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Pricing Consulting Services

post # 538 — April 28, 2008 — a Client Relations post

Raintoday.com has just released a new study Fees and Pricing Benchmark Report: Consulting Industry 2008. 645 respondents in the consulting industry completed the survey. Among the findings:

Firms that are well-known in their target markets receive higher fees, see their revenue grow, and earn higher profits than their lesser-known counterparts. Brand leaders were more likely to price their services at a higher level than their competitors in the market (42% of brand leaders were premium-price vs. 28% of lesser-known firms). And, they were more likely to actually get higher fees by up to 35%.

While most consulting firms (and consultants to consulting firms) criticize the use of discounting, 65% of consulting firms report that they do indeed discount their fees. Even the most profitable firms discount – 49% of firms, with 25% or more firm profit, report that they discount. The average discount level: 11.7%.

When it comes to premium-price firms and what sets them apart, it is not their size, the amount of repeat business they are able to get, or the region of the country in which they are located. As a matter of fact, none of these had an effect on a firm’s ability to charge premium fees. The factors that matter most to premium price firms are how valuable their work will be to the client upon completion, and whether or not the firm can deliver superior results versus the other providers – 36% find this “extremely important”

Verbatim Comments From Respondents:

Pricing Strategies:

“We do not compete on price. Ever. If we can’t compete on value, ability, talent, and, frankly, if we can’t create a better value proposition for the client, we don’t want their business anyway.”

“We are aware of the potential need to reduce cost to gain access but also believe that the selling process should effectively focus on value and reference capability to deliver.”

Introductory Service Pricing:

“We’ve found that the first project creates pricing expectations for future projects, and that the work is valued more when it is priced at full rate.”

“The introductory pricing strategy is not necessarily a lower price, but a smaller or pilot project which makes it easier for the client to accept without prior experience with our work.”

Why Do Use Value-Based Pricing? Respondents Say:

“Our work, approach and value delivered are unique enough that value-based pricing is the ONLY way in which we are compensated fairly. A time-based approach simply makes no sense for us – one intervention/coaching session often causes a change in direction that’s worth millions of dollars to the client–how many hours of our billing would that be worth?”

“Part of our approach is to address the business’s issues and value of any potential solution to the bottom line of the business or business unit. Our pricing is provided in relation to the benefit. We also use this approach to minimize work in low value areas of the business/org.”

“Provides income far beyond hourly billing availability.”

Standard and Realized Fees:

“Our pricing model almost always ensures that the standard hourly rates are realized, hence the zero difference in the numbers above. Sometimes we will cash in a little more on the senior levels, and provide juniors cheaper, but on average we end on the standard rates (which are not public).”

“Difference between published and realized rates is due to discounting to get the business and/or project taking more hours than estimated to complete. Often this is due to client being unable to supply content or time when needed.”

“I do not even keep track of time, nor is time a factor in establishing value to the client. I simply don’t think this way. Managing capacity is about being extremely effective, not about focusing on time.”

Service Guarantees:

“It is a great source of competitive advantage. We offer to solve a specific business problem with a specific technical solution at a specific time and price (price includes expense and travel). No excuses, just deliver. Using this philosophy, we are slowly taking work away from competitors who don’t know we exist. We are also charging 2 to 3x more for projects than competitors are bidding on an hourly basis.”

“We find that our consultants rise to the expectations, so the service guarantee has not cost us much but has led to a higher level of personal dedication to meeting client expectations.”


jeremy knott said:

The link to Fees and Pricing Benchmark Report: Consulting Industry 2008 doesn’t work!

posted on April 28, 2008

Ed Kless said:

This report provides all the evidence one needs to see why hourly billing is doomed to the ash heap of history.

The Almighty Billable Hour is dead!

posted on April 28, 2008

David (Maister) said:

Here’s a functioning link.

posted on April 28, 2008

Beyond Niche Marketing said:

Another take away is the goal of “becoming well known” is no longer an exercise in ego, but rather an investment in the bottom line.

If this marks the end of the billable hour, it marks the beginning of the art of self promotion!

posted on April 28, 2008

Cary King said:

We certainly keep track of time, internally, to better understand our profitability for each client and to improve our estimating.

We much prefer to work in guaranteed, fixed-price contracts based on value – to us and to the client. If the work is interesting and a little “leading edge” we are eager to give our clients a price break because it is more fun for us.

We are finding, however, that the Procurement department policies of many companies are simply not set up to handle anything but time-and-materials.

posted on April 30, 2008

Ed Kless said:

Cary, since when does the customer get to set the pricing policies of the vendor? If they buy a car for the organization will they ask for the timesheets from the manufacturer.

If they have a leaky faucet will they insist that the plumber bill by the hour. (Note: most are not.)

I have found that a conversation with the economic buyer about value will, in almost all cases, allow the professional to bill however he or she wants. For those cases where this conversation still does not allow the buyer to overrule the purchasing department, I would not walk, but rather run away.

posted on April 30, 2008

Will Swayne said:

It depends on the industry to some extent, but value-based pricing is the way to go in my opinion.

As soon as you start talking hourly rates, you begin to become commoditized AND you put a ceiling on your income, regardless of the value you deliver.

The formula should be “deliver massive value and bill accordingly”.

I also believe that the strength of your METRICS will determine your ability to set prices. The weaker your metrics, the more likely you are to be squeezed into a price-taking position.

Lastly, you have to know your value and stick to your guns. Any client who tries to nickel-and-dime you in the first exploratory meeting should be told to look elsewhere, because chances are isn’t going to get any better if you engage them as a client.

posted on May 21, 2008