Thursday, December 15, 2011

What Are You Worth?

One of the first things you'll have to do as an independent consultant is determine what to charge for various products and services. There really isn't a guidebook for setting prices. It's very much a matter of what the market will bear. As with most services, the more experience you have and the better your reputation, the more you can charge. Many of the consultants I've known over the years charge less than they could probably get away with. It's hard to know how much you can command until you push the limits.

The best advice I ever got on setting prices came from a great book by Gerald Weinberg called The Secrets of Consulting: A Guide to Giving & Getting Advice Successfully. Weinberg's Principle of Least Regret states "Set the price so you won't regret it either way." In other words, set your price so you're happy whether the client says yes or no. I keep this principle in mind every time I quote a price to a client for a prospective engagement.

For instance, I have one course that I have taught, mostly in two-day format, 181 times in the past fifteen years. That is, I have spent nearly one full year of my life presenting this material! It is not interesting to me anymore, although it is still in demand. If a client asks me to teach this course now, I really would rather not do it. Therefore, I will ask for more money to teach that course than for another course that's more interesting to me. If the client accepts my outrageous offer, fine—I'll be there. I'll do the best job I possibly can, smiling all the way to the bank. But if the client decides my fee is too high, no worries—I'm happy to stay home. I might quote a lower price if the engagement is local or involves travel to someplace I would like to go anyway, perhaps to visit friends or do some wine tasting or sightseeing. So I have a base daily training fee, but then I adjust it based on numerous factors for a given situation.

Weinberg's principle has been valuable for me when setting prices. It also served as a good way to regulate how many commitments I made during those days when I was fortunate enough to receive lots of inquiries. If you're hungrier, you might be tempted to charge less to boost your chances of landing the gig. During the rich times, though, you can quote higher fees to make sure you don't exhaust yourself by accepting every possible opportunity that comes along. It's all a matter of balancing your supply of time (and interest) with customers’ demands for services.

When I launched my independent consulting career some years ago, I set my prices based on what I saw other experienced consultants were charging. Back then I charged $1,500 a day for consulting and $2,500 a day for training. I figured that training was a higher-leverage activity. The client received more value per day for my services; therefore, I was entitled to more compensation. Over the years, those rates went up. But I still know some established consultants who are charging only maybe $1,500 a day to deliver training. In my view, they are underpricing their services. Obviously, you'll get paid less if you're working through a parent company that contracts out your services or an agency that finds jobs for you. They're working on your behalf and are entitled to their slice.

There is a school of thought that says the higher your price, the greater the perception of value to the prospective client. Therefore, you will get more work if you charge more. Sometimes this strategy works, at least up to a point. I do have some colleagues who said that when they raised their training rates, they did land more gigs. Obviously, though, there's an upper cap beyond which the market is no longer interested and prospective clients will seek lower-priced options. As more competitors enter your domain, this will also exert downward price pressure.

I observed this in the field of software requirements engineering. I got into the game relatively early, with a well-received book and numerous articles and presentations in this area. I was able to establish fairly significant training fees. However, as more and more people wrote books about requirements and developed their own training materials, requirements training became more of a commodity. I couldn't command the same fees and still be competitive, although certain clients did want me personally to teach the class. It's all about what the market will bear.

Partway through my career I also began offering a service of off-site consulting at an hourly rate that works out to less than my usual daily on-site consulting rate. This way I can provide useful services to clients who perhaps don't want to spend a lot of money, have small questions or projects, just want me to review some documents for them, or want a little coaching on specific topics. In fact, most of my consulting work over the past several years has been done in this off-site fashion. I don't have to travel, I can work in my pajamas if I wish, and I can work however many hours per day I want so long as I meet the client's deadlines. I've even done large-scale and long-term engagements like this for remote clients, which has worked out well for everyone.

I suggest you base your price for a specific engagement on the value you're providing to the client. If I'm delivering a presentation with an unlimited audience, that provides more value to the client than a class whose attendance is restricted. If I'm helping one person with some project questions, I will probably provide less value than if I'm developing, say, a new requirements process to be deployed across the company's development organization.

It's important to keep in mind the objective of a win-win outcome. Most of the time, a client and a consultant can agree upon a fee structure that satisfies all of the participants and seems fair to all of them. If you can't, walk away from the engagement.

(If you found this article helpful, please consider making a donation to the Norm Kerth Benefit Fund to help a consultant who has been disabled since 1999 with a traumatic brain injury from a car accident. You can read Norm's story or donate here. Thanks!)

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