Episode 93: Deciding on a Pricing Model for Your Consulting Services—with Deb Zahn
Deb Zahn: Hey folks, this is Deb with the Craft of Consulting. And today I want to talk to you about pricing, and I don't mean the exact price that you're going to charge as a consultant. What I mean is how you think about and approach pricing so that you make sure that you're getting paid for all of your value, and you're not falling into one of the common traps, which is underpricing yourself or picking a pricing model that's ultimately not going to serve you and serve whatever it is your business goals are. And I know that there's a whole lot of information out there about pricing and very, very strong opinions about it.
What I want to say is I have a very strong opinion and that very strong opinion is that you should deliberately choose how you're going to approach pricing and how you're going to pick your pricing model and not let somebody else who isn't you and isn't in your shoes dictate how you should be doing it.
I actually am going to go over it's different choices that you need to make to be able to make the choice that works best for you and a way to approach it with a mindset that actually serves what it is that you're trying to do. And again, not just defaulting to something because you think, well, that's how consultants actually do it. Or defaulting to something because it's all the rage now, and if you don't do it that way, then you must be doing it wrong. So I'll get in a little more detail about what I mean by all of that.
But one of the reasons that I'm going to spend the entire month of February talking about pricing is because it's the number one thing that comes up when I'm coaching people. So usually when I start coaching folks, we have to figure out who it is that they're going to be serving and what they're going to be offering. But invariably, we have to get to the issue of pricing because, as they have prospective clients in front of them, they need to make decisions about it. So whatever they put in front of that prospective client is not only more likely going to get them a yes to that contract, but it's going to ensure that they get paid for all their value and they're ultimately building a profitable and sustainable business.
That's why I'm going to dive into pricing because that's really one of the things that's at the heart of this. Now with most things I need to start with mindset. And the reason it is so important to start with mindset is because as I've said many, many other times, mindset drives action. It will help you either make really good, healthy choices or really bad, unhelpful choices. It's going to cause you to go down certain paths and not others. So you’ve got to get your mindset in a place that is actually going to be helpful for how you think about pricing, not just what you're going to charge, but ultimately how you're going to charge folks. And it is completely common for anyone in consulting to have questions about pricing and not just when they start by the way throughout the whole time that they're consulting. It's perfectly reasonable to not quite be sure how to do it or not quite be sure when you should switch things up because the reality is, regardless of what anybody may say, there is not a single source that tells you how to do it. There's not something that you can easily just look up and it tells you what your price should be. That tells you how you should charge. That tells you how you're going to get clients to say yes to your price and yes to how you're talking about charging them.
It also is a really fraught area. So there can be a real sort of minefield around mindset that can just bring up a lot of emotions, because think about it. One of the things, when you start to set your price or you're in front of a prospective client and you need to think about what you're going to charge them and how you're going to charge them, it's as if you're asking yourself questions about self-worth. How much is it really worth for me to serve somebody else? And that can be really difficult to do that either because you lack confidence, or there are just other things going on inside of you that might cause you to value yourself less than what you actually are. But no matter what it can be really, really emotional, which is one of the other reasons that getting your mindset in the right place is so helpful.
And, again, if you have a good, healthy, helpful mindset, you're more likely to make good choices and take the right action. And for those who haven't heard me say it before, don't know exactly what mindset is. I'll define it for you quickly. It's your attitudes, your beliefs, and your habits of thinking that ultimately tell you what you think is true and not true, and what you think about yourself and what you think about your environment. So if you have a mindset that is skewed in a certain direction, let's say in this case, when it comes to pricing it's skewed towards not really valuing yourself and what you can do for clients. And you're now going to make pricing decisions based on that skewed set of beliefs and skewed habits of thinking. You're going to undervalue yourself and, therefore, underprice yourself in the market. And it's going to be harder for you to make the living that you want to make as a consultant. That's why it's so important.
So let's talk about what some of those really common mindset traps are that you can fall into. And we're going to talk about how you can get get out of them. So the first is, as I said, lack of confidence or it could be that you have the dreaded, awful imposter syndrome that so many of us get. And, by the way, I definitely get sometimes. So it's extraordinarily common. In fact, when you're in front of her prospective client, you can pretty much bet 9 times out of 10, they've probably also experienced imposter syndrome too. So it's not just you, but this is where you might not believe that you or your services are valuable, or you might not have confidence that somebody really wants to buy them. Or if it's imposter syndrome, you might believe that, you're just kind of faking it and somebody's going to figure it out. And if you try and put a price in front of somebody and they're just going to laugh at it because it's ridiculous that anybody would pay you. That's the chatter that can go on in your head. That will keep you stuck in a mindset that ultimately isn't going to be helpful for you.
