Turkeys or Troubadours: Pricing Methods for Independent Consultants (Part 1)
You probably know how much your project is worth and what you should be paid for it but how do you price your services? Are we turkeys dutifully charging for the hours we work or troubadours joyfully plying our trade? Price setting is an art not a science. Here are several methods to consider.
Value-based pricing. Well-known management consultant Alan Weiss (2003) prefers value-based pricing. This means that your fees are based on the client’s perceived value of your services. For him, the quickest way to get wealthy is to do superb work and be paid high fees (Weiss, 2003, p. 172). He suggests that any other method, particularly one involving time tracking, is for turkeys and is both amateurish and self-limiting.
While Weiss offers a lot of useful information on consulting, our objectives are very different. He sees consulting as a way to bring enough value to the table to justify above-average compensation. As a program evaluator and applied researcher, I see consulting as a way to bring excellent research skills to bear on thorny organizational problems. This is how society gets better—by making informed decisions. Yes, I admit it, I have a social justice perspective. I use business as a means to support the provision of my services and along the way, I want to make a fair wage and live a comfortable lifestyle but I don’t aspire to hang out with the rich and famous.
Daily rate. The per diem or daily rate is the traditional price-setting method for consultants. For me, having a daily rate makes proposal writing more straightforward and billing easy. My government and not-for-profit clients demand strict accountability and happily, I can always pull out my time sheet if anyone questions my bill.
The challenge with using the daily rate approach is completing the project as close to the proposed contract amount as possible. Your proposal has to be so accurate that you don’t walk away at the end of the project leaving money on the table. At the same time, you don’t want to be left holding the bag with extra costs to cover out of your own pocket. It takes more than turkey brains to finesse this delicate balance.
My solution is to provide a milestone deliverable in the form of a status report at the end of every month. It accompanies my monthly invoice and ensures that I get paid regularly. My cash flow remains healthy which keeps me happy (and in business) and the client happy because he is up to date about project progress and budget status.
Fixed fee. Many consultants believe that they make more profit by charging a fixed fee or flat rate. Some collect half their fee up front and the rest upon completion of the project, or even worse, they collect everything at the end of the project. This approach benefits the client who holds some or all of the money until fully satisfied. It can take quite a while to complete a project, often for reasons beyond your control, such as lengthy approval processes or staff turnover. Further, organizations are under so much duress these days that it may be difficult to collect in a timely way.
You are also disadvantaged if the project costs more than originally planned. Nothing ever goes exactly as anticipated. Does the over-run reflect poorly on your planning or management skills? Are there unexpected issues encountered in the field? Do clients hold things up for political reasons? Regardless, clients are not pleased if unexpected additional costs arise. If a contract is already in play (and there should be) you will be out of luck entirely for those additional costs and if you continually cover cost gaps yourself, you will soon be out of business altogether.
Despite these issues, many consultants use a fixed fee approach all the time. Others tend to charge a flat fee for small engagements such as quick surveys, workshops, or the research or evaluation designs for grant proposals. To protect yourself on fixed fee assignments, prepare a one-page letter agreement, limit the scope of your engagement, or consider using a phased approach. Breaking down an assignment into smaller parts allows you to estimate costs more accurately, limits your financial exposure, and allows you to judge your client’s willingness to pay.
Standing offer. Government departments and agencies frequently hire consultants through standing offer arrangements. To get on their short list, you must submit an extensive description of your skills, research methods, former projects (with budgets and references), team members, and, yes, daily rates. You need the time, energy, and resources to participate in this rigorous selection process and there are no guarantees. However, if you are selected, you are that much closer to work and the agreement can last for several years.
When the agency needs consulting services, a quick request is circulated to a select group of consultants. It feels like you’ve been invited to an exclusive party when one of these lands in your in-box. You then submit a brief proposal on methodology and price and await the decision. The odds are obviously better than in a typical RFP process but be aware that there still is no guarantees. I have been on lists where I have never heard from the potential client again. Other times, the opportunities have just kept rolling in, especially towards the end of the government’s fiscal year (but that is another story!)
Think carefully about which pricing approach works best for you. There are still a few more options which we will explore in my next blog. Remember that one size does not fit all and you may find yourself using different methods in different situations. We all know where turkeys end up but troubadours rove from project to project and just keep playing.
Other important consulting topics, such as determining billable rates and managing contracts, are discussed in my new book:
Barrington, G. V. (2012). Consulting Start-up & Management: A Guide for Evaluators & Applied Researchers. Los Angeles: SAGE.