Episode 214: Using Layers to Build Your Consulting Price—with Deb Zahn
Deb Zahn: I want to welcome you to this week's episode of the Craft of Consulting Podcast. So, in this episode, I'm going to talk about something particular to pricing, and that is, regardless of the type of pricing model that you're using, what type of layer should you be including in however you build that price? And so I just did this great pricing training that went into the basics of pricing models and how you build your price. This gets down more of the nitty-gritty. And I will be perfectly honest, this is the type of thing that, typically, only my members in the Craft of Consulting membership get.
So, what I'm going to talk about today was actually part of a training I gave on how to develop a flat fee price or a fixed price. Also have done that for values-based pricing, where we go deep into the topics that actually allow you to build things from scratch. And so I went over the basic overview, gave some great information on this free training that I had on LinkedIn, but this is where I get down to the nitty-gritty.
And so one of the things I want to do before I get started is, if you are interested in getting more help to get more clients more easily, with more confidence, way less stress, then I do invite you to apply for my Craft of Consulting membership. So, basically, what you get when you're in there, is you get direct support to be able to get clients. So, if what's in between you getting clients is generally not knowing what to do, that's what we focus on.
If what's getting in your way is, "I have no idea how to price this," or, "I have no idea what I should put into this proposal," or "I'm headed into a tricky conversation around a potential engagement, how should I handle that?" That's the type of support that you get in the membership. You get it directly from me, but you also get it from the other members in there who have also been through a lot, seen a lot, and are there to help each other make sure that you get the clients you need at the clip that you want them. And also, just generally to support each other and have your own sharing section and not to feel so isolated.
So, if you haven't checked it out, I do encourage you, you can look on my website under membership or you can look in the show notes and take a look. If you think it's right for you, submit an application. If you're accepted, then you get the first 30 days for free because I want to make sure that it's a fit for you. So, in those 30 days, dive in, the people that do, the people that dive in and start to ask questions and participate in the trainings and participate in the group coaching calls and all of the good stuff that comes with the membership, tend to see results faster.
So, 30 days for free, you get to see if it's actually a fit for you. And if it's a fit, stick around. And if it's not fit, that's OK, I hope you got a lot out of it. So, I do want to encourage you to go check that out. And if you think you might be interested or you think it might be a good idea, go ahead and click Submit My Application, and I review those pretty quickly and you can see if you're improved. And if you're improved, you can enroll and you can get the good stuff cooking.
But as I said, I want to give you sort of a little flavor for some of what actually happens in the membership itself, particularly when we're talking about building prices. Now, as I said in the training, there's a variety of different pricing models that you can choose. There is value-based pricing, there is fixed price, there are retainers, there is hourly. But for each of those, there are what I consider these building elements that are absolutely critical in order to build a price that's going to make sure that you're actually getting paid for all of your value, and that it ultimately supports the life that you want to have. And so basically, I'm going to start kind of at the bottom what the floor is and then we're going to build up from there.
So, the first thing is, regardless of the pricing model, I want to know, if I'm pricing it as a consultant because I'm still a practicing consultant, so I have to do this, I want to know that I'm going to get paid for my level of effort. So, how much effort it's going to take to put me in. I want to make sure that's the floor of my pricing and we don't dip below it. And the tricky thing is, is that if you haven't been consulting a really long time or you're doing some work that you haven't done a lot of before, or if there's any sort of particular things about the client that might make the level of effort a little bit more and you just sort of blanket price it the way that you've always blanket priced, or you just come up with a price, you might actually end up making what's called an effective hourly rate.
So, an effective hourly rate is what you would be paid if you were paid hourly. So, you might be charging hourly, you might be charging in some different way, but basically, if you broke down the amount of time you put in it, you would know, "How much would I be paid if I was paid hourly?" And what you don't want to see, is that that is Burger King wages or essentially that that's below what you would've made if you actually charged hourly. You don't want to get into a situation where the amount of dollars seemed like a really nice thing, but ultimately, you underpriced yourself because you didn't think through the level of effort that actually went into doing this.
