Scaling Consultant Services: Packaging & Pricing
Although a wide variety of recommendations currently exist for how small consultancies can package and/or price their services, the most credible sources (e.g., Harvard Business Review, Entrepreneur, Forbes, Foundr, Consulting) assert that new, independent and/or smaller-scale consulting practices should rely on a project-based or hourly fee structure, at least until they graduate into a larger and more established industry provider. A broad overview of these two best practices as well as details on the nuances associated with their deployment have been provided below.
Project-Based Fee Structure
- Deploying a project-based fee structure was identified as perhaps the most ubiquitous best practice for small consultancies when packing their service offerings and/or formulating an associated pricing schema based on the fact that a preponderance of industry experts (e.g., Harvard Business Review, Entrepreneur, Forbes, Foundr, Consulting) currently recommend this pricing structure, while its widespread use among small business consultants adds further credibility.
- As the Harvard Business Review and Entrepreneur note, project-based pricing models involve developing a "standard suite of products" and charging a "predetermined amount of money" for each of those productized services.
- Notably, project-based fee structures are currently the most common pricing methodology among small business consultancies, according to Consulting, with over one-third of such organizations deploying this best practice.
- The Harvard Business Review and Entrepreneur add that project-based fee structures offer small consultancies the advantage of "predictable income" (given that revenue is established at the beginning of the project) without demanding the industry reputation or trust that is required to trade up to often more lucrative retainer agreements.
- Moreover, Forbes and Foundr tout the "simplicity" of this pricing model, while Duke University instructor and author Dorie Clark adds that this fee structure is particularly suitable when combined with fixed-format projects (e.g., half-day strategy sessions) given that it provides a superior level of transparency for clients.
- However, these industry experts also consistently emphasize that it is "crucial" for small business consultancies to define and remain firm on a "predetermined scope of work" when deploying project-based pricing, because scope creep will quickly erode profitability.
- Entrepreneur suggests that small businesses can avoid the pitfall of scope creep by using more detailed contracts with clients when setting up projects as well as by having discipline in addressing any additional/subsequent client demands as an "extra line item which comes with additional charges."
- Meanwhile, Entrepreneur, Forbes and Foundr suggest that independent consultancies can establish the specific per-project rates within this pricing schema by considering (1) the hours required to deliver on a package of work, (2) any associated expenses and (3) and a "healthy profit margin."
- Quality Media Consultant Group CEO Lori A. Manns specifically suggests that independent consultants have a "gross margin percentage of 30% or greater" in these instances, while Consulting notes that the ultimate project price can vary dramatically.
Time-Based Pricing Model
- A time-based pricing model was similarly selected as a best practice for small consultancies in formulating fees per the analysis of top-tier media (Harvard Business Review, Entrepreneur, Forbes) and industry trades (Foundr, Consulting).
- Simply put, a time-based pricing model involves a consultant charging clients "by the hour" for all work that is relevant to an agreed-upon project.
- Forbes asserts that a per-hour fee structure is "best for new consultants," as many small business consultancies struggle to appropriately estimate their project fees.
- The Harvard Business Review similarly notes that this best practice is the "simplest way" for newer and/or smaller consultancies to charge their clients, given that it avoids the risk of making a "bad calculation" about what to charge for a given project.
- Moreover, Harvard adds that many clients are amenable to this pricing schema, given their familiarity with other professionals (e.g., lawyers, accountants) that similarly use this fee methodology.
- Although Entrepreneur and Foundr report that hourly billing is not the favored pricing methodology of more established and/or larger consultancies (owing to its inherent limitations on total fees), they add that the strategy is "pretty common" due to the aforementioned advantages. Consulting corroborates the popularity of this methodology, noting that nearly one-third (27.3%) of small business consultancies deploy this fee structure.
- Meanwhile, in order to determine an appropriate hourly rate, Forbes and Foundr suggest that the small business consultant starts with their most recent annual salary, and either divides it by 2,000 hours per year (given that full-time employees typically work this many hours) or divides it by 52 weeks per year times 40 hours per week.
- Once this base hourly rate is established, Foundr recommends that an entrepreneur should then add a 25% to 50% mark-up. Adding this profit margin is considered particularly important, because the hourly fee is viewed as an "expression of value," and "low consulting rates don’t necessarily lead to work, or respect."
- Authentic Resume Branding & Career Coaching CEO Rosa Vargas corroborates the benefit of this fee structure and calculation methodology, stating that after a small business consultancy establishes its "hourly rate based on your target yearly income," it should avoid setting lower rates because "customers will pay higher rates if they can see value in the investment."