What is best way to price consulting services? Here are effective guidelines to maximize results and avoid common pitfall. Despite I mainly focus Business Intelligence consulting, this guidelines are applicable to most IT consulting and software development activity.

Time based billing: so usual, so wrong!

Most consultant accrue price through an hourly or daily fee. This usual practice is surely not the best one. Can you figure why? It's very simple: you can get much more using a different pricing policy!

Your client has little interest in how much time you spend, what really matters is the value of what you produce. I said “little” interest because in fact her only interest in your time is to guess if somebody else could do the same for less.

Prospects only compares your price with only two other factors:

1. The benefits deriving by the resulting solution (the outcome of your service)

2. The cost possible alternatives (that's why she needs your hourly price). By the way, remember that at least one alternative always exists: stay "as is".
   

Perceived value is the key

What really matters is perceived value. Perceived value is customer opinion of your service value to her or her business.

Perceived value has nothing to do with cost:

• How much people pay for a glass of water?

• How much the same glass of water is sold on a sunny beach?

• How much you could charge for the same glass of water to somebody lost in a desert?

It is not a question of being honest: it is a basic economic principle applicable to any product or service: value is determined by buyer disposition to pay. If your company can produce in one hour of work something that clients are disposed to pay $ 10,000 that's what you shall to charge.

If you charge less you can possibly feel honest, but your shareholder will probably consider you stupid. Just look around: how many famous surgeons, singers, or sport star (just to cite a few) make an hour? Is anybody questioning if they are honest? Obviously not. What matters is that somebody is willing to pay the price for saving life, hearing music or watching their preferred team respectively.

So the question is now: how to determine and show the value of your service?

Deliver and bill results, not time

The first rule is to deliver and bill results, for example a solution, an up and running application or an online service, never hours or days. You shall possibly take some risk, but you can overcharge charge for that risk. If you are a consultant you are in your own business: managing risk and taking advantage from it is part of any business.

What to do if your client insists on a time-based fee? Explain that you deliver results, not time. Show that time is only a small component of packaged solution (see below) and hiring a solution, instead of time will avoid risks.

You can make some comparisons to convince her, a typical question I use is: “When you bought your car, did you ask your manufacturer how much time they took to assemble it or selected a reliable alternative fitting your needs and budget?”... “By the way, what's your budget?”...

Package your solution

Packaging a solution is another way to avoid time-based fee discussions. If you package your solution with software and other services any time-based measure looses meaning. At Component Based Solutions, for example we employ a very convenient policy for our partners. We do not license or negotiate our software products with users, but only through consulting partners. Our prices are undisclosed to general public.

This way our consulting partners (see note at post bottom) have absolute freedom to define whatever price they decide for the provided solution. Obviously the price will depend on actual value provided to client, exactly as the glass of water example.

Investigate perceived value

That's possibly the most critical part. Your first attempt can be frankly ask your client through questions like:

• Which benefits can result from the availability of those information?

• How much economy can be made once such analysis is available?

• Which benefits you think can derive if we have that solution up and running?

• How much budget is allocated to this project? Consider your prospect before making this question! If your prospect feels the question strange or not opportune use the "car buyer" example. Explain that, like cars, there is a very wide range of alternatives, with costs ranging in 1:100 proportion. You were attempting to identify an initial price-feature point.

Once you get those numbers you can figure possible price. My experience shows that solution price shall be in the order of 10% to 30% of perceived value to obtain a fast decision and client satisfaction.

Do not forget to consider competition, specially time-billed competition. Time-billed competition can employ a dangerous strategy. Since they charge for time they can intentionally underestimate the project to win the prospect and then renegotiate value. I have seen cases where the final project cost has been ten or more times the original estimate.

If you perceive that some competitor is using this strategy, insist with your prospect to consider the risk factor and suggest (if she really decide use that competitor) to document crystal clear requirements bounds to an agreement with penalty provisions should supplier be unable to comply.

Help your client to determine value

It is unavoidable: most of your prospects have an idea or feeling of value, but did not actually quantify it. You can surely improve your chances, presence and trust if you help her to transform those ideas and feelings into a cost-benefit analysis. Offer your free assistance to do that: in most cases your success chance doubles.

It is a small investment that would surely pay. In addition to keeping in touch with prospect staff, you will get free expertise for similar cases. This is the reason Component Based Solutions offers free guidelines and support to consulting partners that employ this strategy.

Keep cost undisclosed

Finally remember: try to keep your cost as undisclosed as possible. Developers shall stay remote from client and unaware of charged price. Prefer software suppliers and partners that offer OEM agreements or at least do not publish prices.