Welcome back to the Consulting Crash Course. I'm Drew with Hourslogger and in this video we're talking about consulting pricing models. We're going to talk about the various pricing models, how much to charge, your payment terms, and how to talk price with clients. Let's talk about pricing models.
There are various ways you can set your rates and fees. The model that you should use depends on your industry and experience. Here are the main pricing models.
We've got hourly, per project, retainer, productized services, and value-based. Hourly is the simplest strategy and probably what most clients expect. You agree upon an hourly rate and send the client an invoice based on how many hours you worked. For per project, you 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 or overbill. 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 means 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 billing means 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 it's the hardest to negotiate with clients. This may work better with some industries like marketing and sales where you can 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's easy to implement and common for most clients.
Now let's look at how much to charge. This simple formula. tells you how much you should charge to make your desired salary.
So if you want to make a hundred grand you take a hundred grand divided by 10 months divided by four weeks a month divided by 35 hours a week and that gives you roughly 70 dollars an hour. Note that this is just a starting point in simple calculation. It assumes that about 75 percent of your hours are billable. You will need some non-billable hours for finding new clients, taking time off, admin work, and other activities. 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. 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. Consultants normally charge more than employees because they are not given employment benefits like healthcare, dental, and vision, and pay additional tax like self-employment tax. Something that's important is if you're running a solo consulting firm, more clients doesn't always mean more money.
You only have about 40 billable hours a week regardless of how many clients you juggle. Fewer large contracts is easier to manage than lots of small contracts. One piece of advice I try to give anyone starting out is always charge more than you think 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. You want to make sure that your payment terms are well understood and are included in your contracts and invoices.
Payment terms refer to how often you bill, the period of time the client has to pay the invoice, the acceptable payment methods, and any late fees or discounts. So for how often to bill, I think 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 the 16th. This splits the month into the 1st through the 15th and the 16th through the end of the month, the 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.
So for example, net 15 means they have 15 days to pay. I set my invoices to due upon receipt, but allow the client up to 7 days to pay before bugging them. Acceptable payment methods ACH, automated clearinghouse, check, or credit card are the typical payment options.
ACH is an electronic money transfer between two financial institutions. It is a small fee or free and deposits the money into your account within 1-3 days. You'll have to 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 the other options. You have to wait for the check in the mail, take it to the bank, and then have it clear before you have access to the funds. Credit card is another option to get paid quickly, but there is a fee.
About 2.9% is the standard fee. This can be significant over the course of the year. So if you make $100,000 and you multiply that times.029, it's about $2,900 in fees.
Late fees and discounts. Some people give discounts for early payment or additional fees for late payments. This is usually a small percentage, around 2-5%. I recommend specifying late fees or discounts if you consistently have issues getting clients to pay your invoices on time. More information on payment terms can be found at these links.
It's a good idea to practice how and when you tell clients your price. Discussing price can feel awkward, so you want to make sure that you 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. Here's a link to the template I use for potential clients. 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. But 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 give me a little bit more detail 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 conversation and aren't ready to give them your price yet, give them a high-low range. This allows you to move the conversation forward and gauge their reaction. Don't beat around the bush for clients that just want to know the price. If you can tell they just want to know the number, don't try to play games with them. And every situation is different.
The general point is you want to understand their needs, the scope of the project, and time frame 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 your price and see what they say. So for example, I charge X per hour. Are you comfortable with that?
And then listen. In sales, when a potential client turns down your offer, this is called an objection. However, Remember, 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 make sure that you actually understand the real reason why they said no rather than just taking their words at face value. The four 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 chance at solving the problem.
at getting a yes. Some common objections are it's too expensive, I'm too busy, or I'm not interested. To see more on handling these common objections, check out this link. A few responses that I use to handle objections are what if x changes?
Does that change anything? Would you consider doing a test run for x and seeing how that goes? What would have to happen for us to do business?
Do you mind if I follow up again in the future? Alright, that's all I've got in this video. In the next video, we're going to be talking about accounting for consultants. Thanks, and see you in the next video.