And so generally, what I like to see as a gut check, before I personally am building any of my prices, whether it's retainer, fixed value, whatever, is I actually want to break down what I think the work itself is going to be. And I say this and I recognize that this is a little bit different than some of the advice that's out there. Some of the advice that's out there, particularly as it relates to value-based pricing is, go in and if something is worth a million dollars to the client, you're going to take 10%, so you're going to make $100,000 and that's going to be great. And my point is, that could be great, but you need to make sure that you're actually making the amount of money that it takes for you to do the work.
So, if it takes you, Lord, with the equivalent of $30,000 or $40,000, if you were charging hourly and you made the margin on top of it because, "Hey, great, they thought it was valuable enough to pay that," well that's great, but if you've set a price and you're like, "OK, I'm going to charge them 10%, that's going to give me $100,000," but what actually ends up happening, is that you're putting 150,000, $125,000 worth of work into this. Well, now that's not so great.
So, that is why I always start with level of effort, and I always think through the details. I want to think through, what do I think is actually going to take to get the client the result and get them the deliverables that essentially I would owe them under this particular arrangement? And if I had a product, by the way, I would do the same thing. I would sort of break down what I think the cost would actually be as in addition to what my labor would be.
And so I truly break it down by tasks. I include a line for project management because there's always general project management that you have to do in any type of engagement. And so I include that. And then I go task by task and then I break it into sub-task. And by the way, this doesn't have to take a really long time. The first time I did, it took a long time because I'd never done it before. And I have done it many times since, so now I can do it pretty quickly and I'm pretty good at judging how much time it actually takes to do things.
So, for example, if I have, my first task is I'm going to be facilitating a leadership strategy session. I will actually break down requesting and reviewing documents, how long do I think that's going to take? Client strategy calls in prep before that session, how long do I think that's going to take? Developing the materials, reviewing them with them, how many rounds of revision do I think are going to have?
And by the way, some of these details are some of the guardrails that you're ultimately going to put into a contract, so it's really good to see them. I don't want them to think that they have six rounds of review of anything I produce, if in reality, how I price this was the assumption of two. So, I'm going to have to put that assumption in the contract because that's what matches the price. I want to think about meeting prep the session itself, is there a debrief afterwards, do I have to create a summary document? And it might take longer if they want a narrative than if they want a PowerPoint.
So, I think through all of those. And then usually, I tag on a couple ad hoc meetings, which tend to happen, particularly if you show up to review something with someone on a meeting and there's two people missing. Well, guess what? Their expectation is going to be that you're going to meet with them. I've now covered that because I thought through what the tasks are to actually do this.
And then I go to task two. So, let's say, part of what they want me to do is they want me to go out and interview stakeholders in their larger market and they want to find out more about their positioning and the perception of them. I then break down exactly all of the steps it would take to actually do that. And what that does is it tells me, "OK, I think for task one and task two," and I'm making this up, "I think it's going to take about 76 hours."
So, again, I want to make sure that whatever the price is, if I were charging hourly, what would essentially that be? And I know that I can't go below that now. I'm not going to stop there. That's why there's other layers that I'm going to be adding, but I at least want to know what the level of effort cost would be if I was doing this hourly.
And again, when you're new to consulting or consulting or there's a new piece of work you're doing, this is the type of stuff that you need to do until you get more familiar with, what does it really take to do the work that you actually are going to do? So, it may be, as you get further down the road, "Yeah, I've done that dozens of times, I'm seeing these things so I know I need to adjust it this way, and boom, I know the pricing model I want to pick and I know what this is going to be. But if you haven't done that before, don't guess. Really break down the task so you know truly what goes into actually making it happen. And if you do that, that's going to give you, as I said, the floor, but you're not going to stop there.
So, then, if I'm looking at pricing, I'm going to look at my next layer. And the term I use is not meant to be pejorative, but it's actually true, which is, I call it drama padding. And the reason I call it drama padding is because if I'm looking at what's going on inside the client environment, or it could be the external environment that I have to help them in, and if there's stuff going on, all right, if there's just a lot of moving parts and people don't agree, or these two folks tend to go at it all the time and I somehow have to get them to agreement, whatever that version of extra things that are going to be going on that are unique to this particular engagement, or it could be that they have so many different layers that actually have to approve this, that I know that it's going to take extra time just because of some things that I can't necessarily anticipate.
