Consulting Pricing Strategies

Jul. 14, 2020 by

Welcome to the 3rd lesson in the Consulting Crash Course


In this section we're going to cover:

  • various pricing models
  • how much to charge
  • payment terms
  • talking price with clients
  • handling objections



Pricing Models

There are various ways to set your rates and fees. 

The model you you should choose depends on your industry and experience. 


The main pricing models are:

  • Hourly - charge X per hour. This is the simplest strategy and probably what most clients expect. You agree on a hourly rate and send the client an invoice based on how many hours you worked.

  • Per project - put together an estimate for a predetermined amount of work. The problem with this is the estimate is usually based on how long you think the project is going to take you, so it can be easy to under bill or over bill. 

  • Retainer - a retainer means that a client pays you a fee in advance to keep access to your services when they're required. This can be helpful if you're not actively billing against their project on a daily basis but the client still needs your services from time to time. 

  • Productized services - you systematize your service so you can package it for a one-time sale or recurring fee. An example to productize software development would be instead of billing hourly to build a website for a client, I would sell websites for $1,000 a package regardless of how long it took me.

  • Value based -  you negotiate a price with the client based on the value or ROI you bring. This is one of the ways to make the most money but is hardest to negotiate with clients. This may work better in some industries like marketing and sales where you see a direct impact on the bottom line versus software development where it takes time to see the outcome.


If you're just starting out I'd recommend hourly because it is easy to implement and common for most clients. Over time you should experiment with different rates and pricing schemes to figure out what works best for you. The natural progression is to start hourly and increase your rate over time or switch to value based.



How Much to Charge

This is a simple formula to tell you how much you should charge to make your desired salary. 

[Desired salary] / 10 months / 4 weeks / 35 hours = $ / hr

Ex. 100k / 10 months / 4 weeks / 35 hours = ~$70 / hr

*Note: this is just a starting point and simple calculation. It assumes ~75% of your hours are billable. You will need non-billable hours for finding new clients, time off, admin work, etc.

10 months x 4 weeks x 35 hrs = 1400 hrs
12 months x 4 weeks x 40 hrs = 1920 hrs
1400 / 1920 = ~73% billable time
 
How much you can charge is going to vary by industry, experience, and location. You want to know the entry, mid-level, and senior rates for the work that you're providing. Another good strategy is to figure out how much your competitors are charging and use that information accordingly.


Consultants normally charge more than employees because they are not given employment benefits (like healthcare, dental, vision) and pay additional tax (self-employment tax).

One piece of advice I give to anyone starting out is to always charge more than you think that you're worth. If you're going to go through the hassle of running your own business and doing everything yourself, you want to make sure that you get paid and aren't doing a bunch of work to make less than your previous job.



Payment Terms

You want to sure your payment terms are well understood and are included in your contracts and invoices.

Payment terms refer to:

  • how often to bill
  • the period of time the client has to pay the invoice
  • the acceptable payment methods
  • any late fees or discounts


How often to bill
Twice a month is a good place to start. Once a month or longer may be good for larger invoices. I try to bill on the 1st and 16th. This splits the month into 1st - 15th and 16th - end of the month.


Period of time the client has to pay
Due immediately is the best situation. This is also known as COD (cash on delivery) or “due upon receipt”. 

Net 10, 15, 30, or 60 are other options. This means the client has X amount of days to pay the invoice. For example, net 15 means they have 15 days to pay the invoice. As a general rule, the larger the invoice, the longer the client has to pay.

I set my invoices to “due upon receipt”, but allow the client up to 7 days to pay it before bugging them. 


Acceptable payment methods
ACH (automated clearing house), check, or credit card are the typical payment options.

ACH is an electronic money transfer between 2 financial institutions. It is a small fee or free and deposits the money in your account within 1-3 days. You’ll have give your client your accounting and routing number so they can enter it in their payment system. You can also set up QuickBooks to receive ACH transfers.

Check is a good option to avoid any fees but is slower than other options. You have to wait for the check in the mail, take it to the bank, and have it clear before you can access the funds.

Credit card is another option to get paid quickly but there is a fee. ~2.9% is the standard fee. This can be significant over the course of the year.  $100,000 x 0.029 = $2,900 in fees.


Late fees or discounts
Some people give discounts for early payment or additional fees for late payments. This is usually a small percentage (2-5%). I recommend specifying late fees or discounts if you consistently have issues getting clients to pay your invoices on time. 


More info on payment terms can be found here and here.



Talking Price with Clients

It's a good idea to practice how and when you tell clients your price. Discussing price can feel awkward so you want to sound confident and prevent stumbling over your words.

Generally, you want to disclose price later or last so you have time to understand the client’s needs and build a relationship with them. It’s smart to  
create a list of questions that you ask clients to help you understand their needs.  

When a client asks you your price, your answer should vary based on the situation.

If you’ve already had multiple interactions with the client and understand their needs pretty well, feel free to discuss price. 


If it’s the first interaction with the client and they ask your price, it may be a good idea to redirect the conversation and say something like “It depends. I need to understand exactly what you need before I can answer that. Can you tell me a little more about ...”. This gives you more control in the negotiation rather than just saying a price and waiting for a yes or no.

If you’re in the middle of a client conversation and aren’t ready to give them your price, give them a low/high range. This allows you to move the conversation forward and gauge their reaction.

Also, don’t beat around the bush for clients that “just want to know the price”. Every situation is different. The general point is you want to understand their needs, the scope of the project, and the timeframe first. Then you should discuss price.

For price delivery, say your price, then shut up and listen.
It’s common for new consultants to start rambling at this point. Just tell them the price, then see what they say.

“I charge X per hour. Are you comfortable with that?” … Then silence.



Handling Objections

In sales, when a potential client turns down your offer, this is called an objection. However, just because someone says no, doesn’t mean you’ve lost their business forever.

Many prospects will give an excuse or lie to you when they say no. You need to understand the real reason they said no rather than always taking their words at face value.

The 4 steps to objections are listen, understand, respond, and confirm. You need to truly listen and understand the real reason they said no. Then form a response that handles the objection. If done correctly, you’ve given yourself another shot at getting a “yes”.

Some common objections are “it’s too expensive”, “I’m too busy”, or “I’m not interested”.
Here’s more on handling common sales objections - 
HubSpot

Good follow ups to use are:

  • Would you consider doing test run for X and seeing how that goes?
  • What if X changes, does that change anything?
  • What would have to happen for us to do business?
  • Would it be okay if I follow up later?



That's all for this lesson. In Accounting for Consultants we'll cover accounting, bookkeeping, QuickBooks Online, and taxes.


If you found this useful, please share it and try HoursLogger if you need time tracking and invoicing for your business. 

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