Podcast

Episode: 174 |
Will Bachman:
Setting fees:
Episode
174

HOW TO THRIVE AS AN
INDEPENDENT PROFESSIONAL

Will Bachman

Setting fees

Show Notes

A listener asked for advice on how to set fees, and here are my thoughts.

In this episode I refer to, and strongly recommend, Chapter 22 of The Irresistible Consultant’s Guide to Winning Clients: 6 Steps to Unlimited Clients & Financial Freedom, by David A. Fields

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Will Bachman 00:01
Hey, welcome to Unleashed. I’m your host, Will Bachman, a listener asked me this morning will I’m new to independent consulting, what is your advice on how to set my fees? There is no simple answer to the pricing question. So I’m going to share a series of observations slash recommendations slash reflections. I’m not going to give any specific numbers since fees can vary based on so many different dimensions. But hopefully this will be some some help. So if you’ve got a specific situation where you aren’t sure what to charge, you can email me at unleashed@umbrex.com. And I’ll see if I can provide any useful perspective. So here’s a series of thoughts. Number one, understand the universe of possible fee structures. The very best thing I’ve seen written on this is chapter 22, of the book by David A.. Fields, the irresistible consultants guide to winning clients, please do buy this book, it not only has great advice, but it’s also funny and a pleasure to read. As opposed to a lot of books on professional services, which tend to be dry. This is really easy to read book. So David has explained fee structures using a two by two grid. So imagine if you will, on the horizontal axis, you have when the fees are decided. On the left hand side, we decide the fees before the project starts. And that would be fixed fees. On the right hand side we have fee structures where we decide the fees after the project ends, those are variable fees. on the vertical axis, we have the basis on which fees are determined. The top is value based fees, and the bottom is cost base fees. So we have four quadrants. And in order of increasing margin to you in David’s experience, the lowest margin is variable time and materials. So our lower right hand quadrant. In this structure, if you finish a project in record time, the client gets a great price, and the consultant gets paid less. So the consultant is penalised in effect for being more efficient. The next better is fixed time and materials, you scope out how much time it will take, let’s say 100 hours, you apply your hourly rate and boom, that’s how you price it. So you’re basing it based on time and materials, but you set a fixed price. And then if you can get it done in less than 100 hours, boom, you’re golden. The next better margin is a value based fee. So you and the client say this project will generate $1 million of value. So let’s say a fair cost for the project would be 10% of that, or 100,000. Who wouldn’t pay $100,000 to get a million dollars of value. If the project takes you a day or a year, the client really doesn’t care, as long as she gets that 1 million of value at the end. Finally, the best potential margin to you along David’s premium curve his success fees. So for example, on a procurement project, you may get to keep 10% of all the savings that you generate. This may seem like a decent deal to the client. After all, they don’t need to pay anything if the project is not successful. So the potential upside to you can be much greater. And then there are two hybrid fee structures that David lays out. So number five of all these is the variable time and materials with a cap, do not agree to this is the worst possible world for a consultant. You accept all the downside risk if it takes longer than planned, but you give up all the upside. So if you’re more efficient than you expect, you just get paid less. And number six is a value based fee with a success bonus. This can be the best margin for consultant with a value based fee, you agree with a client on a price that reflects the value you expect to deliver, but maybe discounted slightly. And then if you happen to over deliver, you also get some upside so your interests are aligned with the clients all the way through. There’s a lot more wisdom packed into that chapter and I do recommend getting the book to read read it more detail. Number two, my perspective on fixed fee versus time and materials. Using a fixed fee makes a lot of sense if the scope of the project can be clearly defined, where you know just what the deliverable is going to look like. And the project can be bounded in time and space and scope. An example might be a commercial due diligence of a target for a PE company, you know that it’s going to take you three weeks, you know it’s gonna involve interviewing 40 experts and a b2b survey. You’ve done 20 of these you have the work plan, you have a ghost of the deliverable. Or for example, you’re going to do a lean operational diagnostic of a plant and you’ve done this plenty of times you have a standard set of things you’re going to look for. You have a template for what you’re going to do. An advantage of fixed fee for the client is That they don’t need to worry about the price once you’ve agreed on it. And if you’re efficient and get done quickly, well, that’s good for you and good for the client, they get the results earlier, the client still gets the value. And if you take a long time, well, tough luck to you, the client is gonna have to pay extra. The problem with using a fixed fee, of course, is that it takes a lot of brainpower to determine in advance exactly what you’ll be doing, and what the scope is going to be. So you you have to agree with the client what is in scope and out of scope. And often in life, something unexpected comes up needs change, or problems get discovered. change the direction, the client may ask you to change course and work on something else. In those cases, if you’re on a fixed fee, you have to you have to do a renegotiation on how the new thing is out of scope and require revising the fee, or negotiate what in scope thing gets dropped. And the whole negotiation may not be a super positive thing for the relationship. Whereas if you’re on a time and materials basis, then it’s a whole lot easier to say, Okay, today, instead of doing that other original thing a will be doing thing B and I’m still going to charge you for one day today, on a post merger integration for example, it could be hard in