So, I might have, in my level of effort, said two rounds of revision. And then I get in there and I find out, "Oh no, corporate has to take a look at this and this person's out of town, so we have to do this." And there just might be some extra drama that I didn't anticipate. And generally, what I try and do when I'm in the discovery process, is I will ask questions that try and get them to reveal what's actually going on. So, I might say, if I'm talking to a CEO and the CEO wants something to happen, I might say, "What does the rest of your senior leadership think about this? What is your board's response to this been? Are your VPs and below on board with this?" So, I'm trying to find things out that would suggest to me that there might be a little extra drama that I have to account for when I'm doing this.
The other thing is just pay attention to what's going on in the room. So, I might be in a room and if I'm there with a couple or more senior leaders or whoever I'm meeting with, and in the room they do not agree with each other, or they're thinking about this in a completely different way, or they answer the questions in ways that contradict each other, I know that there's going to be a little extra drama that I'm going to have to deal with. And what I have to judge is, how much extra drama do I think that is? Because I need to account for that in my price.
What I don't want to do is when I'm in an engagement, suddenly stop because now the scope and the budget have been blown because I didn't anticipate these things and now I have to do a contract amendment or I'm going to eat some of the costs, which I would never eat the costs, I would do the amendment, but that's a little awkward. And because it's not like you want to go to the client and say, "It's because y'all got issues," even if “It's because y'all have issues,” or it's because we weren't able to get ahold of all these external stakeholders that you were certain were going to be able to get back to us and have conversations, whatever the drama happens to be.
So, what I tend to do, is I tend to look at this because it's not an exact science, and you aren't going to see everything and know everything when you're in a discovery process. So, you have to take some sort of best guesses in terms of what the right estimate is. And I like to just do it as a percentage. Because again, it's not an exact science. I can't be like, "OK, here's all the people. I think I'm going to have drama and I think I'll have this much from you and this much from you." You're not going to know that all at the beginning. You might know some, but you're not going to know all of it.
So, I typically will say, OK, if there's just a little bit, but there's a little bit, it's not extreme, but it's just a little bit, I might add 5% on top of what I'm doing. If I see a lot, it could go up to 15%, 20%, 25% because that's what it's going to take to get them the outcome. So, it isn't anything that is disrespectful to the client. In fact, it's very respectful because you're seeing them for what they are. You're understanding that to accomplish what they want to accomplish is going to take more than what we're sitting in the room and talking about, then it's worth adjusting it to make sure that they ultimately get what they need. So, the drama padding is the next piece. And all the rest of these, by the way, I essentially add percentage-wise.
The next, is I will think of what I call value layers. And so these will be additional things that I may add to the price. And again, depending what pricing model you choose, if you're doing hourly, you can add it to your hourly rate, if you're doing flat or you're doing value based, you can add it to that. But this is where I'm thinking of is there particular value that I'm providing that is something that they truly, truly need to be able to accomplish this?
So, for example, is there urgency? So, if they come to me and they say, "Look, we've decided to do this thing," and I know it typically takes two to three months to really pull that off and pull it off well, but they need it in three weeks, there's going to be an urgency fee. Because if I'm willing to basically make that happen, which probably means I'm not going to be eating well and sleep will be rare and less time with my family or things like that, and if I choose to do that, then that is a value that I'm providing them, is that I'm able to respond to their urgency. So, I will add a percentage associated with something like that.
It might be that there is something that I have knowledge of their sector or I have knowledge of them that is going to allow me to do this extraordinarily well, or they can't find anybody who's going to do it as well as I can, or it'd be hard to. Or because I know them really well, I'm going to be able to do this extraordinarily efficiently because I'm going to be able to build on all of my past knowledge of them. Then I am going to add a percentage to it because that's a value. That is definitely an extra value that they're getting from me that they can't get from anybody else or it would be hard to get from anybody else. And again, it's something that's valuable to them, so it's reasonable that that's something that they would pay for. So, that's another piece I would add.
