Changing your pricing strategy is arguably the fastest way to grow your consulting practice. Why? They don't require any time, money, or people to implement. And you start reaping the benefits immediately.
There are several reasons why micro and lifestyle consultancies don't do a good job with their pricing:
Luckily, these problems are easy to solve. There are a number of best practices that will immediately improve your pricing strategy. Following them is the starting point to improve your margins.
Of course, understanding the pros and cons of different pricing models is key. I won't discuss them here (feel free to check our blog section). What you need to know is that there are no right or wrong practices, only right or wrong for your specific situation. That's why it is important to understand when and how you can use fixed or project-based pricing, value pricing, hourly or daily pricing, and performance pricing, and which kind of clients and engagements are typically a good fit with each pricing model.
In short: Your pricing strategy, just as your growth and business development one, needs to match your overall business strategy.
Are you a solo advisor or a boutique with a larger team? Are you selling to FT500s, SMBs, mid-size manufacturing companies in the US? Do you offer strategy, implementation, coaching, interim services? Different firms should and must price differently.
What every consultancy needs, however, is to make sure they are not making any of the 5 mistakes I previously mentioned.
If you don't know what your services are worth to your clients, you need to invest time clarifying what are the exact problems they solve. No one hires a consultant out of boredom. Even though many clients struggle to verbalize it, all of them have a specific set of desired outcomes they want to achieve when they consider hiring you.
Your proposals probably include deliverables, key tasks that will be performed, and how often you would communicate with the client. But if the client doesn't know what are the short and long-term effects of the engagement to the company, the price will look like an arbitrary number, and you will see objections. It's your responsibility to educate and clarify to the company what savings or improvements are being generated.
To justify your fees, most of your metrics should be measurable. They can be short or long-term metrics, but most all be directly linked to the implementation of your project. Here are some examples:
There might also be metrics that the company is already using (that you should identify during the sales process) and personal metrics that are usually emotional and tied to your buyer (such as behavior change and the impact of the project on internal culture). I recommend you make a list of at least 10 metrics that your offerings impact, and keep them in mind during the sales conversations. Not all of them will be relevant to a prospect, but most will. They will provide you and the client with a good estimate of what your services are worth to them.
If you don't know what your clients are willing to pay for your services, you are probably avoiding pricing conversations.
Consulting partners who thrive in business development don't hesitate when it comes to pricing. They look at money as nothing more than a quantification. It represents the client’s perception of the value they will receive from their work.
Why does it matter? Because your goal is to make the conversation about money as easy and enjoyable as the rest of the buying process.
There are two counter-productive behaviors that many partners display:
Talking about money is just one of the many steps in your prospect's buying journey. Your goal is to help them and build a relationship. Delaying the pricing conversation will help neither of you.
If you can't clearly explain to your clients why you charge what you charge, you need to work on your communication and business development skills. Assuming you know what your services are worth to the client and how much they are willing to pay for it, all you need is to provide a reasonable argument to defend your price.
A reasonable argument doesn't mean you need to justify how exactly you got to your prices, what your margins are, and the exact math that went into it. It might be as simple as saying:
As you can learn in our Rethinking Growth Advice email course, consulting services are credence goods. Clients don't have the expertise to evaluate what they need, how difficult it is for you to deliver it, and what constitutes good work before or after hiring your services. This means to purchase consulting they need to implicitly trust you.
As long as you help prospects clarify what's the impact of the project for them and don't try to capture more value than you create, pricing objections are never really about your pricing methodology. You either rushed the sales process and haven't built enough trust, or you failed to uncover key information in your discovery conversations that need to be considered in the proposal.
If you price based on internal costs and/or what your competitors price for similar services, you are accelerating the commoditization of your services.
This is how many consultancies do pricing: They look at what others are offering and how much they charge. Go slightly below the average fee to "remain competitive". And aim to provide the same offerings with small tweaks to "overdeliver" or "differentiate".
The problem with this is that it's not a sustainable strategy. Pricing where the market is means you're pricing for market efficiency.
Over time, more consultants enter offering "a little more for a little less", until eventually no one can provide any more for any less. You make just enough to keep going.
But the consulting industry is not an efficient marketplace. Many people and companies want to hire the expensive consultant. They just need a reason.
It's up to you to provide them with one - through your narrow and clear positioning, effective marketing initiatives, winning offerings, and consultative conversations.
Finally, if you don't allow your clients to choose their price by presenting options, you are leaving money on the table.
The reason why presenting options work so well is that it changes the question you are asking the prospect. A proposal with one price asks, "Does this represents good value?" One with multiple options asks, "Which of these proposals is the best value?"
And as you know, value is subjective. You can only measure it against something else. This means:
You would be a fool to neglect the importance of providing pricing options. I provide some numbers to illustrate it below.
"To succeed as a pricer you need to watch for your own tendency to default to the labor theory of value. My wife, the hardest working person I know, will occasionally remark about someone, "She is very successful. She must work very hard." Like a programmed droid, I reply, "No, she must take a lot of risk." After the initial stage of success (the validation or proof-of-concept stage, which does require a lot of hard work), your success will depend more on your creativity (ability to see opportunity) and risk (willingness to leap for it) - which together equal what I call innovation - than it will on hard work (labor). To price based on effort is to shackle yourself to a life of hard labor and devalue the expertise you have amassed."
Source: Blair Enns, "Pricing Creativity"
It's easy to understand the subjective theory of value: it states that all value is personal and subjective. But when we're under pressure, stressed, or not in our best conditions, we fall back to the labor theory - that the value of something is determined by the cost to make it.
We do that because we biologically hate uncertainty and ambiguity. We look for objective rules or laws to guide our actions and explain the world. As Enns puts it, "Many people consider value, beauty, fairness, color, sound, and time to be absolutes - real things external from us and universally true - and yet none of them are. They are all our own mental constructs."
The idea that your services should cost X or that the price of your time can't be more than Y is nonsense. But that doesn't mean your clients will accept any number you shoot them.
One important idea that is deeply connected with price, especially for consultants, is that of risk. I wrote about it before: All profit comes from risk. The bigger the risk you reduce (or manage) to your clients, the more they will pay for your work.
To charge more, find and solve more expensive problems.
Consultancies that give three pricing options are 50% more likely to have a high "year one" client value (above £100k) and twice as likely to have high conversion rates (above 60%).
Still, almost 1 in 2 consultancies stick with the old practice of providing a single price. When asked "how many pricing options do you provide?", the latest research shows 43% of consultancies provide one, 40% provide two, and only 16% provide three options.
Source: Consultancy BenchPress 2023
When you sell large or bespoke projects, do you charge different prices (for a similar scope of work) based on who the client is?
Fairness is something I hear often from consultants when we discuss the possibility of charging much more for what they do. If I suggest that you charge twice or thrice your regular prices in specific situations with certain clients, you might tell me that those prices are not fair. But what is fair?
Many economists would say that any price paid is by definition a fair price. The buyer agreed to pay it, the seller agreed to sell for it. But that's not true.
Fairness is a feeling: It's not about the number of digits in your invoices, but how your clients feel when they pay them.
It's even more subjective than value, since value is still correlated (at least to some extent) to the financial benefits you generate to clients. That also means you can't play the judge and decide what fee is and isn't fair for your clients. It's up to them to decide it.
When you undercharge for your services and justify it with "fairness" arguments, you're not only leaving money on the table. You're also signaling to clients you're not confident you're worthy of what they thought you are.