The other big one is perceived scarcity. Now I am emphasizing the perceived part. So perceived scarcity is when you believe that there's not enough work out there for you, or you believe that you're not going to be able to compete on anything but price because there just isn't enough work. Now, obviously with COVID we know that particularly in some industries, scarcity really did happen. It really does happen. So when I say perceived scarcity, what I mean is when it's not actually real but you perceive it as such. And that's the type of mindset thing that you can shift.
Now, if there's actual scarcity again, as there was with COVID when so many folks that I knew lost their business overnight or they lost half of their business, that was a whole different set of actions that they needed to take to solve that problem. But perceived scarcity is a problem of perception. It's not a problem of reality. And given that those are two different problems, it actually requires a different solution.
The good news about all of these traps is they really are just traps. They really are just how you are perceiving reality. They are not reality themselves. And so the solution for them is to bring reality into your field of vision and your way of thinking. So getting intel about what reality is is actually the solution for getting out of these traps. And the good news is you can get out of them.
Mind shifts mindsets. That’s the one of things we know about them. And actually I called them “mind shifts.” That would probably be better. So the mind shifts you need to make to get to the right mindset are very possible. If we know anything from neuroscience it is that we actually can change the way that we're perceiving things, our attitudes, or beliefs. And we can certainly change our habits of thinking towards something that is more reality based and more helpful. It takes things like questioning your narratives, the stories that we tell ourselves about who we are, what's real, what isn't. And interrogating them, asking questions about whether or not those things are actually true. And do we know? And have we verified that it is actually true? Or is that just some chatter in our head and we need to, to deal with what's actually real and not what we think is real.
We then can…and this is where going out and getting evidence is really helpful is replace those narratives…replace those stories we're telling about ourselves with what is actually true. So if I have in my head, “Oh my gosh, there's just no business out there for me. Nobody's going to pay me to do work.” Instead, I go out and I talk with folks in my market, and I ask them what's going on. What are the things that folks are asking for help for? What is it that they're hiring other consultants for? And a whole set of questions that would tell me what's really going on in my market. I now can replace what I believe with what is actually true. And now I can base my actions and I can base my choices based on that.
The beauty of that is the more we do that, the more we interrupt and interrogate the stories we tell ourselves and replace them with evidence of what is actually true, we will start to form new beliefs and we'll start to form new habits of thinking for no other reason than through repetition, which is an extremely helpful thing. So with every situation, if we take it as, “Oh my gosh, it's this new, fresh thing that I have to deal with. And so now let me fill that blank space with all of my worries and fears,” we will get into the habit of understanding, “Hey, wait a minute. I don't know enough about this. Let me go find out some information. And then that'll dictate what I do.” That starts to become a habit that you get into that changes the way that you ultimately perceive and you think about things. This is where science is super helpful to us in this regard.
I'm going to talk about a little bit more about some of the key solutions to this, because, again, I, I don't want to say mindset's important and then say, “OK. Yeah. Now go handle that” because truly, truly, truly, if you don't get mindset right, it's going to be hard for you to make the right choices. That's why I'm spending so much time on it.
Let's talk about what some of those key solutions are. So I mentioned one already, which is getting input from other people, but I want to be very specific in terms of who you're going to seek input from because not everybody is equal. So you definitely want people that know you. You want to talk to people who have some understanding of your value. They've worked with you. You've worked for them. They've seen you in action, whatever it is. But they have some reason to see that you've accomplished good things in your work world. You want people who actually know your specific market. So if you have a market and you have a niche within that market, you want folks who know enough about that to be able to tell you what's going on. You definitely want people who are going to be honest with you. So if you have a friend that loves and adores you and is in your market and knows you, but never, ever would want to tell you something that's difficult. That's not who to go to. Go to somebody who is actually going to be really honest because what the most helpful thing they could do is not just say, “No, no, no. You're wrong. There's tons of business out there for you.” That's kind of helpful, but what you really want is to have someone say, “List for me the types of things that you think you could help clients with.” And when you answer that, the person who's most helpful will say to you, “OK. I don't think that there's a lot of demand right now in the market demand, meaning something that folks are willing to pay you for the first thing you mentioned, but the two next things you mentioned, I see tremendous demand for that. And in fact, here's specifically what that looks like.” That's way more helpful than somebody who's just going to give you some general advice. So look through the folks and identify who you can go have a conversation with to get some really good intel about what's happening in your market, relative to your skills and relative to results that you can actually help folks achieve. And that's who you have a conversation with.
