Special Episode 7: Key Elements for Determining Your Price—with Deb Zahn
Deb Zahn: Hey folks, I want to welcome you to this week's episode of the craft of consulting podcast. So this episode is just going to be me. I'm going to talk about one of those absolutely critical topics, which is how do you price your consulting services. And that's important not just when you first start off as a consultant but on an ongoing basis because you should be revisiting your price, particularly as you're able to add additional value in your market.
Some of what I'm going to talk about today is how you approach figuring out what to charge You're going to use this approach at the beginning and you're going to use it again as you build your consulting business over time.
I am going to talk later about a free live webinar training that I'm going to give this all about how to price your consulting services, including how much, what the different pricing models are, and when you might use different ones, how to talk to clients about it so that they understand that it's really about value. And, if they're willing to pay your price, they're going to get so much out of it. And I'll talk about that more. That's coming up September 1st, and I'll tell you all about it at the end and how to register for it.
But in this one, I want to talk about some of the key principles and approaches that are absolutely essential to make sure you don't come up with the wrong price. And what do I mean by the wrong price? So the wrong price usually is underpricing yourself. I'm going to talk about that in detail in a little bit, but the other wrong way to price is also having a price that doesn't match your life. So if you have a price that means, and again, depending on how you choose to charge, that means that you have to work a ton in order to have the income you ultimately need for your life, then you've essentially established a price in your market, that one, is going to be unsustainable because most people can't keep up that pace and still have high performance over long periods of time, but it's also not necessarily going to enable you to have the life that you want to have and to have other things in your life like your family, like your health, like other meaningful things to you. It's not going to enable you to have that and be able to support that.
So the first, most important thing is that when you're establishing your price or you're revisiting your price, you need to start with you. And I've seen a lot of information on the web about how you should calculate what your price is. And usually they're talking about hourly rates, which is not the only way to do it…but that you start with what your previous salary was. You figure out how to turn that into an hourly rate, which I would not do. And I'll talk about later, why I wouldn't do that. But the other thing that doesn't do is that doesn't say, ultimately, what do you want you and your life to look like in terms of what you want your income to be, how much you want to actually be able to work or how you want to set boundaries around what that work is. And if you don't know that at the beginning, then it's not a naturally occurring phenomenon that you will suddenly have that life. If you just hope it works out, or you figure out what your price is and then you look back and say, "Hey, does that actually support my life?" Chances are, it's not going to.
So you actually want to start with that, and you want to think about what it is that you want your life to look like across various dimensions. Then from there you're going to think about, OK, how can I charge and what can my price be such that it's actually going to support that? And I wouldn't worry at the beginning that you're going to be too elaborate with it. If you think within two months of being a consultant you want a yacht and you want three houses and sort of this rich, extravagant lifestyle, I wouldn't actually worry if you go there at the beginning because you're going to look at other inputs later that are going to temper the reality of what is possible for you. And that isn't to say, by the way, that you couldn't end up with this really nice, beautiful, wealthy lifestyle. You certainly can. That's going to depend on what you ultimately want and what your market is in a number of other inputs. But don't worry about it at the beginning. Think about what matters to you, think about what matters in your life, and then we're going to look at other things. I'll talk about what some of those are in a moment.
Now, the other thing that's really important to think about as you approach determining what your price is going to be is you want to pay attention to certain underpricing traps, right? So it is extremely common for new consultants—and I'd also say consultants who've been doing this awhile—to underprice themselves. And there are a lot of reasons that that can happen. So one of them is that often because you just started off as a consultant and you don't have any income yet or you fallen into that dreaded feast or famine cycle of consulting (which by the way is preventable), and you think, "Oh my gosh. The only way I'm going to get income is if I'm the cheapest. If I compete on price." Now the problem with that is if you're competing on price, then you're going to be signaling in your market that your brand is cheap, your brand is less expensive, instead of singling that your brand is value. And again, I'm going to talk about a little bit more about that in the moment in terms of what your price actually communicates in the market.
But another reason it happens is a lot of times you just don't have confidence in the value that you ultimately have to offer into your market. And there are a lot of reasons, particularly when you first start off or if you've been on that or, again, the wave of the feast or famine cycle, for your confidence to take a hit. That's often a reason. Then other times, it's just because you have not done your homework about your market and really have a solid idea of what others are charging your market, again, relative to the value you're able to provide. All of those things, either individually or combined together, can produce a situation where you're more than likely going to underprice yourself. That's what you really want to avoid.
