The Pros and Cons of Each Consulting Pricing Model
Since there is no perfect pricing model for your consulting services, you need to know what you are gaining and giving up when you pick among the models. There are trade-offs to every model and different things you have to do—and do well—to make them work for you, your business, your clients, and your life.
So what do you need to know to make a good choice?
What Do You Want From Your Pricing Model?
There’s a lot at stake with a consulting pricing model. It’s essential to know what you want your pricing model to do for you and what you want to avoid.
A pricing model is more than just the way you bill and get paid by clients. Picking a pricing model can support or undermine your ability to get paid for all your value and have the income and life you want.
Your pricing model can eliminate, reduce, or create stress for you and your client. It can reduce or increase the time you spend doing work you don’t get paid for, such as negotiating and executing contract amendments.
That’s why you need to know enough about each to make an informed decision.
Below, I share four different pricing models, along with pros and cons of each and an overview of situations that tend to be best for each. Keep in mind that a pricing model won’t eliminate client management issues like scope creep or project drift. You’ll still have to contend with those. But the right pricing model will reduce risks and increase benefits for you and your client.
Value-based pricing is when you receive a defined fee based on the value of the outcome you achieve for the client.
Your revenue is predictable.
You can focus on providing value, not hours.
It is usually an advance payment, in part or whole.
You can scale your business more easily and make more.
You can have more flexibility with your time.
You could underprice the value of the engagement and not get paid your full value.
Sometimes the actual value to your client can be difficult to determine.
Not all clients are used to this model or understand it.
Some clients, such as government clients, can’t use this model.
Existing clients may not want to switch to this model.
When I Would Use Value-Based Pricing
If the conditions are right, I would do value-based pricing in a heartbeat. Personally, I do not like watching the clock or pretending that my value is a unit of time. I like focusing on value for my client. The first time I did a value-based price, it felt liberating—for me and my client! Plus, receiving an upfront payment is wonderful because it helps with cash flow and means I don’t have to spend time and tracking down payments.
Being able to tease out what the value is with a client—and ensuring the price meets your value and income needs—isn’t always easy to do. Doing it well requires new knowledge and skills and enough information and confidence to price it correctly. Depending on who you want to work with, they might not understand or accept this type of payment model, which means you either have to choose clients who will do it or pick another pricing model.
I would use this model when:
The project outcomes are clear.
The scope is sufficiently clear and predictable.
You know what is needed to achieve the outcomes.
You have enough control over achieving the outcomes.
The complexity and duration of the project does not increase the uncertainty of the scope and outcomes.
Good examples might include creating a product or offering a package of services that are well defined. Or value-based pricing would be a good fit if the price is high enough to absorb any project shifts or uncertainties. An example would be mergers. Since the majority of mergers fail, the value of not failing may be high enough to negotiate a sufficient value-based payment that can cover uncertainties that come with most mergers.
Fixed-price or project-based pricing is when you charge a flat fee for a defined scope of work or deliverable(s). You may get paid a set amount for the entire project or you may get paid based on completing a series of deliverables.
Your revenue is predictable.
You will be rewarded for being efficient.
It usually includes an advance payment.
You could lose money if you underprice the scope of work.
You could lose revenue if the scope or timeline changes or you have to renegotiate every time it does.
When I Would Use Fixed-Price Pricing
While the fixed-price model and value-based pricing might sound very similar in terms of their pros and cons, the conditions for selecting between them are quite different. While a value-based payment is a type of a fixed-price model, it bases the price solely on value. The fixed-price model is often based on the time and effort it takes to achieve the outcomes or deliverables rather than the value.
I admit that I rarely do a fixed fee, partly because the nature of the work I do inherently involves a lot of uncertainty. If I did work that was more technical in nature, and there was a project that had a lot of certainty about what it takes to complete the work, I would definitely consider a fixed price, especially if it’s work that I can do efficiently.
I will also use fixed prices for shorter engagements—measured in weeks rather than months or years. I would also do it if I am charging a day rate (plus expenses) for tasks performed during a set workday, for services performed within discreet hours, like an onsite training with a set duration, or for a product (e.g., an assessment tool).
All that said, I’d still rather ensure that my fixed price is based on value rather than on hours.