Now, by all means, please, please, please, please, please avoid people who have confidence issues themselves. And I mean, big confidence issues. So if there's somebody who doesn't embrace their worth, they're going to have a really hard time embracing yours. Actually, I've seen this go two different directions. I've seen it go where they feel like, to put it bluntly, they suck so everybody sucks or they feel like they suck in which case everybody else is so much better than them.
In either instance, you're not going to get helpful, actionable information. So go to people whomaybe they don't have a 100% confidence, but they have it high enough that they're going to be able to talk with you with clarity and not have it filtered through any insecurities or lack of confidence or anything that they're personally dealing with. So that's why it's important to pick the right person.
Then you really need to take time…and I talked a lot about this in January…but you need to take the time to determine the value of what it is you can do for clients. So if you are in a mindset trap, and all you do is sort of generally think about what you could offer in terms of services to a client, you probably aren't going to hit your full potential and your full value.
You have to get really concrete about it. And I think you have to take a concrete process that you use to define that value with enough specificity that now you've got something to go share with folks in your market, but that you then will have a harder time refuting it. If you're not feeling confidence because it's not just some, the general vague notion of value. It is actual value that you have evidence to back up. So value is not how you feel about yourself, and it's not how you feel about your value and your worth, your value as a consultant, very simply is what clients are willing to pay for that you can help them achieve. So if it's a problem, you can help them solve. It's an, if it's an aspiration that you can help them achieve, that's what your value is in your market.
That's what you want to sit down very deliberately and think through in your specific market and in your specific niche, if you've chosen one. What are the things that you can really help clients achieve and be able to look back and say, “I be able to do before that I could demonstrate in some form or fashion that I can achieve that value.” That's helpful when you're going to go out and do marketing period. So you got to have it as you're going to enter into your market and try and get business. The other benefit of doing it is that you have it now to be able to balance against any of the mindset issues that you might have as it relates to imposter syndrome or confidence or whatnot. It's sort of the baseline for recognizing your value.
Then when you go out into your market and people start to hire you, you start to help them accomplish things, and you hear things that people are saying about you. Then that evidence you start to build on that until you really build a case for what reality is. And that's going to help get rid of the case that maybe you've built about yourself that isn't actually true, where you're not really as wonderful and as valuable as you actually are.
As you start to do so you go in and you have some initial conversations, sit down with a piece of paper, computer, however you want to do it, and you define your value in very specific terms. You then want to validate your assumptions about your market and validate what you can help clients achieve. So this is where you're now going to do some much more specific market outreach to get reality-based intel about what clients truly have a demand for in your market and what they're willing to pay and who, and what type of person with what skills they're willing to pay to satisfy demand. So this is where maybe you go back to some of the same people that you first talked to or you dig a little deeper into your market. Now you're going to really start to validate assumptions to say, okay, okay.”OK. Based on initial feedback I got, I was able to define my value. Now I'm really starting to see for where my place in the market is going to be based on the type of value that I can provide.” That is extremely important. To know that as you start to think about what your price is and how you're going to charge, and then again, as you start to work with clients, you're going to accumulate more evidence about your value, more evidence about what's valued in the market.
And, and again, I'm encouraging you to validate that in yourself and acknowledge it as you go along. I actually have someone that I'm working with who was having some confidence problems. And so she has an Excel spreadsheet. Every time she helps clients achieve something, every time she gets good feedback, or every time she recognizes that she was able to do some, she actually throws it in a spreadsheet. The benefit of that is two things. One, when she's having a rough day, like when she gets stressed out and when you're stressed out, it's, it's a little more difficult to maintain a good mindset. It's easy to relapse. She takes a look at it. But she also takes a look at it when she's going to go out and meet with prospective clients. And when she's doing marketing and outreach because it is her evidence pool from which she can actually draw things that will actually help her get other business and help her figure out the best way to talk about herself and what she does. So that's really the part about mindset that I think is so important to dig into, as you're thinking about how you're going to do pricing and what your price is ultimately going to be.
