In this article we will talk about:
- What is Consulting
- Types of Pricing for a Consulting Project
- Step-by-step pricing of a consulting project
- Practical pricing example
- How to value your pricing
- The Right Tool for Consulting Pricing
See also: Complete Pricing Manual
Consulting is the provision of a counseling service, performed by a professional who specializes in a particular topic or subject, with the aim of improving the performance of a specific individual, company or area within an organization. One of the major challenges for consultants is understanding how to price a consulting project the best way possible.
Throughout this article I will explain a detailed step-by-step how to price a consulting project and, while knowing that there are differences, I will use the word consulting to refer to the advisory and coaching activities as well. Generally speaking, these 3 practices involve professional advice for people or companies that is carried out through projects that have beginning, middle and end.
As we have just said, consulting is a service and, therefore, has specific characteristics that will differentiate it from a simple product. Some of them are:
- Intangibility - can not be seen
- Percibilidad - has no stock
- Variability - never exactly the same
- Concurrency - delivery only occurs at the time of providing the consultancy
Knowing of these attributes that are inherent in any consulting project, there are a number of actions you can take to arrive at the ideal price.
To begin with, there are different types of pricing which can be used in a consulting project. The main methods are:
- By cost - analyzes fixed and variable costs linked to the consultancy and puts a profit margin on top. Ignores the customer's perception. If I have 10.000 for cost and I want to earn 2.000 for profit at the end of the month, I define that the price is $ 12.000.
- By value - price is generated from the customer's perception of value. The same consultancy can cost R $ 1.000 or R $ 50.000, it depends on who offers it and how the client perceives this consultant or consultant.
- Variable - A benefit of the consultancy is identified and charged from it. A classic case is that of reducing a company's costs. The more cost is reduced, the higher the price paid by the company. Another example is goals. If a revenue goal is reached, a bonus is paid.
- Collaborative - price is achieved with the help of customers. Although not common, I have seen cases of consultants who left the value of their time open for the client to reach a value of mutual interest.
If you want to understand more about each of these cases I recommend you read our article that shows 5 pricing examples that you can use in your business. Regardless of the type chosen, I like to think (and use) a middle ground of all these items I quoted above.
I say this because there is no possibility of you selling a project below its cost (only if you want to go bankrupt), but at the same time it is important that your client sees value in the consultancy and that he is happy with the final price, as this can influence the future perception of quality of the project as a whole.
As I said at the beginning of the article, it's time to explain in detail how to price a consulting project. Before you begin, it is worth saying that there is no right or wrong and depending on the size of your company, it may be that one step or another is not absolutely necessary.
- Step 1 - Pick up general customer information
Whenever a customer gets in touch get the most information about his business and create a document with the most relevant information. You can look up this information on his company website, on social networks, doing searches on Google, and of course when you have the opportunity to talk to him.
Depending on the type of consultancy you have, this first contact can be by phone, skype or in person. Regardless of how to talk to him, identify the main pains and where you can actually help him.
- Step 2 - Define Project Scope, Risks, and Steps
From the information raised in step 1 it is possible to define what type of project you will offer to the client. Are 3 most important items:
– Scope - what will be delivered to the client at the end of the project (can be a document, the implementation of a spreadsheet or software and even
– Steps - the project will be divided in which way
– Risco - problems that may occur throughout the project leading to delays or loss of quality of the consultancy
- Step 3 - Set the project deadline
If you already know what to deliver and in as many steps, there comes a delicate time to define how long it takes you to do this. An important care is not to set very long deadlines (since many clients are urgent) and not very short (since problems can happen and delay a project is a very delicate subject that can make your customers dissatisfied).
For this, it is always good to rely on the past experience of similar consultancies that you or your company have already done, on the size of the customer and the problem that it has (analyzing processes in a 5 company employees is completely different from analyzing processes of a multinational ), the number of meetings you intend to make, and what deliveries you will make in stages.
- Step 4 - Raise Direct Costs
Now that you have tangibilized the consulting project in the best possible way, you can analyze what costs exist for each step or that are inherent to the project as a whole (if you have difficulties, you can understand a little more about the differences in direct costs and overhead in this article).
For each type of consultancy there may be specific costs. For example, if you conduct consulting in another state, a unique expense of this project is the hosting, transportation and food. In the case of environmental consultancies, the cost of licenses usually goes here. Similarly, the outsourced workforce for specific consulting projects come in as direct costs and so on.
- Step 5 - Choose the consultants to be allocated
Every consulting project needs to be done by someone. In small companies it is quite common the role of the solo consultant who does all the work. In larger consultancies or large projects it may be necessary to set up a team. Here is an example of a team with a manager, a consultant and a trainee in our project pricing worksheet:
Regardless of the amount of people involved in the project, it is worthwhile to understand how much time they will devote to each step as this will show you how much of the total free time you have for other projects.
