Whether you are an independent consultant or part of a firm, you have to decide which pricing model or fee structure to propose when you are doing a proposal for a client. This will define how you will be paid. You and your client need to agree on the fee structure and then write it into a contract.
The main goals of any fee structure are to:
Make sure you get paid not just for what you do but for the value of what you do for the client.
Eliminate or reduce future stress for you and your client.
Eliminate or reduce the time you spend doing things like contract amendments, which you do not get paid for!
There are 4 primary ways to charge clients.
Charing them based on the value of the outcome(s) they want
Charging them a monthly retainer for the work you do for them.
Charging them a flat fee (fixed price) for the entire scope of work.
Charging them for every hour that you work for them and any expenses.
There’s no one best way to do it. In this blog, I’ll talk about what value-based pricing is, the pros and cons of using that fee structure, and when I would suggest using it.
What is Value-Based Pricing?
Value-based pricing is when you receive a defined fee based on the value of the outcome you achieve for the client.
For example, let’s say a company wants your help to increase their annual net revenue by $1 million dollars. If you used this pricing model, you could negotiate for 10% of that target amount, which is $100,000.
It may not always be as quantifiable as that. It could be that the prospective client is trying to do or avoid things that don’t have a specific dollar value attached to them, such as reducing talent loss after a merger, implementing new systems, or developing strategic plans. In those cases, you will have to get them to reveal things that help you develop price, such as what they have to gain or lose and what that means to them as an entity. (More on that in a moment.)
Value-based pricing lets you focus on what matters most to you and your clients, which is getting them the results they want. It frees you and clients up from watching the clock and rewards efficiency.
One of the best things about value-based pricing revenue is that you will earn predictable revenue. You set a price for the engagement and payment triggers, and that’s what and when you get paid. Having predictable income can help with cash flow, which is critical for independent consultants and firms.
Even better, it’s usually an advance payment, in part or whole. Typically, you can charge half up front and half upon completion. If it’s a longer duration, you may want to have more payments spaced out over time to help with cash flow.
If also gives you income that is not dependent on how many hours you work. That can give you more flexibility with your time.
Value-based pricing is one of the best ways to scale your business more easily and make more income without having to work more hours. And the more valuable you become over time, the more you can charge.
Because the price is fixed, you could underprice the value of the engagement and not get paid your full value. This is especially a risk if you don’t know what it will take to achieve the outcomes or can’t control or influence the factors that yield outcomes.
As stated, sometimes the actual value to your client can be difficult to determine. If you’re lucky, it’s quantifiable and you can get to agreement with the client on the monetary value of the outcomes they want. However, often it isn’t always that straightforward. You may have to do some additional research to determine a monetary value or use your best judgement and hope it matches their budget.
Many clients also are not familiar with this model or understand how it benefits them. And they often default to hourly billing. If you want to work with clients you haven’t made the switch yet, you have to help them embrace the value of this model to them. If you have existing clients who are used to you using a different model, they may not want to change to this model. Given that, you’ll have to decide if you want to keep them as a client.
Some clients, such as government clients, can’t use this model. There may be regulations that require hourly billing.
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 what it takes to achieve 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.
No Matter What…You Have to Get Good at Determining Value
Asking the right questions is a critical skill for getting clients to reveal the value of the results they want.
For example, if a prospective client says they want to retain top talent of the surviving entity after a merger, you have to explore the quantitative and qualitative value of that to them.
You need to ask them to quantify things like how many people they consider top talent, what their salaries are, and what the financial risks are of losing that talent.
But you also need to mine for evidence of value that is more qualitative by asking questions like what it means to the organization to retain that talent, the risk is of doing nothing, and what the value of retaining that talent is to them from organizational and cultural perspectives.
The more you get them to talk about the nuances of the value of the outcomes, the easier it will be for you to pick a price that will be right for you and feel right for them.
Always Get Paid for Your Value
Whatever fee structure you use, it is critical that you always make sure you get paid for all of the value you bring to the client. You are not just showing up to be a warm body for the client. You are giving them all kinds of value: your expertise, intellectual property, insights, instincts, output, and more. You are also helping them do things that they couldn’t do and would have difficulty doing without you. That value is worth a lot and you deserve to be paid accordingly.
Other Fee Structures
You can get more information on other types of fee structures by clicking on the links below.
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