. There are countless semi-retired, under-employed and College level educators that are using this as an avenue to additional income.
To get into this business I would suggest coming to agreement with a close friend or associate that is in a position to offer you an engagement. Make the price mutually beneficial. Use that as your springboard.
It is a commodity business where the buyer has more than likely been burnt more than once and is suspect of anyone they don't know personally.
Unless you have a stellar track record and publications to back it up, this will more than likely amount to either a stop gap strategy or supplemental income. If you have major universities around, especially with an entrepreneurial program, this is a very hard sell.