Making A Living and Setting Your Fees
If you ever want to start a great discussion with a group of consultants, just bring the conversation around to the subject of what is the best way to set fees. Not the amount, but how one goes about pricing one’s services. If you really want to see a great, animated discussion, ask this question of a group of consultants after a national conference in the hotel bar.
It’s probably the question most asked by new consultants: how much should I charge and how do I determine the amount? My standard answer is to tell them to take whatever amount they are thinking about charging, and double it. Almost invariably new consultants charge too little. They either lack the confidence to charge full-market fees, or feel they can gain a competitive edge by charging less. Their most common mistake is in underestimating their expenses -- and what the market will bear. Most new consultants only figure this out AFTER they learn their competition beat them even though the price the competitor quoted was a lot higher.
It’s important to recognize that profitability is a product of fee-setting. There are many fine consultants who argue, rightfully, that they are in the business of making the community/country/world a better place and fees are simply a necessary evil. And that’s fine. For the rest of us, while we may not necessarily wish to someday be on the Forbes 500 list, we want to make a good living and receive fair financial compensation for our work.
So let’s start with an assumption that financial gain is at least ONE of the factors motivating you to be a consultant. If it isn’t, stop here because you will find the rest of this article irrelevant.
Good, you’re still with me. That’s important because you’ve taken the first step in admitting that fees are a part of the equation of consulting with non-profits. Until that step is taken, unabashedly and without apology, you will always have trouble justifying your fees to your clients -- who are the only people that matter. Go ahead, admit that fees are important! You’ll feel better. Fees don’t have to control your life, but they will have a huge impact on it.
I once heard a story and the person telling it swore to me it was true. A local ophthalmologist used to wait until the customer asked "How much?" The good doctor would then, very slowly, answer a specific amount, say $200. But he’d watch the patient’s reaction and if there was no negative reaction, he’d quickly add the phrase "per eye." Again, I don’t know if it is true, and I don’t think I’d want to try it, but it is a cautionary tale of how setting fees can run our practice.
Okay, so how do you set your fees? Usually it boils down to two philosophies: time-based or value-based. I’m the first to admit that I don’t fully understand the concept of "time-based" fees simply because I don’t think time is relevant to either the consultant or the client. Think from the client’s perspective (which is all that matters since you won’t earn any fees if they won’t hire you) -- why should they pay you more because you write slower? Or think slower? Or have to do things three times to get it right? Why should they pay you less for the exact same product and results just because you have a lot of experience doing something they need?
Now there are probably some very good reasons for charging on a time-based model. I can’t think of any right now, but I’d encourage those who advocate such billing systems to respond to NCR "Another Perspective" and spell out the reasons why it works well. A lively dialogue will do all of us some good.
I have a consultant friend I’ve known for 15 years. He is fixated on how much he makes an hour. He actually tracks every 10-minute slot of his work day and applies it to one of several categories such as "client service," "marketing," "management," "travel" and so on. He once told me he spends as much as five hours a week computing these figures. I told him I’d rather play a round of golf.
He viewed his "value" in terms of how much he received per hour. And that’s how he sells his service. He tells potential clients that he believes their project will take X number of hours, over Y months, and that his hourly rate is $Z, so his fee is X times Z, paid monthly (Y). If the project takes more time, well, he simply eats that time (as he’s said, he wants the client to know the maximum cost possible before hiring him). If it takes less, he bills his client less. In order to sell his service, he gives the client a maximum cost, but not a minimum cost. Essentially, the more efficient he is, the less money he makes.
This seems to be my sticking point with hourly fees. The client wants to know they won’t get a whopper of a bill at the end of the project because the consultant spent more time than planned. So the consultant sets a "maximum" number of billable hours -- but is still committed to completing the work if it takes longer. If it takes less time, the consultant bills less. So the consultant limits the amount he can make, without limiting the amount of work. That has never sounded to me like a good way toward financial freedom.