I want to say a little bit of something about the pricing model that you're going to pick because this is the area where there's just tons of opinions out there in the world. I mean, a lot of really strong opinions about how to do it. So most consultants, when they first start consulting, they think, “Oh, well, the only way that I could possibly charge as a consultant is hourly. That's how we do it.” And, that's true. A lot of consultants do. Everybody doesn't. And there are big trade-offs if you decide to charge an hourly rate, and I'll talk about that in a moment, but then there's another camp that says, “No, no, no, no, no. You should only do value-based pricing. If you do any other kind of pricing, it's ridiculous. Only do value-based pricing.” And there are there some folks who are like, “No, no, no. You really just need to make sure that you get recurring regular revenue in the door. So you should use a retainer model.” There are strong opinions out there about that.
So here's, here's what I'm here to say. I'm going to say it again. You're the boss of your business. You get to decide what actually works for you. You get to decide overall what works for you and then seek out clients that would do that. And, or you could decide to change the way you do your pricing based on the clients that you have in front of you that you want to work with and what the type of work is. You are the boss. That is your decision for how to do that. You have to understand what the pros and cons and the trade-offs are of each in order to make wise decisions. But you get to decide. And what I want more than anything for you to avoid is to being on default setting. So default setting is there's only one way to pay or it is wrong to do it any other way.
I charge as a consultant different ways depending on the types of clients I work with. When I assess my business and the type of business I want to go after, I do think about what type of work do I want to do that I am well suited to do that and I can deliver the best results that match pricing models that I'm more interested in. But I always ask the question because I know there's not a single right way to do it. So there you go. I'm going to give you the freedom to be your boss of your business in the same way that I am the boss of mine.
But let's start. I want to talk about what some of the goals are of picking a pricing model, because that's one of the things that you have to understand in order to make good choices about what you're doing.
All right. So the first thing, obviously, when you think about your goals is you have to determine your pricing model first before you get into your pricing, what the actual amount will be. Now, that seems kind of given, but it isn't necessarily. So if you just jump in, you're like, “OK. I'm going to figure out what my price is.” What often happens is that people will default to hourly pricing, and they will go about their business and try and figure out what their hourly rate is. Again, remember the goal is not to default to having to use that pricing model. The goal is to make sure that you get paid for your value and that you are marketable within your market. So it's important to think about that. You might do different pricing models. You might do different pricing models within one engagement.
I've actually done that where I've done a portion of the engagement in one model and another portion in another model. You might decide that you only want to do one type of pricing model, and, as I said earlier, you're going to seek out clients that will pay you in that way. And that matches what you're able to do for them. Or you might do it on a client-by-client basis. None of that is wrong. It's just a choice that you're making for your business. And you can change your mind at any time, and you can do it in a different way. If you change it sort of abruptly, there's always some transition, but don't worry about that right now. So the first thing is to be really clear when you're approaching, thinking about what pricing model you want to pick, what are your goals.
And I would argue that your first goal should be supporting the life that you want to have the life that you want to have should never, never, never be an afterthought. Like you figure out how you're going to run your business and you figure out your pricing models, you figure out your price, you figure out all of that. And then you get cooking more than likely. What you're going to find is that you might've made choices, that don't actually support the overall life that you want to have the life in which war work is a part, but it is not the whole thing. You might make choices. That mean that you're working far more than you ever intended to work. And you're letting other really meaningful things in your life, you know, fall away or fall apart. So I always encourage you at the beginning to understand that your goal is to support the life you want and to know enough about the life that you do want that it's going to help you make good choices.
And the second thing, which I say over and over again, and I'll keep saying it because I think it's so important is to make sure that you get paid for all of your value of what you do for clients. So as you're thinking through your pricing model, certainly as you're thinking through what your prices you want to ask yourself, “Am I actually being paid for all my value?” So that's why it's so important to not only define your value, but to also embrace it so that you can make choices based on that.
The other goals that you have. And I think these are really important, particularly from a client experience perspective, which I'm going to talk about in a moment, but you want to eliminate and reduce future stress, not just for you but also for your clients. So if you pick a particular pricing model and all it's going to do is to cause stress for you or the client, then that's not something that's ultimately going to feed your business because businesses solid consulting businesses are based on relationships and based on a reputation and market, which a derives from the relationships you have. So if all it's doing is creating stress, that's not going to be helpful for you. It's not going to be helpful for the clients. You're not going be helpful for your business.