And then the last is market adjustments. And it's really, really funny. Anytime I've said this, and particularly in the membership, what people often hear, as soon as I say market adjustments is, "Oh, that's lowering my price." And it is definitely not lowering your price. In fact, in many cases, it could be increasing your price. But this is where I want to have some knowledge of what the range of consultants in my market are charging for the types of things that I'm doing. So, if it's something where one of the things that I do as a consultant is I actually help different groups of leaders often from different organizations or even within the same organizations, I help them make decisions together. So, it's more than a facilitator, it's extra where they get strategy, they get decision support, they get other things. It's more on a level of a mix between a trusted advisor and a counselor, probably.
And so I want to know, who are the other people I think are doing this work? And in my market, what's the range that they're charging? And often, other consultants who are good people will tell you. If somebody were to ask me, "What are you charging?" I would tell them because I think it's better for everybody if we're just sort of transparent about what we do. Some other consultants will not do that or cannot do that, in which case, I'll ask other folks in the market, I'll ask anybody that I can get ahold of, that I know of has done similar type of work or even in the ballpark. And I'll say, "Curious, what's the going rate for that? What are consultants charging for that?"
And if you ask even a handful of people or maybe a little bit more generally, you'll get close enough that will help you figure out what that range is. So, if you know what the range is, for example, I do a lot of strategic planning and I know that there are people who strategic planning is their bread and butter, they have a single way that they do it, they don't typically stretch beyond that, and they tend to charge at the lower end of the continuum. And then you've got folks up through the continuum who do really customized stuff and have content and sector expertise, dot, dot, dot, that really makes them more valuable.
And if I know what that range is, which I do know what that range is, then I know what my position in the market is. So, I am definitely not at the low end. I would never want to be at the low end, I'm not in the middle. I am closer to the top. And that has been a deliberate decision that I made. That was a decision I made based on my knowledge and my expertise and the things that I know I'm able to help clients do. But it's also something that I've cultivated. So, I stay on top of what's happening in my market. I make sure that I am always increasing the value to my clients because I feel like I have to earn that position and not just like, "Oh, I'm going to pick it and then I don't have to worry about it again." I believe I have to earn that position. And so if I know sort of where I fall in that range, then I might make market adjustments to match what my position should be in that market.
And one thing I would tell everybody is if you know what the range is for the types of things you do in your market, put a line in the middle. And so this is where you're going to do sort of the non-average median, whatever, there's probably statistical people that would pick one. But I'd say, what's sort of the middle of that range and don't go below it. Because if you go below it, in many cases, what you're ultimately doing, is you're competing on price. And competing on price means that chances are you're going to be paid below your value.
And you can, by paying attention to giving excellent results to your clients and giving them an exceptional experience, you can earn your position above the middle of that range. And the higher you can go based on what really you can help them achieve, because they care, they're paying for results. Right? Then that's what your market position is, and that's where you're going to make market adjustments.
So, if I put all of that together, and I know my level of effort, I've added my little drama padding. And hopefully, it's not too high, but I've added it and I know there's a few value layers that I'm adding given the unique circumstance that I'm looking at, and then I look at my market and I want to make sure I'm placed where I should be placed, and so I might then increase it by 5% because that's perfectly reasonable.
One example that I've been thinking about is, some of the things that consultants do, and I certainly did a lot of this at the beginning, is there's federal grant opportunities and they will help clients write and craft what their response is. And it's not just grant writing, it's strategy work, and it's all kinds of other things. And if you've won a lot of them, which I have, then there's a value to that, that is worth folks paying an extra fee because they're going to get someone that has a winning track record.
But if you also look at the market, and this is where the market adjustment comes in, you want to have a pretty good sense of, what are people generally paying for people to help them with this? And you don't want to be below that range. And again, if you can really, really truly help people achieve the results and basically put something in that has a really high chance of getting awarded, then you want to make sure that your market position matches that. But you want to make sure that you're getting paid for the value pieces of it.
So, like I said, if you have particular knowledge that's really going to knock it out of the park, then that's worth charging for. Often when I've worked with folks on grants, it's not just capturing their ideas and putting on a piece of paper. Usually, I'm what they want to implement while we're actually doing the grant. Well, that that's worth something. That's the reason that those clients were smart enough not just to hire a grant writer. God bless grant writers, they do tremendous things in the world, but they needed somebody that could help them design it while writing it. That's the reason they were willing to pay more.