Add to this the billing hassles. I’ve seen my friend’s invoices: line after line of detailed explanations of what he’s done, how long it took and how much it cost. They look like our long-distance phone bill. It must take him, or someone he pays, hours a month just to figure out how much to bill a specific client -- and then he has to make sure that the total bill STILL doesn’t exceed the maximum amount. So he spends five hours delineating his time and another couple of hours computing invoices each month. Personally, I’d rather be playing golf, throwing a ball for my Golden Retrievers, or doing just about anything other than THAT.
Let’s not forget that the time computing bills is time better spent. We have anywhere from four to ten clients in any given month. It takes an administrative assistant about an hour to produce, print, fold, stuff, stamp and mail all of the invoices each month. I don’t even see them anymore. That’s because the fee is justified by the value of the work, not the time spent producing the work.
Combine these issues with the "shower" problem, and it gets easier to see that billing for time creates conflict. The "shower" problem is simply this: do I get to bill for the time I take during a shower when I’m thinking about a client’s problem? I once developed the solution to a client’s very, very sticky problem while playing golf. Even if I say so myself, it was a brilliant solution (and the client thought so as well). So now do I get to bill the client for the two or three hours I thought of their problem while playing golf (or taking a shower)?
Over the last ten years, I’ve convinced myself that "value-based" fees are the simplest way for most non-profit consultants to sell their services. The simple way to define the philosophy behind value-based fees is to ask a simple question: how much is what I’m about to do worth to the potential client?
Every client, every situation, is different. For a large, national non-profit a strategic planning retreat could conceivably be worth five times what the exact same retreat would be worth to a struggling community non-profit -- ONLY because national organizations seem to put more VALUE on the whole strategic planning process (for better or worse). Even though the work is the same for the consultant, and takes the same amount of time, the client values the work more and is therefore willing to pay more.
It works as well with proposal-writing. No, the value isn’t based on the amount being requested, or, heaven forbid, the amount granted. The value is in the information contained in the proposal. A proposal for a single, one-shot program or project is likely of lower value to a client than one that can, with few adaptations, be used again and again for a variety of proposals. So if we are going to propose to write a grant application that is a one-shot deal, our proposed fee will be less than one that can serve as a master proposal for years to come. In either case, the proposed fee will be high enough to cover our cost, profit and growth needs, but with a "high value" project, our fee will be higher.
This also eliminates the "who owns the work" question. If work we’ve done, say writing a proposal, can be used again and again, we’ve charged more upfront -- so we don’t need to control the work after we’re finished with the client. If it has a limited use, the value is less, as is the fee.
My best case for value- vs. time-based fees comes from a simple example: writing a case statement. Two consultants are hired to write a case statement. One, Consultant A, takes 50 hours to write a great case statement. It took this long because Consultant A had never worked with a similar organization, had to do lots of research, and had to test-market the drafts several times. Consultant B, however, had worked with five similar groups and had basically done most of the research and test marketing five times before. It takes Consultant B ten hours. Both consultants turn in identical, excellent products. Should Consultant A get paid five-times more than Consultant B even though the client ends up with the exact same product? For the life me, I can’t see why either the client OR Consultant B should be happy with that.
In order to price your services this way, however, you have to have a realistic evaluation of the value of your services to the potential client. You may think you are the one true savior of the client -- the one with ALL the answers -- but unless the potential client agrees, and can’t find anyone better for less, it doesn’t matter what YOU think.
When setting "value" for a proposal, I ask myself several different questions to arrive at how much I think the client will value our service:
- Why does this particular client need us? In essence I want to know why we are special to them. For example, maybe we’ve done a dozen similar projects with similar organizations and can bring that experience with us. The more we bring to the table, from the beginning, the more it is going to cost the client. We don’t sell time, we sell knowledge.