You also want to eliminate or reduce the time that you spend doing things like contract amendments, all of those things that you don't get paid for. So if you're in a particular circumstance, a certain pricing model might be “the right one,” but based on who the client is or whatever the circumstances are, you're going to have to do amendments to your contract over and over again. You might decide to pick a pricing model that eliminates or reduces the need for that. Because again, you're spending time doing things that you're not necessarily getting paid for, you're not serving your client, and it's not directly generating revenue.
So those are some of the goals to keep in mind when you think about your pricing models.
Then the other thing I want to say about, and I said this at the beginning, is for every single pricing model, there are pros, cons, and trade-offs to every one. There is not a perfect pricing model that solves all the problems we'd want it to solve. If, by the way, there is, somebody please tell me what that is. I haven't encountered it yet, but everything as in life has trade-offs. And you just got to know what they are so that you can actually pick the consequences you want, and you can pick the trade-offs that you're willing to accept. The key again is not to default but to decide.
So if you got anything out of this or you want, you want to make a t-shirt to help you remember, it's decide don't default. And that's really at the heart of having a thriving business. As I said, you might, and I, by the way, do this all the time, you might apply certain pricing models in any given situation that increase the benefits to you and to the client because it's also got to benefit them and reduce, reduces any risks that you have. And you might pick one of those models or mix models based on multiple factors. And I want to go over what those are because I think those are so, so, so, so important.
The first is the scope of the project. There are some scopes that work really well with some pricing models and not others. So things are really well-known and what it takes to actually do the work can be predicted. Then it's much easier to apply a value-based pricing, a fixed price, or a retainer because you know exactly what's in the scope. It doesn't mean that you're not going to have issues with scope creep because chances are you are. And I was giving this example to someone the other day, which is we were talking about retainer pricing. So retainer pricing is when someone pays you an advanced payment, either for access to you or for a certain amount of your time or your effort within a given month. So it's sort of like a subscription fee and you get paid at the beginning. What I said to them is regardless of what you put in the contract…so if you put certain guardrails into the contract to ensure that the client isn't taking up too much of your time, too much of your effort, and thinking now that this means that you're going to solve everything under the sun…to them it doesn't matter what you put in a contract for some. I mean, you want to put the right things into the contract, but, for some clients, and I have encountered this when they pay a retainer, what they hear in their head is unfettered access to you.
And you need to make sure one that they know that that's not what it is. So that doesn't mean that at 2:00 AM on a Saturday, they expect you to answer their text message. And yes, I have had clients email me at 2:00 AM on a Saturday. I luckily turned all of my alerts off so I didn't hear it nor did I respond to it that weekend. But you will need to be comfortable communicating that likely on an ongoing basis, or you have to be comfortable saying no to that client because you can tell at the beginning that this is not going to work for them. Or you pick a pricing model where the consequences of them doing that are on them. So this is one of those instances where either you learn to negotiate really well, which you should anyway as a consultant, or if you pick something like an hourly rate where you could say, “Look, we're going way above what your target was.” In either case, as you'll notice, you'll still have to negotiate, but certain scopes lend themselves better to some pricing models and not the others.
Complexity is the same thing. So if something is really, really complex, and there are a whole lot of uncertainties that you cannot predict at the beginning, some pricing models might make it easier for you to manage that. If you have a fixed-price contract, that's where they pay you a set amount agreed upon amount for either a set of deliverables or for an overall project scope. If something is really complex and there is tons of uncertainty in it, the chances of you having to renegotiate that and, therefore, potentially causing yourself and your client more stress can be really high because, even in a fixed price, if you say, “Here's exactly what it is, sometimes what some clients hear is, “Oh, I can have them do whatever I want for this price.” I've had that happen.
So sometimes with complexity and uncertainty, you might make choices about your pricing model that might lean you towards hourly because there's too much that's unknown for you to predict what it's going to take to be able to do that. Or you might do a value-based arrangement, but you're going to set the price point high enough. Again, value-based arrangements are when they pay you for the value of the outcome, not for a unit of time, not for certain deliverables, but for the value of the outcome. You might set that high enough that it can actually handle additional complexity, and it can handle uncertainty because you're getting paid high enough to be able to be able to absorb those things.