And so again, that's where all of these different adjustments to your price get made, so you make sure that you are definitely not getting paid below your level of effort, that you're making sure that if drama happens, then payment happens along with it, and you're making sure you're getting paid for the general value that you provide and the unique value that you provide. And then you want to make sure that your price matches what your market position is and what your market position should be. And if you take those things into consideration, then chances are you're going to land at a price that is going to make a lot more sense to the folks that you're going to say that price to, the folks that ultimately you want to work with.
And again, it applies to any type of pricing model. So, if I am building a retainer, then I do this exercise because I want to make sure that the amount of the retainer I'm doing actually makes sense. Now, sometimes I don't know exactly all of the things I'm going to be doing because part of why I have retainers with clients is they need a trusted advisor. But I can make some assumptions, and I can make some assumptions about value, and I can make some assumptions about drama, and I can make some assumptions about the market itself and where I should be.
So, it applies to retainers, it applies to flat fees, it applies to hourly, and it even applies to value-based pricing. As I said at the beginning, there's a lot of folks out there who are like, "No." Just find out what that number is to them that they think this is worth, and then you essentially charge that or what they hope to gain from this, and you charge a percentage of that. And that, as I said earlier, might be fine, but you're going to want to make sure that it's fine so that your effective hourly rate does not dip so low that you have to end up working more to get the income that you need. As you start consulting and pricing things over time, this is going to be a faster and faster task, but it's still a worthwhile task to do.
After, what, it's almost 13 years of consulting, I still do this. I still do this when I'm pricing something, even if it's work that I've done before, because I know that there's some things that might be different, there's some things that might change. And there might be different adjustments that I'm going to be making to that price based on the unique circumstances of what I'm doing, and this is how I earn a good living.
So, I wanted to share that with you. And again, as I said at the beginning, in my membership, we go deeper than what obviously I was going to do or could do in a free training. So, I have specific training on building the fixed price, there's a specific one on value-based pricing, there's a specific one that's coming up on retainers. I certainly talk about hourly and some of the advantages and disadvantages of that.
But the best part is, and I'm actually about to respond to someone after I get off this podcast, is someone can actually put up, "OK, here's the circumstances and here's what I'm thinking about pricing." And they actually will put up their Excel, they'll put up their proposal, and what I will do is I will review it and I'll say, "OK, so I know she don't have anything here on project management. This number seems a little low. Have you looked in your market and found that out? In this task, I would add these three other things." They get really detailed feedback from me and for others.
And others might jump in and say, "This might work better as a package, and here's an option of how you could actually package it." And then I will jump in and I'll say, "Here's how you could describe the value when you essentially share this price with someone so that they understand that this is worth it." That's the kind of nitty-gritty that we get into in the membership itself.
And just lovely folks are in there, everybody really supporting each other when they win, everybody's supporting each other when something frustrating happens or people start to lose hope. Everybody jumps in and makes sure that that folks have the cheering section that they need to keep on going and the information they need to really, really make this work, and to make sure that you get a due, ultimately, the work that you feel like you're put on the planet to do, and to do good in the world and to be paid really well for it. So, sign up for the membership, apply, and if you get accepted, get on in there and you can get your first 30-day trial and see if it is a fit for you. And so I hope to see you in there.
Thanks so much for listening to this episode of the Craft of Consulting Podcast. I want to ask you to do actually three things. If you enjoyed this episode or you've enjoyed any of my other ones, hit subscribe. I got a lot of other great guests that are coming up and a lot of other great content, and I don't want you to miss anything. But the other two things that I'm going to ask you to do is, one is, if you have any comments, so if you have any suggestions or any kind of feedback that will help make this podcast more helpful to more listeners, please include those.
And then the last thing is, again, if you've gotten something out of this, share it. Share it with somebody you know who's a consultant or thinking about being a consultant, and make sure that they also have access to all this great content and all the other great content that's going to be coming up.
So, as always, you can go and get more wonderful information and tools at craftofconsulting.com. Thanks so much. I will talk to you on the next episode. Bye-bye.