Pricing Redux: How to Dump Hourly Rates

Stroll through the zoo and you might see a multi-ton elephant tethered by a rope to a three-foot pole. The elephant has been trained to believe that it has no choice about staying in its current position.

And so it is with the hourly rate, which consultants and clients are trained to believe is the only way to price services.

But just as that elephant could break free from the pole, one collective tug by consultants in the industry and the hourly rate would be a legacy of a bygone era.

How can that be done?

Dumping hourly rates is all about reaching agreement with clients on value. If, for instance, you propose to help a client reduce indirect expenses by 2%, then you must quantify that cost reduction and provide a way to measure it.

Some consultants argue that it's too difficult to quantify the value of a consulting project in advance. But those who take the time to nail down that value will encounter less price resistance from clients, especially if the value-to-fee ratio is high.

Every project has potential, measurable benefits or value. Of course, some values are easier to measure than others. To orient clients in the discussion of what your services are worth, consider the possible drivers of consulting value below.

Drivers of Consulting Value

Consultants Can Help Clients…

Increase	Reduce	Improve	Create
Revenue	Costs	Productivity	Strategy
Profit	Time/effort	Processes	Systems
Growth	Complaints	Service	Processes
Value	Risk	Information	Business
Retention	Turnover	Morale	Products
ROI or ROA	Conflict	Reputation	Services
Efficiency	Paperwork	Skills	Brand
Visibility		Loyalty
		Quality

Once you have articulated project benefits, figure out, in conjunction with your client, what the proposed changes are worth. That becomes the basis for your fee. For example, reducing employee turnover by 20% might reduce recruiting, hiring, and training costs by a similar percentage. Find out what that would be.

You might help clients improve the quality of their products, which should result in fewer complaints and returns and a lower cost of stocking merchandise. If you improve morale among a client's staff, managers could spend less time in meetings and more time running the business. What is it worth to have motivated workers instead of absences, or to improve poor work habits that are due to low morale?

Quantify all benefits that are relevant to a project, and confirm those numbers with the client. That information provides the crucial context for you and your client to assess your proposed fees.

Once you've agreed with the client on value, you can use any number of pricing methods, from contingency billing to fixed fee to pure value-based billing. But most importantly, you'll have an opportunity to shake off the shackles of the hourly rate.

Comments

[Simon Heap]

Mike, like the thinking.....this is the age old question. how to increase your earnings without your hourly rate pushing you out of the market place.

[Bob]

this is an absolutely critical issue in our field. Can you (or Anyone) provide some concrete, real world examples?