You also think about things like duration. So if you have a short-term project, some pricing models are going to be easier than others because you know exactly what needs to get done, and it's going to get done quickly. That's where fixed price; value based; and, in some cases, retainers may make a lot of sense. If you have a really long duration, long duration, meaning over a year, two years, sometimes three years…I've had really long contracts like that, which can be great if you can get them because it's guaranteed income over a long period of time. But the longer the timeframe is, the more uncertainty can actually creep in. And you have to ask yourself based on what your goals are, what's the right pricing model that I can use with this client that is going to help me manage all of the uncertainty that a long time period is likely going to insert into this process. You also think about context if there's major shifts happening in the market, or if there's a lot going on at the company or organization you want to work with, again, looking for those things that might increase uncertainty and uncertainty means it's harder for you to predict. Predictability is one of the things that you will use to choose what what the right pricing model is going to be for. You want to think of all those things.
I also always think of the client. So I've had clients who, in a normal circumstance, a retainer arrangement would make sense because they needed me on an ongoing basis. Generally, what they were using me for is as a trusted advisor. Now, a trusted advisor is a role that I can play. Not all consultants can. You might be a consultant who is better at and more interested in hands-on-the-ground implementation and things like that. Trusted advisors tend to be folks who know a lot, but they tend to be helped more with strategy. Again, not all consultants do that, but in this role, as a trusted advisor, in a normal situation, I would have done a retainer. They need me on a monthly basis. It makes sense that would give me recurring revenue and would give me predictability in my cashflow. Normally, that would have been great. With this particular client, I did not offer a retainer. I did not because I knew managing that retainer with this client, the same one who would text me at 2:00 in the morning, managing that retainer was going to be way too much work. And I'm really good at negotiating. I'm really good at setting boundaries. All of those things I knew I would have to do it likely a couple times a month. Like we're not talking every quarter. I'd have to say, “Hey, wait a minute. We've got to recalibrate that.” That would be something I would have to do on an ongoing basis. I knew that it would stress the client out. I knew that it would stress me out and I knew that it would involve me having to say no to work they expected me to do. Regardless of what was in the contract, it would have confused them because, when they heard retainer, they heard unfettered access and she'll do whatever we want. So with that particular client, I knew that it wasn't going to work with them. So I chose a different pricing model. So you have to think about who the specific clients are as well.
Now, as I said earlier, you might decide that you're going to do your ideal client profile. And part of your ideal client profile is only working with those clients for whom you can be, let's say, a trusted advisor and who you could have value-based payment arrangements for that type of work that is going to be manageable. And then those are the only clients that you seek out. You could absolutely do that.
Or you could decide on a client-by-client basis. I generally decide on a client-by-client basis only because I'm really interested in the work itself. And there are a lot of good things that I can do for a lot of different clients. And I don't mind if they're different flavors or different versions of what they do. That's just me. You might make other choices for your business, but you'll notice in all of these things that one of the factors that you have to consider when you're coming up with your pricing model is also your capabilities.
So if you have imposter syndrome or you have low confidence, it is going to be more difficult for you to defend your boundaries. If you don't have a habit of and skills related to defending your boundaries and renegotiating scopes, those are all things that are worth acquiring. But if you don't have them today, you might also consider that when you're looking at your pricing model because depending, on the type of work, depending on the client, you might need to do more or less of that. And if you're engaged with a client, a prospective client, let's say, you're in a meeting with the CEO, CFO, and COO, and they all can't agree on what the project actually should be and what you should be helping them with and what types of strategies are going to be key to them. Well, that signals to you that you are probably going to have to do some work to facilitate their coming to agreement. And chances are, you're not just going to have to do it once. You're going to have to do it multiple times. Now that has everything to do with the scope. That has everything to do with the scope complexity and potentially the duration. That's an important context to know. And you need to feel comfortable that you either have the capabilities or you're willing to show you have the capabilities, but you might need to stretch a little bit more. But you'll be able to manage that situation. Now, those types of skills are skills that I think any consultants should get should acquire if you don't already have them, but you want to ask yourself what you have today and what you're able to do today. And have that influence the decisions you're going to make about your pricing model.
Now I'm going to go over just really quickly what the pricing models are. I'm not going to dive into the details about the pros and cons of trade-offs of each because I'm going to have a blog that's coming out very soon. That does all of that. So you can actually have it on a piece of paper in front of you but let me just say what they are really quickly, and then we'll wrap up.
