Carl Angotti on Strategies for Pricing Consulting Services
Direct link to download “How to Decide How Much to Charge for Your Services” http://traffic.libsyn.com/skmurphy/AngottiPricing180912.mp3
Key approaches – High Level Summary
- Use the 1000 invoiced hours rule – To reach a desire target income, assume you can invoice 1000 out of the available 2000 working hours there are in a year. Then, your Rate per hour = desired Income per year / 1000 Hours Invoiced per year (Minimum Income Strategy)
- Consider the dollar value of your services compared to those of an employee in your skills area. Should include an estimate of company overhead (Alternative pricing)
- Ask other Consultants selling similar services what they charge. (Market Research Strategy)
- Decide to price below, at, or above the market, (a Perception Strategy)
- Try an amount and see how it is received by clients (Market Testing Strategy)
- Check out your price with “job shops” (assume a 40% discount for them) (A competitive Strategy)
- Consider if you will plan to do projects based on a short, medium or long term basis (Strategy based upon different offerings to potential clients)
- Consider offering Fixed Price Contracts
- Consultant takes on some or all of the risk
- Fix price of Initial Offering (Proposal or Initial Assessment)
- Fix price on a “per phase completed for a Project
- Fix price on the Basis of the Value Delivered to the Client
Sean Murphy: Hi. This is Sean Murphy. I’m here with Carl Angotti on the PATCA Podcast. PATCA is the Professional and Technical Consultants Association from Silicon Valley. You can find out more about us at www.patca.org. We’re a 40-year-old organization of consultants. Carl has facilitated the new consultants’ lunches for PATCA for many years and this presentation is based on three years of lunch meetings where he’s addressed the topic of how to price your services. Carl?
Carl Angotti: Hi. Thank you, Sean. Much of this material is based upon my years of working with PATCA in the round table, and what I’ve learned from others regarding how to set the price you can charge for your services. This talk assumes you already have researched and have a market and a service to offer to it, and now we want to decide how much we should charge for your services? This question presents a dilemma when a person first starts on a consulting practice, or for a seasoned consultant that wants to introduce a new service or just considering raising their rates.
The title today is “How to Decide How Much to Charge for Your Services?” There are a number of different ways of considering what price to charge. Among these are, and I’m going to go through several ways, what I referred to as strategies, approaches to doing this.
Minimum Income: The Thousand Invoiced Hours Rule
Carl Angotti: The first one I’m going to talk about is the use of the 1,000 invoice hours rule. To reach the desired target income, assume you have can invoice 1,000 of the available 200 working hours there are in a year, and your rate per hour equals your desired income per year divided by 1,000 hours invoice per year. I call this the minimum income strategy is a good place to start you want to make sure it makes rational sense what you’re trying to do. Very often, it’s difficult to reach 1,000 hours, even if you’re running a long range practice. That’s because of all the overhead and habits involve having a practice. It’s a good place to start.
Alternate Pricing: Benchmark Against an Employee With Your Skills
Carl Angotti: Another issue would be to consider the dollar value of your services compared to those of an employee in your skills area. This, of course, should include an estimate of the company overhead, which often can be from 40 to 80% of the salary that’s paid to the person. That usually means that you will be charging a lot higher rate than you where used to receiving as a wage. This I call alternative pricing, which means that you’re an alternative, usually inside an organization, who are usually comparing you to what it would cost to do in house, kind of a make or buy decision.
Market Research: Compare Notes With Consultants Selling Similar Services
Carl Angotti: The next thing I’m going to consider is ask other consultants selling similar services what they charge. I call this the market research strategy. Then, there you would be surprised how many consultants are forthcoming with the rates they charge, and want to know some of your thoughts, of course, why you’re going to choose the rates you’re choose. One could go and ask quite a number of consultants what they’re charging and then say, “Okay. Now, I at least have a rough idea of what I might be able to sell my services for.”
Managing Prospect Perception: Decide to price below, at, or above the market
Carl Angotti: The next area I’m going to consider is to make a decision in your own mind about how you’re going to approach the market. I call this a perception strategy. You make a decision whether you’re going to price your rates at below, at, or above the market. These strategies each have their pluses and minuses.
Pricing Below Market
Carl Angotti: When you’re first starting, very often consultants will price their services below the market, try to gain volume, and that sometimes doesn’t work because if you charge too low, people perceive you as not being worth as much as the other people in the market. That strategy may backfire on you, but on the other hand, you might get a large contract at the beginning.
Charging Market Rates
Carl Angotti: Now if you charge at the market, you will be with a group of other consultants and so now you have to differentiate your services in a way that allows you to be considered above the other folks because your price is roughly the same, at least your rate per hour is. It’s surprising how many people who hire consultants just look at rate per hour, instead of the total overall cost to do the project, which is much more important than what someone’s rate per hour is, and that’s for another story.