So here are some key principles related to that that you want to keep in mind. There are four key principles.
The first is that, as I said, price communicates value. So if you've ever listened to anything I've done, you've probably heard me say that multiple times. But it tells your market what the value of what you do. And even if there's a client who is price sensitive, so for whatever reason, maybe a legitimate reason, maybe not, they really just don't want to pay a lot. Or there are some that just want to get a deal. Even for those people, the truth is, on some level, they're likely going to think you get what you pay for. So that's why in my experience I've seen few clients actually seek out the cheapest consultant because they think then they're going to be settling and they're going to get the bargain basement price, as opposed to a valuable consultant who's truly going to help them achieve what they want.
And so I have definitely seen clients look for the cheapest consultant or choose the cheapest consultant. I rarely see them do that multiple times because often, unfortunately, it is correct that they're going to get less than if they pay the true value of what it is a consultant offers. So just understand that even though it might seem intuitive that one way that you can get a bunch of clients is to have the lowest price, you are going to be communicating and it’s going to stick to your brand and it's going to stick to your reputation, that you are lower price and that equals lower value. So you want to be careful of that.
The other thing that you want to be careful of, and a principle to understand is don't trust your lack of confidence. So if you generally tend to be a person who lacks confidence, or you're so nervous about becoming a consultant, or so nervous about getting business, that your confidence is going to take a dive, which by the way is so common mind you. When I first started, oh my goodness. I had been a really confident person before. More confident than most people I knew. And when I suddenly became a consultant and I couldn't figure out how to get business initially, I took a big dive in my confidence and it made it really difficult to make decisions. So don't rely on how you feel about yourself when you first start off because, at that point, you don't have a really good reason to believe yourself. Because you don't know enough about your value. You don't necessarily know enough about your market. And if all you're relying on is whether or not you're feeling confident, you're going to make bad choices.
So this is where, under this principle, I would say the best thing you can do is get input from people who know you, know what you do, know what value you can actually provide to folks, and who will be completely honest with you. So this is where I would make sure that I actually don't ask people who also lack confidence or also worried about income and things like that because you'll likely get an answer that's filtered through their own confidence issues. So you want to go to people who know, who are going to be honest with you but also are going to have enough confidence and understanding of the market that you're going to get an accurate answer.
The third thing that I want to mention in terms of principles is know thy market. You need to know what is reasonable and what the range is in your market to be able to understand where you want to place yourself on that continuum of prices. And this requires exploration. Even if you've been in your market for a long time. So when I started, I'd been in the healthcare field for decades. That doesn't mean that I knew what the range was, and that doesn't mean that I knew what the range of prices were relative to value. So this is where you don't rely on any unverified assumptions because that's going to get you to send your price in the wrong direction.
So don't assume that you know your market even if you've hired consultants before because, I'll tell you, I had hired consultants before and the range was tremendous. And it didn't necessarily correlate to value so that was kind of an odd thing. But this is where you really need to do the market research to see what's the real range, what's similar to the types of things that I can offer a client, the types of results that I can help them achieve. That's going to be inputs that you're going to need to know to set the right price. And the more you know, the better you're going to be able to do that.
And then the last thing is principles, I mentioned this before, is that your past is not your value today. So when you were employed, there were all kinds of reasons that the way you got paid, your salary, your compensation, things like that, were what they were. Many of those reasons have absolutely nothing to do with your value and don't have to do with your value in the market. Your value in the market is essentially defined as what clients are willing to pay for the results that you're going to help them achieve. It's really about the demand in the market and what folks are willing to pay for that and how it is valued. That doesn't in any way match what your past salary was because that's not what your value is. You can look at your past experience as a way to tease out things that you can do that will be a value to your market, but the price that you were actually paid as an employee should not be one of those inputs. And again, as I mentioned at the beginning, I've seen that advice given in a lot of places to come up with a rate based on what your former salary was, and I think that's absolutely the wrong way to go about it because they are unrelated.