- Step 6 - Remember the taxes in the final price
This part is almost obvious, but I have seen some consultants forming prices and forgetting taxes. As much as this item is not connected to the project itself, it will have to be paid at some point and neglecting it is not an option.
- Step 7 - Reach the sale price
With a real estimate of your direct costs, you can already reach your selling price without profit margin, ie the minimum selling price. The logic is very simple, if you will spend $ 10.000 on a project and offer it for $ 10.000, at best it will go from zero to zero.
So thinking about a markup is going to be the difference between being profitable and profiting from your project. In the same example above, if I wanted a markup of 50% would sell the project for R $ 15.000, after the costs (and we will assume a tax of 10% = R $ 1.500), would have R $ 3.500 of contribution margin will help pay the fixed costs).
- Step 8 - Finding Break-even, Contribution Margin, and Fixed Costs
Lastly, the last step in understanding whether your pricing makes sense is to analyze the breakeven. As I was saying, you need to look at your contribution margin and see if it is sufficient to pay your fixed costs.
In the case above we have a project that generates R $ 3.500 for our company. Assuming I had a fixed cost of $ 35.000 would have to sell at least 10 projects similar to this to have no loss at the end of the month.
If within your review you know you can provide up to 15 projects and believe that this is a good price, you can move on to the next steps that do not involve the pricing itself anymore.
- Step 9 - Send proposal
Although it does not involve more values, the commercial proposal has a great influence on the perception and expectation of the client. It is in it that will be detailed the stages of the project, the term, what will be delivered at the end, values and conditions of payment.
More than anything else, the proposal is a message you pass on to the customer. If you deliver with speed, it shows that you are worried and that you are agile. If it has a beautiful design, no mistakes in Portuguese, you will be showing that you care about quality. All of these aspects will directly influence the customer's expectation and his willingness to close a project with you.
What kind of proposal would you most like to receive between these two?
- Step 10 - Track the execution of the hours spent in the project
If you did your job well to price the consulting project and were able to close the deal, you now need to follow up the execution to find out your level of error regarding the consultants' dedicated hours, the costs linked to the project, and the set deadline. Usually a project management worksheet is the ideal tool to do this monitoring.
Maybe some of the steps explained may not have been 100% clear. If this is the case, I will show an example based on a real case of LUZ using our project pricing worksheet for you to understand how to do the price formation of a consultancy in practice.
By the time we consulted a supermarket chain owner he sought help in solving problems related to his business financier. Apparently he could not know the actual financial result of his month-to-month (since he paid many suppliers and received the term with several different payment methods). In addition, he did nothing about the future projection of revenues and expenditures.
- Step 1 - Raise customer information
From what I said up there, you know it's a supermarket, but a few things that can help you when setting the price of your consulting project is to understand the reality of the company. In our case, this network of supermarkets has 3 branches, a team dedicated to the financial area with 3 people, being a manager and two analysts. In our project price formation sheet, to facilitate people simplifies this amount of information:
- Step 2 - Define Project Scope, Risks, and Steps
One thing every consultant needs to understand is that not everything your client wants is in fact the need for it. One of the great roles of the consultancy is to identify where the actual problem lies with the company. Assuming that in our case, in fact the biggest problem was the financial one, we have to start with the definition of what the financial consultancy will offer. In that case, I separated 5 steps:
- Diagnosis of the financial area
- Mapping of financial processes
- Plan changes and corrections
- Financial planning
- Implementation and monitoring
In addition, since the project team already has experience in designing control and financial planning projects, I have defined the knowledge of the LUZ team as 8. This note is important for an understanding of the risk attached to the project:
- Step 3 - Project Term Definition
Just knowing the amount of steps is not enough, you also need to understand how many days you will spend on each of these steps. This was the division I did:
- Diagnostics - 10 days
- Financial Process Mapping - 5 days
- Changes and fixes plan - 5 days
- Goal setting and budget distribution - 10 days
- Execution and monitoring - 30 days
Notice that the total is 60 days. In some projects where there are more uncertainties, sometimes it makes sense to increase the deadline as a guarantee and be sure to deliver everything on time. Remembering not to increase too much, as many customers can have an urgency and deny a project on account of this item.
So far we do not talk about values properly, but it is essential to understand this initial information to arrive at the correct values and costs. Remembering that the risk is always with your advice. If you miss the price down, it may not profit at the end of the project
- Step 4 - Raising the Direct Costs of Consulting
As I said, the initial information will help you further. Now we will get into one of the most important parts of any pricing consulting projects, which are the direct costs of the project. It is worth dividing these costs into:
- General direct costs:
We call them general direct costs because they are not tied to a stage of the project itself, but only exist when the consulting service goes into effect. In our case, 2 locations are in other states, so we have placed airfare and lodging costs for the days when you need to visit those other affiliates.