Charging Premium Rates
Carl Angotti: You can also choose to price your services above the market, and this is an interesting perception strategy. You have to be perceived as being worth more than the average consultant. That often requires you to do more marketing and also more promotion and other kinds of activities, which unfortunately eat up time and as a result, you need to charge higher rates in order to overcome the lower number of hours you can bill in a year.
Market Test: Try an amount and see how it is received by clients
Carl Angotti: Another strategy that I’ve heard other consultants suggest is to try an amount and see how it’s received by clients. We call this market testing strategy. Find a potential client and try a rate out. If the client, say balks at the rate, it’s just too high, and several of them do, maybe it is a little too high right now. If the client immediately hires you when you quote your rate, may be pricing a little too low. Next time, you might try a little higher rate and you can go back and forth and your first few clients, you’re not going to be really sure what to charge, but you’re doing market testing to find out what a good group of people in the market will pay.
Competitive Strategy: Check out your price with “job shops”
Carl Angotti: The next strategy is a competitive strategy. What you do is you check out your rate per hour with job shops or placement agencies that place temporary workers. I call this competitive strategy in that you now can find out if they complained or ifs they’ll be open with you about whether your rate’s too high or often they don’t say if your rate is too low, unfortunately, so you might want to start off high and then work your way down. You should assume that they’re going to take about 40% for themselves, and so that means that you’re going to be billed out of the client for more than … It says here one over .6 of the rate you offer them. That may seem high, but in the meantime, you were using them as your marketing agent, and as such, you need to pay for that marketing. That allows you to bill almost full time if you can all the way up to $2000 in a year, which several people do.
Consider if you will price projects based on a short, medium or long term basis
Carl Angotti: Another strategy you might consider is you make the decision about whether you plan to do projects based on short, medium or long term basis. What that means is you’re going to be pricing … For example, if you sell a small project and you have to sell a large number of them, it definitely takes more time to attract clients, and hence, you need to make a higher rate in order to compensate to get your average rate per hour. Of course, medium sized projects are similarly in the middle, and long term basis would be someone hires you for $2,000 per year, which essentially sells you out sometimes even more than that. Of course, you can plan to do that and so maybe you might have a lower rate because you’re going almost no marketing during the year. Unfortunately, when the contract ends, then you don’t have any potential group clients.
Consider Fixed Price Contracts
Carl Angotti: One of the last things I’m going to talk about is to consider offering fixed price contracts. Many, many, many high tech consultants consider this to be a very challenging thing to do. I would certainly agree with that, but there are some certainly management consultants, marketing consultants, many of them do price their contracts that way.
Consultant takes on some or all of the risk
Carl Angotti When you fix the price, you’re taking on some or often all the risk in the project itself. Of course, you might want to be careful not to make a project that requires you to have a very exclusive outcome. If you do, then you need to price accordingly because of the risk that you may underbid by quite a bit.
Fix price of Initial Offering (Proposal or Initial Assessment)
Carl Angotti: Another approach to give a fixed price for the initial offering–the proposal or an initial assessment. This allows you to get acquainted with each other and see how you work together. In my case, I provide a full-fledged proposal, which includes the spec and a plan which shows what everyone working on the project will do. The client is free to use the proposal directly or shop it elsewhere because he has paid for it. I encounter a number of prospects who will pay for my project plan because many people do not offer such a good plan. Ordinarily, when I work on such projects, they’re sort of semi-fixed price and that I do a four different price not to exceed. Then, I track the hours very carefully and make sure that we are not overrunning and sometimes we have to shift the scope or increase the fee in the middle of a project, and that’s just the negotiation after work has started.
Fix price on a “per phase completed) for a Project
Carl Angotti: Another way that folks have worked for fixed price is on a per phase completed basis, where you fix a price for each phase going forward and then you attempt overall to make a good rate per hour. If you underbid one section, perhaps you can get the client to agree to be more loose on another phase. This can often work. There are people … As you go into the project, the more you’re on it, the higher the probability you will be able to predict the outcome. Main reason why many people don’t like fixed price contracts is because at the very beginning, there’s a lot of risk involved on the part of the consultant if they do a fixed price. Now, as your project is going along, you know more and more about it so you’re much better able to fix the price.
Fix price on the Basis of the Value Delivered to the Client
Carl Angotti: Another popular basis for fixed price contract that is frequently offered by management consultants and other consultants that have more, what might be called soft or semi-soft outcomes in their delivered service. In these services, I’ve been describing Alan Weiss’ book, “Million Dollar Consulting,” in which he talks called value delivered for the client price basis. You have to figure out what the entire project is to deliver a measurable outcome: for example, reducing the turnover rate in the company by a certain percentage or more. Then, you price it based on the savings the client will see when you deliver on your promise, and charging the client some fraction of that amount of money. Weiss suggests in the book that you give the client their money back if you don’t deliver.
Other perspectives and models for pricing
Carl Angotti: Here are some other articles I recommend that discuss pricing strategy for consultants from a number of different perspectives: