So many prices

Clients usually say they don't buy consulting services on price. They'd be foolhardy to choose the lowest price consultant to handle work they consider important—or so the reasoning goes. Nevertheless, when one competitor discounts price, clients often use that leverage to drive all prices lower, creating a price war.

While you may be constrained by what clients want, many pricing options are available. Understand how they work so that you can offer creative combinations. Here's a quick rundown on the most common pricing strategies.

â–º Hourly Rate (Time and Materials)

Fee for service is a standard pricing format used by most service providers, including consultants, lawyers, accountants, and plumbers. It's simply a specified dollar amount for each hour, day, or week you put in on the job. For decades, service providers have trained clients to think that the "hourly rate" is the gold standard of pricing. It is easy to understand and gives clients a simple way to compare rates between competitors. It isn't usually too long after clients see hourly rates, however, before they pressure consultants for discounts.

Clients will also quickly see an advantage for them to cap or limit the total hours that providers can charge for projects. With such limitations, clients must preapprove any work that exceeds the hourly ceiling. With hourly caps, project fees are fixed and clients get some price security. But if the project schedule slips because of an unforeseen event or because the client fails to complete a task on time, consultants can find themselves working for free and losing money.

How to Use Hourly Rates

Hourly pricing limits consultants' opportunities to share in the benefits they're helping to produce for clients, so some consultants try to avoid this strategy. However, many clients demand hourly rate agreements, so they are difficult to avoid. The following guidelines are useful when using this approach:

Establish an hourly or daily rate that will ensure project profitability.

Avoid caps on hours per day or per project. ^ Provide an hourly or daily rate for each consultant level (for example, partner, senior manager, manager, and consultant). Don't quote a composite rate for all consultants on the project because any change in the consultant mix will impact the project's profit.

Confirm that rates apply only to this project and that other projects can be billed at different rates.

Establish a firm time frame for rates to remain in effect; if a project extends beyond your fiscal year, include any planned rate increases for your practice.

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