Updated: Jun 24, 2020
Too many consultants are reducing what they charge as they become better at what they do.
There. I said it.
But that sounds ridiculous, right? Why in the holy heck would anyone ever do that? Well, if you’re still charging hourly, you’re probably doing it too.
How is that possible?
Value Up, Price Down
It works like this. As you consult, you will start to accumulate more knowledge and skills. You will learn more while you are working with clients and get better at what you do. You’ll work with other consultants and learn from them. You’ll get more insight into what makes your industry tick and be able to anticipate where it’s going. You’ll uncover gaps in your knowledge and skills and fill them. Related to all of that, as new knowledge and skills become ingrained in who you are and what you can do, you’ll be able to deliver your increasing value in less time.
There’s the rub!
You will be able to offer more value in less time.
I know that’s true for me. When I first started to do strategic planning for clients, I labored over the right way to do it. I spent more time producing interview guides, slide decks, operational assessment tools, etc. I now have much of that in hand and can customize it to each client. I have done it enough times that I know what works and what doesn’t and how to quickly adjust what I do based on the particularities of each client.
That’s not to say that you should ever “phone it in.” Never do that. Our clients deserve a thinking, engaging human being, not an autopilot robot in a suit. But you will show up with a bigger toolbox and better skills than you had when you started. You will become more efficient, which is in and of itself tremendously valuable to clients.
However, let’s say that you can deliver the same value to a client that used to take you 10 hours in 4 hours. That doesn’t mean you were ripping them off before. They still got their money’s worth before. It just means they’re now getting a more seasoned consultant who is faster and better. The value is the same. If you charge hourly, let’s say $400 an hour, you would have charged $4,000 before and now would charge $1,600. Let me do that math for you: you would have reduced your price by $2,400! For the same value. That doesn’t even take into account the extra value they would likely get because you know and can do more.
Value Up, Price Up
Your value is not your time. Say it with me! Your value is not your time.
As a consultant, you should be paid for the value you bring to a client, that is, the results you produce for them.
This is where value-based pricing makes more sense. Value-based pricing is a pricing model where you are paid based on the value you create for clients. For example, if you can help clients increase their annual revenue by $1 million, you agree on a payment that is based on a portion of the value of doing that. So you may charge 10% of that or $100,000. It can also be based on avoiding bad things, like reducing losses or mitigating potential reputational, operational, or financial risks. So if you can help stop a company from losing $1 million , you would charge them for a portion of the value of doing that.
Value-based pricing also doesn’t limit your income potential because it’s not fixed to a clock. It’s fixed to value. Hourly-based pricing automatically limits you because you only have so many hours in a day. Plus it sets up an unnecessary battle between your time to generate income and the time for other meaningful aspects of your life like your family and your health.
Value from the Beginning…Or Now
As a popular Chinese proverb says: “The best time to plant a tree was 20 years ago. The second best time is now.”
So if you have yet to take the leap into consulting or have just started, I would encourage you to start with this pricing model and hold fast to it. If you are an old-timer like me, then develop a plan to transition to it.
Do clients like it? The ones who have experience with it often do. Clients who pay in a value-based way tend to like it because they can avoid all of those, let’s face it, annoying conversations about your billable hours. Plus they know that you are crystal clear about what you need to help them achieve and that you will deliver it.
Clients who are set in the traditional view that consultants automatically get paid hourly may have a harder time saying yes. For them, you could either start them off with a small engagement so they can see the value to them of working and paying this way. Or you can seek other clients who already get it.
Master the Art of Value-Based Pricing
Value-based pricing isn’t a slam dunk. You need to learn how to do it and do it well. That includes learning how to ask the right questions to tease out what the true value is to a client. Often clients haven’t thought of it before so it takes skill to help them articulate it and agree on it.
I listened in awe as consultant Lisa Bing queried one of my clients to get them to pinpoint the value of ensuring a new method of service delivery was operationalized well from day one. It was like listening to a Jedi! It became clear to me that this is, as with many things you have to learn to be a successful consultant, a skill that must be studied and mastered over time. But it is worth it for you and your clients.
You also still have to manage scope creep, project drift, waning attention spans of clients and teams, etc. This doesn’t solve those problems. It’s not meant to.
Lastly, if you have not yet embraced the glory which is your value, you may price yourself too low, even using this model. Sadly, that would make your effective hourly rate (i.e., what you would be paid if you worked hourly) well below what you would charge if you billed hourly. So as you approach using this pricing model, seek advice from people you trust, people who know what your value truly is before you price an engagement. And, as always, try it and get better at it as you learn more about your craft as a consultant and as a businessperson.