- Who are we competing with? Maybe we need to match prices with the competitors, maybe not. But knowing who else is competing gives us the advantage of determining how we THINK the client will perceive our value. Sometimes it’s better to sell a higher priced product because it will be perceived as having higher quality. It might be easier to sell the “well, you get what you pay for..." to make a client think twice about picking the lowest bidder (kind of a John Glenn thing where, when asked what he was thinking right before blast off, replied "Good heavens, this whole thing was built by the lowest bidder"). Maybe, just maybe, being low bidder isn’t the position to be in.
- How bad do we need/want the business? If our plate is full, or if the client is located in outer Timbuktu and requires three plane changes, a camel ride, and a short swim to get to, maybe I charge much, much more since it will mean time away from family and friends. By the same token, if it looks exciting, the people are interesting and committed, or it opens new, future markets for us, maybe we lower the price a bit just to eliminate that as an issue.
I’m the first to admit that setting value-based fees is not an exact science. We once submitted and presented a proposal that had a fee of $15,000 -- and that was about 30% higher than our "standard" rate at the time. I wasn’t all that excited about the project and didn’t really want to travel so far to do it. During our presentation, I was asked an astounding question: "With your fees being so LOW, how can we be assured that you’ll do a quality job?" My response, best as I can remember, was "Low? How much are the other firms proposing?" I found out every other proposal they received was for $22,000 and higher! And, yes, had I known, or even guessed, that to be the case, I’d have bumped our fee another $5,000 to $10,000. But, in fairness, we did get the project – and profited handsomely for it.
Sure, But What About MY Expenses?
I’m aghast when new consultants are advised to charge twice what they were making as an employee or, my personal favorite, figure out your expenses and double it. I wish that worked because then I could just rent an expensive office, hire staff, pay myself a bundle, buy a Learjet... and just charge more to cover all the costs. The problem is that it just doesn’t work that way.
Expenses are irrelevant to what you can charge. Do you care what Home Depot’s expenses are when you buy a power sander? Of course not, you care about the value of the sander (including how badly YOU want it) and whether you can get comparable value from somewhere else for less money. So, too, do your clients when they are considering hiring you.
Now, expenses ARE relevant in determining how hard you have to work, but not relevant at all to setting your fees. I could, I suppose, have the fancy office and the Learjet -- if I’m willing to work 100 hours a week without a vacation and no life. I could work on four or five projects at once, instead of two at a time, to generate more money to pay more expenses, but I’m not going to be able to charge clients more just because my expenses are higher. In choosing between two businesses, who would hire the more expensive one just because they said their expenses were higher? Who cares?
I’d suggest computing your expenses on an annual basis, not an hourly or monthly basis. A year’s budget will give you a chance to evaluate the ebb and flow of business and costs. Take into account all the expenses including "little" things like your salary, retirement contributions, benefits, vacations, etc. Make sure your annual budget includes all of those things. After you’ve done that, just divide by 12. Now you know how much business you have to generate each month, and the number of clients you have to work with at one time, in order to pay the bills. Make that "nut" each month, and what you make per hour is irrelevant. Some months you might have to work 300 hours, other months you’ll work 100 -- but as long as you make that monthly minimum, you’ll make what you want each month. It seems maybe that the secret to financial happiness isn’t just the amount of money one makes, but how hard one must work to make it.
Even now, ten years into running my own firm, I know my magic monthly number. I know how much cash has to come in the door each month to pay all the bills. Rarely do we miss that target. My wife claims she can tell each month when the check that puts us over the minimum needed that month comes in... she’s says I’m a much nicer person to be around. And it does get easier each year as you get a better handle on exact expenses.
In the end, there are a variety of ways to set and maintain fees. My consultant friend isn’t wrong for being a strict adherent to hourly billing -- it works for him. It would drive me nuts. My suggestion is to work with various plans and find one you are comfortable adapting to your needs and working style.
The one absolute, however, is that the potential client determines YOUR fees, not you. And they determine it by putting a value on your services. Never forget that... it’s all about the client’s perception, not your reality.
Often the path less traveled is the way to go. Sometimes the path less traveled is less traveled for a reason.
Fare well, and farewell for this week...
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