Calculate Value Based Consulting Fees
Now we will take a look at how to calculate value based consulting fees.
It’s technically quite easy to calculate value based fees but the result might seem ambiguous and it takes some guts to implement value based pricing
P.S The serious consultant can also find more free resources such as videos, e-book and an excel template that helps you do all the calculations automatically at: http://consultingvideos.com/
The steps to calculate value based consulting fee’s are:
- Estimate the value of your contribution
- Estimate your actual cost
- Estimate the “range” in which you can set your fee
- Determine your fee
Let’s now take a closer look at each step.
Step 1: Estimate the value of your contribution
The best way to understand value based fees is probably to use a case study as an example so let’s assume the following scenario.
A manufacturer had a very bad production yield for one of their products and it had to be improved urgently.
They had an extra cost of $180,000 per year for rework due to the poor production yield.
Based on your calculations they could improve the yield and reduce the cost for rework to $90,000 per year by replacing some old machinery and improving their processes.
The new machinery and process improvements would cost $30,000 as a one time investment.
Based on these numbers is the clients value of your proposal $60,000 the first year and $90,000 the following years.
After you calculated the value for your client you sat down with your client and agreed on the value your improvement would bring.
You also made sure to present your proposal as an investment and not as cost.
The key is to convince your client that your proposal is an investment so they will have a return on this investment. And this is the value of your proposal.
Step 2: Estimate your actual cost
At this stage it’s good if you already calculated your hourly consulting rates using method 1 or method 2 because you will need it now.
This step can also be done in parallel with the previous step but i have separated them to make the process clearer.
After you calculated the value of your proposal you have to calculate your cost for helping your client to implement your solution.
In this case you can assume your cost for the labor is $9,000 and you have $1,000 in additional cost for travel so your total cost is $10,000 for this assignment.
Step 3: Calculate the range in which you can set your fees
In step 3 it’s time to estimate the range in which you can set your consulting fee for this assignment.
Let’s start by repeating the numbers from the previous steps.
The value for your client is estimated to $60,000 per year
The cost for your work is $10,000
If you ask for more than the client would profit from your proposal they would be rather crazy to buy from you so it’s safe to assume they are not willing to pay more than $60,000 in this case.
You can of course argue they will also save $90,000 per year during the following years as well and that’s a good observation. In some cases you can get more than the initial yearly savings.
But in most cases they want a payback of less than a year so we will use $60,000 as the upper limit in this case.
You also want to recover your cost so the lower limit for you is at least $10,000
We can now easily calculate that the range you can charge your client is between $10,000 and $60,000
I can now hear you saying - but that’s too vague, i want to know exactly what to charge the client.
With value based consulting fees there is no absolute truth.
You will need to use your intuition to set your fee’s and have guts enough to ask for it.
But there are of course some guidelines you can use to determine if you should aim for the upper or lower part of the range.
Step 4: Determine your fee
In this table you can find some criteria’s that helps you determine if you should aim for the lower or higher part of the range.
Criterias for setting value based fees
Let’s go through the criteria’s one by one.If you have lot’s of good references and a good track record for implementing the same or similar solutions you have a good opportunity to ask for a higher fee.If you on the other hand have no references and no track record it’s difficult to charge a high fee.The level of competition plays of course a big role in this as well.With little or no competition you can obviously charge more and with fierce competition it’s difficult to charge a high fee.If the work environment is bad like for instance stressful or noisy you should ask for a higher fee and if it’s good you can reduce your fee’s.If you can’t use this project as reference or use it for other future benefits you should ask for a higher fee.But if you see many future benefits you can charge a lower fee and hope to get your investment back many times over in the future.If there is a high risk due to uncertainties that your work will take much longer to complete you need to add a contingency and ask for a higher fee.If on the other hand the project is very predictable you can ask for a lower fee.If the client has realized that they need the improvement and is highly committed you can ask for a higher fee.If they on the other hand aren’t committed they’re probably not willing to pay a high fee.You might not want to take on the assignment if the client is not committed because it often leads to problems. Especially if they pay you on completion of the work.Always ask to be paid in advance or at least get a retainer fee before you start if you suspect the client is not committed to the project. It will help to put some pressure on them to complete the project.Your relationship with your client plays a big part in how much you can charge.If you have a good relationship you can ask for more money but the question is - should you do it?You might want to reward a good client with lower fees to keep the good relationship.If you on the other hand have a bad relationship with your client it’s difficult to charge a high fee.And in this case you should ask yourself - do you really want to work for this client?So while there are no absolute truth about value based consulting fee’s you can use the guidelines in this slide to determine where in the “possible” range you should set your consulting fees.
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