The first is value-based pricing. So that's the one that is, I think, reasonably very in vogue right now. And it really was challenging the stereotype that consultants can only charge hourly. So basically it is where you get a defined fee based on the value of the outcome you achieve for the client. And this is one where it can…again, I won't go into all the pros and cons…but this is really where you're saying, “You know what? My value is not a unit of time. My value is what I can help clients achieve. And that's what they're going to pay me for.”
The other version is a fixed price or project-based fee. So that's where you get paid a flat fee for a defined scope of work or a defined set of deliverables. And again, that's a single budget that you get for achieving what you have to achieve within that.
There is then retainer pricing. That's where you're getting paid. As I said, an advanced payment. And it's two different versions of it either. It's an advanced payment and they get a defined number of hours from you up to a defined number of hours in a given month. And sometimes you use them all. Sometimes you don't use them all, but they're basically prepaying for that. Or there's the version where they're pre-paying for availability, your availability or your team's availability to do work within a particular scope. Retainer pricing again is upfront payment. That's always a great thing and it's recurring revenue. That's a great thing.
And then, obviously, there are limitations that my blog will go over…the last is hourly pricing. So hourly pricing is getting paid for a unit of time that you work for a client. So when most people think about consultants, that's what they think of is that you get paid for an hour. And usually when people are thinking about what their prices, they default to an hourly rate, but it is not the only way. That's actually why I put it last is don't default on that. You want to think about whether or not hourly pricing for a particular engagement actually makes sense, or you want to think about if you want to do hourly pricing at all. And if the answer is no, then you need to think about how you're going to seek clients who you can provide very specific value to that is not going to be based on hourly pricing.
Now I want to throw in one extra because this is something I've actually heard of. I've been offered this. And it was a particular circumstance where it was not in my favor to say yes, but there are sometimes where you can negotiate a bonus payment. So a bonus payment would be an add-on to one of the other pricing models. And there's two different versions that you can think about. There's what is called an upside bonus. So that's where you get a bonus payment that is triggered by something. So it's either triggered by you did something, you achieve something at a higher level or much faster than you had contracted for, such as, for example, if there was a 10% revenue increase target and you got it to 15%, or you helped to get it to 12%, or you were able to achieve that in 3 months instead of 6 months.
You may be able to negotiate for a payment that incentivizes you to do something better and faster. You could do it so it’s about avoiding something bad. So if you're helping someone, for example, with a merger, there could be a target related to avoiding the loss of talent. And if you're able to make it within a certain band, they might give you an additional bonus for that.
There's also the possibility. And this is the one that I was offered that I said no to, but I wouldn't say no in every circumstance. I said no in this one because it was a downside bonus. Now that's where you put some of your payment at risk. Meaning if you achieve the outcome, you get everything. If you don't achieve the outcome, you either…I would never get nothing…but you don't get as much as whatever the full amount is.
Now you might ask yourself, “Well, why the heck would I do that? Why would I put anything at risk?” Well, the reason would be—and it's generally the only reason I would say yes to this—is if the reward that you would get is higher than you could otherwise negotiate. So if you're able to negotiate a higher payment by putting a portion of it at risk, that might be worth it to the client because it gives them some assurances that you're going to pull out all the stops to make the outcome happen, It's worth it to them, but they don't necessarily have to pay you all this money if it's actually not going to happen. The only time I would do this is if enough, not everything, but if enough of what would actually produce the outcome was in my controller or influence. If I was too dependent on what a whole bunch of other people did within the organization or externally what happened in a market, I would probably say no to this, but if I'm reasonably sure that there is a path to me achieving whatever it is that higher target is, and I'm going to get a higher payment if I hit it, I might actually do that.
So I'm going to stop there because I think I've given you a pretty good overview of what you need to do to get your mindset in the right place so you make good choices about your pricing model and your price as well as understanding what your goals are when you're choosing your pricing models and the things that you have to take into consideration to make a good choice. And then brief overview of what the different pricing models are. As I said, I'm going to have a blog that's coming out very shortly. That's going to go into a little more detail about what the pros and cons are of each pricing model are.
But hopefully this was helpful. And hopefully I have, if nothing else, given you the caution against defaulting and having the freedom to make the decision yourself. So I will be back with more tips for you very soon. Have a fantastic next week.
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