What is the Right Consulting Pricing Model?
Updated: Dec 2, 2022
What pricing model should you use as a consultant? It's a critical question to answer. And it seems like everyone has an opinion about that. A strong opinion.
It sure sounds like it’s easy to get it wrong. So what’s the right pricing model?
The real answer is…it depends.
I know that sounds a lot like a typical consultant’s answer, but it’s true. You may pick a value-based, retainer, fixed-price/project, or hourly pricing model depending on a number of factors.
Decide, Don’t Default
The key is not to default to a particular pricing model because you think you should. I know it may seem easier to do it that way, but that can create risk you don’t want.
The truth is, there is no perfect pricing model. Every pricing model has pros and cons, which means there are always trade-offs. In reality, the right pricing model is the one that works for you, your clients, your business, and your life. You're the boss of your business. You get to decide what works for you. The key is to pick the trade-offs that are worth it to you and the risks you can manage.
You may decide that you only want to use a single pricing model and then seek out clients who that will work with. Or you could decide to pick a pricing model based on each of the clients you want to work with and the nature of the work. You may also pick more than one model for a single client or different aspects of the engagement so you can better balance the trade-offs and risks.
Again, you are the boss. You want to make informed decisions so you get paid for all their value and ultimately build a profitable and sustainable business, but they are your decisions to make.
Know Your Goals First
Before you pick your pricing model(s), it’s helpful to know what your goals are so you will make better choices.
Does It Support the Life You Want?
I suggest that your first goal should be supporting the life that you want to have. Why do I put that first? Because it is easy to prioritize your business goals and make your life an afterthought. The problem is you may make choices that don’t support the life you want or allow enough time and energy for other things that are meaningful to you. So take the time to write out what you want your life to look like and then, as you are assessing the price models, ask yourself if it supports or hinders the life you described. I’d suggest doing this regularly so you can adjust if it doesn’t head the direction you want.
Does It Enable You to be Paid for All Your Value?
You value in your market is based on the value of the outcomes you can help client achieve. So the second critical question to ask when assessing pricing models is if the model will support you getting paid for all of your value.
At first glance, this may seem like an argument for value-based pricing, which is intended to do exactly that. But if you have imposture syndrome or do not have the confidence yet to embrace your true value, you likely will not offer a price that pays you for your value. If you don’t have the knowledge or skills yet to know how to assess the true value to a client, negotiate a value-based price, set scope boundaries, or renegotiate changes, you may underprice yourself or lose money. These are all essential consulting skills, but you may not have developed them yet. And, the truth is that, for some consultants, these are growing pains and, therefore, temporary. But that’s not necessarily true for all consultants.
If an engagement has a high degree of unpredictability, you may not be able to know how to price it. In these circumstances, another pricing model might better ensure you are paid for your value.
Does It Increase or Reduce Stress?
Ensuring a healthy life for you as a consultant and a positive client experience are both essential to having a sustainable consulting business. That means you want to pick a pricing model that enables you to eliminate and reduce stress for yourself and your clients. If you pick a pricing model you are not able to manage or isn’t a fit with a client, all it's going to do is create stress. That's not going to be helpful for you, your clients, or your business.
For example, I’ve had clients who I knew didn’t or couldn’t really know what they wanted at the beginning of the contract. That's why they ended my help. Or I knew they were going to change the scope or timeframe more than once. I’m good at defending boundaries and renegotiating, but I didn’t want to have to do that repeatedly because it is stressful to me and the client. I instead picked pricing models that made it easier to communicate the consequences of changes to the clients. Or I picked a pricing model that allowed me to absorb most of the changes but then had to account for that in the actual price.
Factors to Consider When Choosing
There are several factors to consider when picking your model(s). Here are the ones I consider so I can increase the mutual benefits to me and my clients and reduce risks of underpayment.
Scope: Is the scope known and predictable or will it likely change in ways I can't predict?
Type of Work: Is the type of work more hands-on project work or strategic support (or both)?
Complexity: Will the engagement’s complexity likely create uncertainty or otherwise impact the engagement?
Duration: Will the engagement’s duration likely create uncertainty or otherwise impact the engagement?
Context: Are there circumstances within the company/organization and/or in their environment that will likely create uncertainty or otherwise impact the engagement?
Client: Does the client have attributes that will likely create uncertainty or otherwise impact the engagement?
Your Capabilities: Do you have the temperament, knowledge, and skills to manage the trade-offs and risks of the model?
These factors won’t necessarily balance evenly or eliminate all risks, but it will enable you to make the best possible decisions. And you can always change the way you do it if you want or as your capabilities increase.
In My Next Blog…
I’ll cover the pros, cons, and trade-offs of each pricing model—and add in an extra model you may be able to negotiate for.
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