So it is possible that you could fall into an overpricing trap. That does happen. It doesn't happen as much as underpricing, but it does happen. And it can certainly be a problem for some folks. In particular, I've seen that it tends to be because they inflate the value of what they can offer clients or they price it based on what they think is particularly valuable, not what a client is actually willing to pay based on evidence of what is actually happening in the market. And, again, that usually tends to be one of the problems is that they didn't do their market research to know that their price was too high. So this is where having a mix of that honest self-reflection, getting feedback from knowledgeable and honest people, and doing your market research will be the difference between overpricing yourself and pricing yourself right. So those are really the most important things that you can do to stop yourself from overpricing and stopping yourself from underpricing: self reflection, feedback from knowledgeable and honest people, and market research. Those are critical.
Now I would say if you overpriced yourself, don't worry. The market will speak and you will have to self-correct in one way or another. Generally what will happen is you either don't get any business and it's because of your price, or you get somebody who's actually going to pay the price but you don't get any repeat business because they didn't get the value that they expected out of it. Ultimately, your value that you provide to a client should at minimum equal but in the best of circumstances it should feel to them, their perception should be that it exceeded what they paid. Not that they got a deal, that's very different, but that they got so much value that it's worth paying you that.
I want to talk about some of the inputs to actually building your price. And when I give my free training that I'm going to do on September 1st, I'm going to go into some of this in a little bit more detail.
Again, the place to start is with your life. So this is what I talk about in terms of developing “life thresholds.” Those are things like how many annual hours do you want to spend working versus other areas of your life? Are there other things that you expect to do during the course of the year like vacation or other things that you might do that you want to make sure important? For example, I don't work on Fridays. That's not what I do when I do consulting. I work on my other business, but I don't do consulting on Fridays. I need to know that going in because that's going to be an important input to determining my price. And then you want to know the range of annual income that you want to make, and that's where I would absolutely establish the lowest annual income threshold. And I would also do a target in terms of maximally what would you like to actually make as a consultant?
And again, here's where I wouldn't worry too much about, "Oh my God, is it way too high?" Because you're going to challenge that with some of the other inputs. So I wouldn't worry about it too much. But there's no single answer to how to do this. The proportions that you want in your life are going to be really different than someone else. So when you calculate, for example, how many hours you want to work, you don't want to do this in isolation. You want to include the hours that you want to work, some of which you can actually bill for are going to be part of your client time, particularly if you decide to bill hourly (which is not the only way to do it). But you also want to think about the other things that you're doing for your business. So the time you spend marketing, the time you spend doing outreach, the time you spend invoicing, doing revenue projections and things like that. Those are part of work hours.
And if you don't think about that at the beginning when you start to establish a business and as you establish your business, those hours are going to come out of somewhere. And they're not going to come out of the work that is going to be related to your income. It often comes out of the rest of your life. That can really throw people for a loop when they first start because they didn't really account for that. How much time am I going to spend that's work-related? Often what they think of is, "How many hours am I going to be able to bill for?" And that's going to be a subset of what your total work hours are.
So then, as I said, you want to calculate your income. Your lowest, and what you want your target annual income to be. And that might go up over time, but at least do it for the first year. I did it for the first three years because I did make the assumption that that would go up over time. And it's just a threshold. It's an upper threshold and a bottom threshold. You also want to think about if that going to be enough for your living expenses, for your savings, for your lifestyle. You want to have some percentage cushion for unexpected expenses. I definitely encourage people when they first start consulting to have at least six months reserve because often it can take a while to build up your business and it can take awhile, depending on how you charge, to get paid. You can think about if you want an enhanced lifestyle. So for some people, that's more travel. For people like me, I want to buy a tractor to support my farming habits. But it's totally dependent on, again, what you ultimately want you and your life to be. So you want to think about those things.
And then again, based on that, I would say you start to come up with what I call a “play price.” Now this is going to be really important to think through how you charge because this price is ultimately going to be different depending on whether or not you're going to go the route of doing retainers or charging hourly or doing value-based pricing. I'm going to go over all of those details when I give the training.
But, at minimum, you want to start to think about here's the price that I generally want to charge, and then you're going to apply other inputs to it. So don't get attached to it. It's just a place to start. And I call it play price, because ultimately you are going to play with it a bit. And what you really want to do is you want to look at it relative to the income thresholds that you talked about, how many hours you actually want to spend doing work in your life, and that's going to help you come up with your play price. And again, you might decide that if you're going to do retainers, here's what your price is going to be for sort of a typical retainer project. And you can put assumptions around that because, again, this is going to help you play with it. You can do the same thing with the other pricing models.