- Direct costs per deliverable (or step):
Each stage of the project may have specific needs that need to be accounted for. As you become more experienced and perform similar projects more than once, you will understand your costs better and miss less in that part. In our case, I have separated a cost for implementing a complete financial management worksheet and the training for using it:
Usually these costs are quite predictable, since when planning the consultancy, you end up thinking about what you need and with a little effort you discover the costs that this can generate to your project.
In cases of costs that you are not paying, it is worth making it clear in the commercial proposal that certain expenses are exclusive to the customer. An example is the adwords expense in digital marketing consultancies. Usually they are not charged in the proposal and the customer is responsible for making the payment.
- Step 5 - Consultants assigned to the project
This part can act as a planning of the hours spent with the project and / or as a direct cost analysis with consultants (if you pay directly to consultants). Anyway it's a survey that tells you the level of effort your team will be committed to.
A good insight is to understand this amount of hours in a month. If they go beyond 200 hours it may be a problem indicator, since you will be "charging" more than one employee CLT can offer.
- Step 6 - Taxes
As I said in the walkthrough, this part is very simple and straightforward. You need to understand the tax model on which your consultancy is framed and find the appropriate tax percentage. In our pricing worksheet for projects we've made this process easy for you.
- Step 7 - Sale Price
This is one of the most important steps, as it is here that you objectively find your minimum selling price. See that we have expenditures of R $ 12.000 with labor (hours allocated to consultants), R $ 12.000 for direct costs of the project (transportation, lodging and expenses of the steps). This generates R $ 24.000 of direct costs, which added taxes, are in R $ 27.180.
This is the minimum amount you need to charge, but as we speak, setting a profit margin is a key factor. This definition is not simple and can be tremendously influenced by the client's perception of value of his brand and his approach. In our case, we use 25%:
With this margin, the sales price with profit margin was R $ 35.012, which after withdrawing all direct costs left a contribution margin of R $ 6.373.
- Step 8 - Fixed costs, contribution margin and break-even point
With the contribution margin calculated, we need to understand what the firm's fixed costs are. In the case of LUZ, hypothetically I put R $ 35.000.
From this data, we already have all the necessary information to discover the break-even point and the ideal value of our project. As I said, the ideal selling price is R $ 35.012, however, in some projects with high risk or in special cases, a multiplier can be used to mark this value. In our case, we adopted a risk factor of 20%, generating a new selling price in the amount of R $ 42.015.
It is worth remembering that there is no right or wrong, what counts is if your client closes the consulting project with you or not. In this scenario (not including risk multiplier), we have a contribution margin of R $ 6.373 and we want to use this project to pay 50% of company costs (R $ 17.500 per month).
If we remember that this project lasts for 2 months, it will have to pay more or less 2 times the 50% value of a month, which is $ 35.000. That is, by selling 6 projects identical to this (at least in terms of contribution margin and assigned values) we have reached the point of balance.
This is essential information to get at your final pricing, because if you do not have the ability to do so many projects within that timeframe you will need to find ways to improve your bottom line, either by lowering your company costs, offer.
- Step 9 - Send proposal
Just to give the example of LUZ, we have always had an approach of responding to emails from customers in maximum 4 hours of delay and to make proposals in terms of 1 to 2 business days. In addition, we always use a very nice proposal template. Once this is done, the follow-up is left.
- Step 10 - Tracking for future pricing
Although simple, it takes a great level of dedication to measure the number of hours used in the project. Overall, I like to do this step-by-step follow-up and it looks more or less like this:
The biggest problem clearly appeared in step 3 - Plan Changes and Fixes. This analysis can help you increase the hours of this step in future pricing.
To close this post with the key of gold we will see some items that can value and much the way you do the pricing of a consulting project:
- Do not rely solely on competitive prices - First, they are out of your control. Second, it indicates that you are more or less equal to everyone, and therefore charge the same.
- Avoid being seen as a commodity - Show results that you have already achieved in similar projects, if you are sure of its capacity, offer a variable portion of the contract that will only be received if the performance reaches a certain level. At the end of the day you have to be seen as an investment and not as an expense.
- First make the benefits clear - So when the customer looks at your price, you will know that the benefits you provide are greater. Remember that making clear its benefits is not a well written proposal, but an experience that the customer has since the first contact with you or your company.
- Agility and cutting edge service - I do not know how many clients I've won because of agility and concern about having a legal treatment. This involves email response time (if your 4 hours are already high), availability to schedule meetings, clarity of proposal, and scope of the consulting project.
I think it gave you a good idea of how to price a consulting project. Throughout this article I have relied heavily on the use of our project pricing worksheet. It's worth taking a look at it. If you have liked the tips, but do not have a consultancy or do not carry out projects, I recommend our package with 7 pricing worksheets with handout, which has tools to help with the pricing of all sectors.