Considerations When Pricing Your Work as an Independent Consultant
Have you been taught to price your consulting work at an hourly rate in the past? Do you currently price your work based on the number of hours it takes you to complete a project?
The most successful independent consultants think differently and focus on a value-based pricing model. Meaning, they price their work based on the value they deliver to clients.
If you currently price on a fixed or hourly rate but want to explore value-based pricing, read on.
Why Price Your Work Based on Value?
Newly minted independent consultants often think about trading their time for money, and calculate a fee based on time spent. But simply pricing on time spent may not reflect the value delivered. Does a time-intensive project always bring a client more value than a project performed in a few days? Not necessarily.
The expertise you bring to a project, the outcomes the client will experience, and the impact of those outcomes all factor in to inform the value a client will receive.
Pricing a project based on value delivered is how large consulting firms price their work, and for independent consultants, better aligns incentives between the client and consultant. It’s also how clients think about return on investment (ROI). A client is thinking about the outcomes they’ll realize when a particular problem is solved, often in terms of time saved, costs saved, revenue generated and influenced, or risks mitigated, among other things. Understanding outcomes helps a client evaluate how much they should invest in solving a particular problem.
Until you have built a track record of success, demonstrating to a client that their investment will yield high multiples can be challenging.
Through a detailed discovery process (and with practice), you can identify how much value a client places in solving the problem at hand, and thus, you can approach proposing a fee that is tied to the value of the result, not just based on time spent, tasks performed, or a deliverable to hand over.
When there is a well-defined scope and clear outcomes, value-based pricing is a great option to consider.
Pricing yourself based on the value you provide clients requires a bit of upfront work. But once you do this, a value-based pricing approach helps you:
- Manage your cash flow better
- Remove administrative work from your day-to-day (no time sheets necessary!)
- Get a deeper understanding of client needs
- Execute more efficiently
- Increase your rates over time
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Considerations for Pricing Your Work Based on Value
The first thing to know is every client engagement is different and should be approached with fresh eyes. This allows you to structure the right proposal to solve the problem at hand. There are times when a value-based path isn’t the one to pursue. If a project scope is less certain, or you’re proposing an ongoing support structure, then hourly or fixed rate might make more sense. That’s why it’s vital to understand all of the ways to manage fees.
When you are establishing a value-based price for your work, consider the following factors:
Do you know what value the client places on this work?
It’s as straightforward as it sounds. So why doesn’t every independent consultant do this on every project, all of the time? Well, because it’s not a novice exercise. It can be uncomfortable to charge a fee higher than you normally do or probe deeper into a client’s problem if you’ve never done so before.
Asking the right questions is the first step to uncovering value. Consider questions like:
- How valuable is this work to the organization?
- How important is this work to the organization?
- What would happen if this work doesn’t happen; what is the impact?
- Why hasn’t this work happened to date?
- How else would you go about doing this work if I wasn’t able to help?
- What could happen if this problem gets solved?
- What would the state of the business be if this problem didn’t exist at all?
These questions are going to help you get a deeper understanding of the client’s needs.
What metrics will the client use to determine success?
It’s important for you to be able to measure value, and to do so you must identify what success means for the client. Successfully implementing a new ERP system could result in outcomes like: employees adopting it quickly, long-term upgrade costs are avoided, and time spent on manual work is reduced. Each of these outcomes has an associated value – time savings, cost savings, etc., which can be used to derive the client’s perceived value of solving this particular problem.
Asking questions like the following can help you get closer to understanding the value:
- When you’ve invested in work like this in the past, what returns did you see?
- What would the cost be to continually upgrade the current system over time instead of implementing a new one now?
- How much time is spent on work-arounds now?
- How much more trust will your executive team have in the projections your team produces if this project goes well?
Asking these questions will also help you understand the desired outcomes of the project, which help shape your work and guide your proposal.
Determine the ROI sweet spot
Now you can set a target price that aligns to the value the client will receive. Through the information you’ve gathered about needs, desired outcomes, and metrics of success, you should be able to derive both tangible and intangible measures of success.
As an example, in the scenario above, let’s assume the proposed new ERP system reduces manual work by 20% for the 300 employees who will use it. If their average salary is $60,000 per year, the cost savings can be calculated to be 124,800 hours saved x $28.85 average hourly wage = $3,601,080 in cost savings annually.
An intangible measure of success might be the increase in satisfaction of the employees who have less manual work to do.
Putting numbers against these outcomes helps you – and the client – understand the impact of the work to be done and the value your expertise will create.
The general rule of thumb is to price your fee 10-30% of the value the client will realize. On the Catalant platform, we see 10-15% on average.
The other way to think about it is in terms of ROI. What is the return the client will make by investing in your expertise? We’ve seen recommendations anywhere from 3x to 9x. On the Catalant platform, it’s about 6x.
These percentages and returns vary by years of experience, depth of knowledge, and track record of success for each independent consultant.
Set a fee schedule that benefits you
When pricing your work based on value, consider charging 25-33% of the total value-based fee upfront, 25-33% at the project mid-point, and the remainder upon completion. If a specific project you’re hired for requires specialized or niche knowledge that you offer, set higher fees.
Ultimately, a value-based pricing method charges based on your expertise and results you will drive for the client. Feedback is important in helping ensure perceived value matches realized value. Consider having a post-project interview with the client to validate the assumptions made in your proposal process, and measure the impact of the outcomes of the work. As you engage in subsequent projects with a particular client, you may be able to see value realization play out as you see the impact of your work over time.
Additional Considerations When Pricing Your Work as an Independent Consultant
As we said before, each and every project should be priced in the way that best suits the problem. Here are some additional considerations on pricing to keep in mind.
Be sure to understand what’s fair market value. To do this, review independent consulting compensation studies and research.
Comparative and Competitive Assessment
Set benchmarks based on what other independent consultants in your segment are charging. Ask individuals in your network how much they charge for different types of work and how they adjust rates based on fee structures. Don’t have a network of peers? Catalant shares benchmark data around things like pricing, pitching, project types, and more.
Level of Complexity
Rates can vary based on the type of project in consideration. For example, if you’re working on a project that simply requires general management expertise, rates may be lower than a project that requires a high level of skill and subject matter expertise.
Experience and Expertise
Take your experience and expertise into consideration when adjusting your fees. Assess your qualifications such as years of experience, certifications, specialized skills, and niche expertise.
Pay attention to how market trends are shifting. Something that you have deep expertise in — which might have been obscure at one time — may become more in demand. If this happens, position yourself so you can jump on opportunities quickly and price yourself accordingly. Catalant often shares data about what’s trending on the platform to help keep you up to speed on which project categories may be coming into higher demand.
Profit Margin and Operating Costs
Understand your cash flow needs and determine how much you want to take home. Be sure to disregard any potential fees that a third party (e.g. a freelance marketplace or independent consulting platform) charges your client. Also, factor in expenses related to your office space, equipment, software subscriptions, taxes, insurance, and other overhead expenses.
Don’t forget to take into account any time that you spend on business development, marketing, admin, and more. These activities contribute to your success but can’t be directly billed to clients.
Remember, your rates will inevitably change as your experience grows and demand for your skill set changes. Ensure that your rate reflects the value you bring, covers expenses, and enables you to remain competitive.