But now you want to kick it around a little bit. You want to hold it up to the market and see if the price that you're thinking about actually does match what you could potentially do in the market. So, that's where you want to do your market research. And you want to look at how other consultants who do similar things to you are charging, and you want to look at what prices they're charging for that. And, again, that might be very different. There are, as I said, different ways to charge. And it's helpful to look at what those different ways are and look at what the range might be. If you're play price ends up being at the bottom of that range, then I suggest you move it up. I don't think, for most consultants, you want to be at the bottom of that range because, as I said earlier, your price is going to communicate your value.
You may not feel that you have enough experience to be at the very top of your range, but that may not be true. So, again, that's worth talking to other people about. As you get more feedback, you can start to think about, "OK, where do I want to fall within that range?" And keep in mind, that's going to change over time because the more you do, the more you learn, the more you know, and the more you'll be able to charge for what you do.
So you also then want to look at that price input start to think, "Well, wait a minute. Are there other expenses that I need to consider, like overhead and other types of ongoing expenses, or even one-time expenses that I hadn't thought about, that I actually want to bake into what my income threshold is? And I want to see if I make that adjustment to my price. Where does that put me in the range? Where does that show up in terms of what I saw in the market?"
You also want to assume that there's going to be some bad debt. So this is where there's going to be some percentage of earned income that you're not going to pocket because the clients simply do not pay you. They don't pay you what they actually owe you. I will tell you, in the entire time that I've been a consultant, which is now just over a decade, I've only had that happen once. So it's rare, but you do want to factor that in. Again, it might depend very much on your market. It might depend very much on how you decide to charge for your services. But is does happen and you want to include some percentage assumption in there about what that ultimately might look like. So I don't think it necessarily needs to be 20%, because that would assume that it happens a lot. If it happens a lot, you want to think about who your clients are. And you want to think about how you're billing people. You might decide to charge up front, but you can make an assumption of 5% or 10% of what you ultimately earn is going to be unpaid income. It's probably on the high side, but that'll give you a nice cushion.
If you're not sure, then ask another consultant who's in the market and who does similar things. You can reach out to them and say, "How often has this actually happened to you? How much do you think that's actually worth?" And chances are, they're actually going to tell you. Don't ask them to name names, but you want to get them to spill the beans so you have a better sense of how often that happens in your market.
Often, I will tell you what actually happens. I've had it happen once where someone just didn't pay and for work that I already did. What happens more often is that a client will ask you to do work that's beyond the scope and you don't intervene and renegotiate. So you end up doing work that's far beyond what the scope is, and, because you didn't renegotiate the price or the budget, you're not going to get paid for it. I consider that bad debt. It's just self-inflicted bad debt. So you definitely want to avoid that. And if you look at my Tips and Scripts for Tricky Client Conversations, which is a free tool I provide, it'll help you learn how to negotiate that situation. That's usually what happens. So if you can avoid that, you'll be in better shape.
Now, the other input that you want to make sure that you have is profit. You're not a not-for-profit. You are a for-profit consultant, and it is perfectly reasonable for you to assume some percentage and profit in what you're actually making. Now, again, you always need to go back and check your market, check where that would put you in terms of the range. But I would definitely assume that you want to make some percentage profit on the work that you're doing.
This is particularly helpful if you're doing multi-year calculations, but you want to include some assumptions about increases to your price. Now, sometimes you might think of that as an adjustment for a cost of living increases or if the cost of doing business increases. That's not the only way that I would look at it. So that's often between 2% to 5%. It's not a hard and fast rule, but that's certainly something that you can do.
But I think even more important than that is to increase your price for certain engagements that actually require more of you or if you're able to add more value over time. So let me hit the first one. So more of you. For example, and this was truer in the pre-COVID time, but hopefully it will be true again, is if a client wants you to be on site and away from home for extended periods of time, you might actually charge more because you're assuming an extra burden. You're also going to be assuming extra expenses associated with that arrangement. And I don't just mean your per diem costs for your meals. I mean if you have to do more childcare at home, if you have to do more pet care. So if I have to be away for extended period of time, I need someone who's actually going to take care of all of my animals, if my husband can't do it. That actually costs money, and I'm going to want to charge more to cover what some of those expenses are. (Talking to a kitten: “Sweetie. Can I not have you do that? Thank you.”)
Now if the other situation happens, which it usually does, which means that you are going to be able to offer more value over time as you work with clients, as you gain more skills, and as you gain more knowledge, you also want to think about what those price increases might be. You might have an, and this not a bad idea, you might actually have an actual plan for enhancing your value where you're going to go seek out a different certifications or different skills, and you want to think about how you would increase your price if it's appropriate to do that. So those are the big inputs that I would say should go into how you approach determining what your price is. So you apply those inputs to the play price that you developed, and you come up with a price that you think is reasonable based on making those adjustments. Then go back out and talk to people who are knowledgeable and are going to be honest with you and get their feedback. And don't just get their feedback on what the final price is, but also talk to them about your assumptions. Talk to them about where you're positioning yourself in your market.
And then what you're going to do is you're going to go out into your market and see if that price actually works. Now, if you don't immediately get consulting gigs, don't assume that that's the price. It could be other things. It could be that you need to get better at articulating what your value is. You need to get better at actually telling people why it is it's going to be valuable if they pay you this certain price to do something. There could be lots of other things you need to do first. But if you aren't sure, keep asking people. Talk to people. Even if, let's say, a client decides not to go forward with you, maybe it's a competitive situation and they went with someone else. You might ask them why. If it was price, they'll tell you. If it was something else, they'll often tell you. But the more input you keep getting, the more you're going to hit the sweet spot with your price. And again, you want to keep thinking about it over time because that sweet spot is going to change.
So I'm hoping that that was helpful as a way to think about, what some of the key principles are in terms of how you approach this and what some of the key inputs are to your price.
If you want to dive deeper into how to stop underpricing yourself, stop trying to figure out how to charge for your consulting services, then I want you to join me September 1st. I'm going to do, as I mentioned, the free live webinar training on exactly that topic. And it's going to be 11 am PDT, 2 EDT. If you're in London at 7 pm.
Here's what I'm going to go over. So by the end of it, you're going to know how to get past some of the key mindset traps, the ones that are getting you to charge less than your value or are locking you into a pricing model that isn't actually going to work for your business or your life. There are some common ones that folks experience over and over again. We're going to get you past those. We're also going to talk about the pros and cons of different pricing models. So I'm going to go over what they are and how they work. We're going to talk about how you might apply them in different circumstances, with the ultimate goal of getting paid for all of your value. Then we're going to talk about how to determine your price. So some of it will be based on inputs like this, but it'll get you closer to think about what's the price that it's going to enable me to meet my business goals and meet my life goals?
We're going to talk about one of my favorite things, which is how to tier and package your services in a way that will entice clients to buy more from you so that they get more value out of you. I did this recently with someone I was coaching who I think was going to go in at about $45,000. And we went through and set up a way that she could tier her prices based on value, articulate the tiers based on value to the client, and how to negotiate those things. And she ended up having them purchase the top tier, which was over $100,000. So over double what she was going to start with. So we're going to talk about the power of doing that, not just to make more money, but also to be able to give maximum value to your clients.
We're also going to talk about the best way to talk to the guys about your price or your pricing model. So there are common mistakes, I definitely want you to avoid those, but there are good ways that you can actually describe things so that you aren't just having a conversation about price, you're having a conversation about them and what they want and what they desire and what you're going to help them achieve. And then the last thing we're going to talk about is how to anticipate, get out ahead of, and hopefully help clients overcome objections to your price and/or your pricing model. A really common objection is the price. And they're really good ways that you can anticipate those and talk about them with clients so you can help them overcome it so you can get to the good stuff. And the good stuff is working with clients and helping them achieve what they most want to achieve.
So please join me in this free training in the show notes, and on my website. You will be able to sign up for the training itself. It's all free. We're going to have a great time. You'll be able to answer or ask me questions because it is going to be live, and you will get so much out of it. You will know so much more about pricing than you do right now. So hopefully I'll see you on the training and thanks so much for joining me on this episode.
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Thanks so much. I will talk to you on the next episode. Bye-bye.