advance to know exactly how much work is going to be required. So to sum up, if you have a clearly defined project that will be under your control, and you can accurately scope it, fixed fee can be a good way to go. If you have a relatively small project, it may not be worth the brainpower and the time to negotiate a fixed fee. And if you have a longer project with uncertainty than a fixed fee can be a lot more challenging. Point number three. That last point applies to independent consultants working as an individual. As soon as you start adding people to your team, it starts making more sense to use a fixed fee rather than itemizing the rate and time of each team member. Number four, if you haven’t yet connected with peers, to find out some benchmark rates, one very rough rule of thumb is take the annual cash compensation that you would expect to be earning if you had a full time job right now, if you just left the job, you could use that salary and then double that and divide that by 250 to get a very rough daily rate. Because if you hit 50% utilization, you’ll obviously earn that same salary. And of course, your last job probably had benefits that were worth about 30% of your cash comp, health care, retirement contributions, insurance, perhaps some days off. So to be to really be even with your salary, you need to do better than 50% utilization. But that formula is just a place to start. Now, if you would expect to earn $125,000 per year, then you double that the 250,000 and divide by 250. So you should target $1,000 per day. If you’d expect to be earning 250,000 per year, then you would target 500,000 divided by 250 equals 2000 per day. And if you aren’t sure what would be a typical annual salary for someone with your experience, check out the annual survey report produced by the executive search firm Charles Eris, they produce a report that shows average salaries for former consultants and just Google Charles Eris salary survey. Number five, if you’re going to do time and materials, should you do an hourly, daily, weekly or monthly rate. I tend not to like hourly rates. For one thing, it’s a hassle to track all the hours. hourly rates can be okay if it is a truly light touch project where you’re only going to do a couple hours per week. But otherwise, I don’t really want to track things on an hourly basis. We’re not in an assembly line where two times the hours equals two times of production. I’ve seen some people estimate that the average office worker only does about three hours of work in a typical eight hour day. And for me that that’s might be an over estimate. I spent a lot of time just answering emails and doing routine administrative stuff. And I’m lucky if I have maybe 90 minutes per day or even one hour per day when I do work that actually creates value. The other 72 hours per day are sort of worthless, but that one hour is amazing. So how should I charge for that if I’m billing by the hour, I get some of my best ideas in the shower or when I’m out for a run. So should I charge for that time? Daily rates are what I see most frequently, most frequently for independent consultants. If you’re going to be working on site then with daily rates. One thing to do up front is to set some mutual expectations on what a daily rate means in terms of time commitment, you know, do they just client expect you are going to be there till 11pm or midnight and six in the morning? Or is it more of a regular kind of corporate type schedule of eight or nine Or 10 hours and maybe occasionally, an 11 hour day when you’re cranking before some progress review. So just sort of what’s the expectation, sometimes I’ll see a project structured as a weekly rate. You see this most often when you have a team, not an individual, and where there’s some uncertainty in the scope, and the client wants the flexibility to be able to just add a week or two at the end, or maybe wrap it up a week early. Sometimes a client will ask for a monthly rate. If you’re going to be working basically full time in a project, you can estimate the monthly rate by multiplying the daily rate by about 21 workdays in a month, I usually would suggest that you still invoice it on a daily rate basis, though, to account for some months, you might have some vacation days, take some personal days off, and maybe some other commitment, or the project ends in the middle of the month, or there’s a federal holiday. So when a client asked for a monthly rate, I generally say sure, it’ll be roughly why we’re y equals 21 times a daily rate, and we will invoice you for the actual days worked at the following daily rate. So number six better than the above thumb rule is, in terms of dividing by your expected annual salary is find out the market rates for someone like you get to know some other consultants who do similar work to you and ask them what they charge. You don’t have to necessarily follow their lead. But you want to know what clients are paying for someone who has a similar background to you, and does similar types of work. Of course, your mileage may vary. You know, individual Different people have different rates because they have different badness or best alternative to a negotiated agreement. So two people with identical skills very might have a very good reason for charging different rates, if one of them has been an independent consultant for a while and has a steady flow of work with clients that are coming back repeat clients. So that person has the right to charge more. And the ability to so number seven, if you’re using a time and material structure, you may decide to vary your rate based on a number of factors. I’ve seen people vary their fees based on location. Do you need to be on site four days a week? Only a couple of overnight trips? Or can you work remotely the whole time, different people put a different value on travel duration? Some people will discount for a longer project to lock in a higher utilization intensity. Are you expected to work a normal, you know human schedule of eight hours or 10 hours a day? Or is it some crazy sprint that’s going to require you to stay up till midnight every night. days per week, some people are happy to do three days per week, because they have some side project. And some people really want to build five days a week. So they would charge a premium if the project is only three days a week, who sourced it, some people will discount their rates if they’re going to be a subcontractor to another consultant, or