Management Consulting Firms Analysis
Pricing management consulting fees involves, at its core, judgments about what the value of the work is. These judgments are difficult to make, but four best practice strategies make these judgments easier. The best practices are: doubling or tripling an employee hourly rate, calculating the client's ability to pay, pricing based on what competitors are charging, and pricing based on the value the consultant provides. These are discussed in more depth below.
1. Double or Triple an Employee Hourly Rate
- In this strategy, a consultant figures out what she or he would make as an hourly wage if they were an employee (make sure to include the value of employee benefits). Then they would double or triple that number. The strength of this strategy is that it is relatively easy to calculate; the drawback is that the price is not contingent on the kind of work or how difficult it is.
- For example, a consultant might work out that they would make $40 an hour (including benefits) if they were employed. Doubling that number would be $80 an hour; tripling it would be $120. An appropriate hourly rate for a consultant could be between those two numbers.
2. Determine Ability of Client to Pay
- This strategy uses the client's ability to pay for the work as the most important information for setting a consultant's price. The benefit of this strategy is that the consultant is able to propose prices that the client can afford. The challenge is that it can be difficult to know what the client is able to pay.
- One way to do this effectively is to ask for the client's budget. This will tell the consultant how much the client has set aside for the work. While this may be difficult, and may not be appropriate for every client, a consultant can explain that they want to ensure that the scope of the potential work is consistent with the resources that are available.
3. Price According to Existing Competition
- This strategy uses the rates of competitors to set prices. The benefit of this strategy is that a consultant can ensure their prices are competitive. The challenge is that it can be difficult to know what competitors charge.
- Here is one 2018 study on consultant fees that could be helpful in determining what management consultants charge. A similar study conducted in 2019 can be found here.
4. Price Based on Value
- The method of value-based pricing uses the likely return on investment for the client as the primary factor in setting prices. If the client stands to gain millions of dollars from a consultant's work, that consultant can argue that they should be paid a percentage. The benefit of this method is that it can result in higher fees that can be easily justified; the challenge is determining what the consultant's work is worth to the client.
- One way to use this strategy is by asking questions that create the opportunity for a client to tell the consultant what they think the value of the work will be. The consultant can do this using questions such as, "What is the value of a new client to you?" or "What is the value of this work to your company?"
- This method can also be used after a consultant has set their prices to estimate whether they are appropriate. For example, one consultancy firm has a rule of thumb in which the expected benefit to the client should be at least 10 times the consultancy fees charged.
Other Pricing Tips
- Price on the high end; it is easy to lower prices but difficult to raise them later.
- Consider what is required for the business to survive. It is very rare that a consultant can bill for an 8-hour day; many consultants bill less than 25 hours per week. If a consultant chooses an hourly rate, it is important that they account for the number of hours they will be able to bill.
The research team started by searching for information on the topic using articles written by business experts and other relevant industry leaders. This provided a list of strategies that was then confirmed by further articles and business experts. We were able to determine that these practices represent the "Best Practices" because they are written by industry experts and corroborated across articles. Then, to provide some sense of what consultants actually do, we searched for polls and surveys of management consultants.