Retainer pricing is when you receive an advanced payment, usually monthly. There are generally two types:
Payment for a defined maximum number of hours that you will work monthly
Payment for being available as needed, which is more like a subscription service
Your revenue is predictable.
You will get advance payments.
You will have more flexibility to deliver value for your client.
Your amount of work and pace can vary.
Your amount of work and pace can vary. (Yes, it’s both a pro and con!)
It requires ongoing management of client expectations.
You have to ensure that clients see an obvious benefit to continuing a retainer.
When I Would Use Retainer Pricing
I love retainers and look for opportunities to use them. Guaranteed income and flexibility are lovely things. I would especially negotiate a retainer if I’m serving as a trusted advisor to the CEO. This role requires ongoing support and flexibility and helps ensure that my value is always felt by the ultimate decider.
I would also use this model when I can easily manage the client’s expectations. Sometimes clients hear “retainer” and think that means they’re paying for unfettered access and unlimited work—regardless of what is in the contract. So I would only use it if I had the sense that a client would accept boundaries if I have to set them.
Hourly pricing is when you get paid a rate for units of time working for a client.
In some circumstances, it can help ensure you are paid for all your work.
It is an easy model for clients to understand.
Some clients will only accept hourly payments.
Your income will be limited by your work hours.
It diminishes your ability to scale your business.
You will have to wait to get paid by clients.
You may have to convince a client about what an hour of your time is worth.
When I Would Use Hourly Pricing
Let me first say that hourly pricing is not my favorite pricing model. My value has nothing to do with a unit of time! I can accomplish more in an hour now then when I first started consulting 10 years ago. That makes me more valuable but, under hourly pricing, I would be paid less. I also want to be able to help more clients and scale my consulting business, which I can’t do if I’m limited by my work hours.
With such an impassioned statement about the cons of hourly rates, you would think I would tell you to abandon them completely. Well, as with many things, it depends.
I do use hourly pricing with some clients, especially when I do work that involves a lot of uncertainty. If I get a whiff that the client is uncertain about the scope or leaders don’t agree on the desired outcome or scope, then I know work in the engagement will be less predictable. In that case, I may I choose hourly pricing. If it’s over a long duration, is very complex, and/or involves my managing a big team, that can dramatically reduce predictability, in which case hourly pricing may be the best choice.
Still, I try to avoid it when I can or limit it to portions of an engagement where there is the most uncertainty. I’ll sometimes use hourly pricing with another pricing model. For example, I’ll do a value-based contract with a bucket of as-need hours for anything beyond the scope.
A Bonus! Bonus Pricing
One final pricing strategy that you may want to negotiate for is a bonus for an agreed-upon achievement. There are two types of bonuses: an upside bonus and a downside bonus.
An upside bonus is a bonus for achieving something beyond the outcome. This type of bonus could be triggered by:
Achieving a deadline or delivering an outcome early
Exceeding a revenue target above a threshold
Avoiding something detrimental, such as a financial or operational loss
A downside bonus is when you agree to put all or a portion of your payment at risk, meaning you will forego part of that payment if you fail to hit a target. For example, you may agree to only be paid your full payment if you secure, say, a grant for your client. These types of bonuses are by design risky but may be worth it if you have enough confidence that you can deliver on the outcome and you can negotiate a higher overall payment.
Which Model is Right for You?
It depends on the clients you want to work with, the nature of the work and the clients, and your desires and capabilities. At different times, for different clients, under different circumstances, you will want to use any and all of these models or a combination of them.
You may also decide that there’s only one type of model you want to use, one that fits well with the type of work you do and what you are able to do for clients. In that case, you will only seek clients and work that are well suited for that model.
The choice is yours! That’s the beauty of being the boss of your consulting business and creating the life you most want.
If You Need More Help with Pricing
Choosing pricing models, pricing consulting offerings, and helping negotiate pricing with clients are some of the main strategies I help consultants with. I recently helped a new consultant develop a tiered pricing strategy for a potential client that tripled the price she successfully negotiated to over $120,000.
If you need help making sure you get paid for all of your value and minimize your price risks, I’d be happy to talk to you about coaching. Click here to see how I can help you build a profitable consulting business.