for came through an intermediary versus the rate they would charge clients when they own the direct relationship. Learning. Some consultants will discount from their standard rate if they believe the project will be an excellent learning opportunity. And I do that myself fun. Some consultants will discount from their standard rate if the project will be particularly fun, maybe working with really great people or maybe you get to watch 747 cargo planes being loaded or you’ll be delivering training workshops in the Bahamas. So think about fun. Alright, number eight, budget. David’s pricing. Tip number one is find out what the budget is upfront. And I definitely agree with that. If possible, when you have your initial context discussion, ask what is the budget because then you can shape your proposal to fix that budget. Number nine, make it easy to say yes to you. Sometimes that means break the project into smaller pieces and reduce the risk to the client by letting them get to know you with a smaller piece. So if the project budget budget is 50,000, but you were thinking that you need to charge 100,000 do everything, then you might want to divide the project into phases, phase one for 25,000 and phase two for 75,000. Then the client gets done a piece of what they want of what they need to get done within their budget. And if they like you, and they want to get the rest of it done, they can. Number 10 consider setting your fees to manage your utilization. I started as an independent consultant 11 years ago and didn’t really know what to charge. And I started mostly as a price taker. My goal then was to get a series of projects under my belt to show future clients that I was credible as an independent consultant and be able to talk about the projects I had done. I also figured that when I was working, I’d be learning and gaining experience. So the higher my utilization, the more I’d learn I may have been underpricing my own services. But for a run of nearly a decade, my utilization was over 90%. Most consultants that I know are more in the 50% range, or in the 70 to 80% at the high end. So I think I was probably a bit of an outlier. And by keeping my own fees at the lower end of the scale, I was able to get a lot of repeat business and clients learned that when they reached out to me, I often was not available. So that allowed me to patiently raise my own rates by about 15% every year. And that meant that over a decade, I was able to triple my initial daily rate. Number 11. for a very short project, such as leading a one day workshop or a training session, definitely consider the value based pricing. Most people will charge more than their typical daily rate to lead a one day workshop. Number 12. Don’t be embarrassed to charge a fair reasonable market rate. Maybe it seems like a lot of money, maybe it feels like your time can’t possibly be worth that much. A couple reasons to raise your fees, there is some placebo effect, and clients may value your advice and contribution more highly if they’re paying more for it. So you actually have higher impact. As a related point, if your fees are too low, clients may not take you seriously, or not even consider you for a possible project saying we were expecting to pay x, but he charges only 50% of x. So he must not have the experience we require or the necessary gravitas or client demand or he’d be charging more. And if your fees are high enough, you can afford to invest what it takes to over deliver and delight your client. And you’ll also be able to invest in staying in touch, and occasionally providing some advice for free and not charging for every little thing. Number 13. This podcast is not intended to be an exhaustive discussion of how to negotiate the fee. The negotiation part definitely needs a separate episode at a minimum. But here are a couple thoughts. If the client pushes back and asked you to lower your daily rate, ask if you could work together to achieve the objectives by narrowing the scope. or using your time commitment, perhaps you can carve off a piece to be done internally by the client. So it will take you fewer days. Or perhaps you could do four days a week instead of five, that saves 20% off the top right there. And in many situations, the client can’t actually absorb five days of consultants support per week, they still have a business to run and their employees still have work to do. So that gives you one day per week for business development or to go serve other clients. And 14 last point. So my motivation, in other words, so my own ability to deliver value to my clients is not linear, but as strongly discontinuous. So there is some number let’s call it x. And I don’t want to go below because if I do my motivation drops off significantly, if I imagine kind of an x y graph, I might reluctantly accept a project below x. But a couple weeks in something else better comes along and I’m kicking myself, why did I agree to this, it’s below my normal rate on a crummy project. And in that state of mind, I’m not just going to do my best work. But if the rate is above x, my ability to deliver does not scale up linearly. So if I’m charging 130% of x, I don’t have the talent to deliver 30% more value than if I were just charging x. So the point of that discussion is know what X is for you. Where is your motivation discontinuous? And that might change over time. And if you can charge more than x, that’s fantastic. There’s nothing wrong with that. But don’t agree to take on a project when you’re charging less than x, it just doesn’t work out well for you or for your client. That’s a long answer to a short question. And to the listener who reached out. Sorry, I still haven’t given you a firm number. But I hope these observations will help you on your pricing journey. So thanks for listening to this episode of Unleashed if you’ve got a question, you can email me at unleashed@umbrex.com. And if you visit our shows website at ask unleashed.com you can download transcripts of past episodes, and sign up for my weekly email I’ll send out to you, which includes summaries of each episode and some bonus features. And if you like the show, and you want to give it a five star review on iTunes, that would be awesome. And it helps other people become aware of the show. And if you don’t want to give it five stars, then really just don’t bother. Just send me your feedback by email. Hey, thanks for listening.

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