I’ve been a marketing consultant for the better part of 35 years. Today, I work with Consulting Success® as their Head of Growth. Both in my consulting work and my role within the world’s leading training organization for consultants, a common question we get is:
“How do you price your work and ongoing retainers?”
Let me share the three ways most consultants price their services, and which ones I use. Most of my consulting work is project-based work, so I price my work accordingly. And the pricing model I use is one I highly recommend for most consultants.
Sure, I also offer several tiered productized service packages for clients who wish to access my expertise either before or after a project is completed — such as an initial assessment period or a roadmapping phase before a project starts, or for ongoing support once the project is complete.
Each model comes with its risks and rewards.
Limitations of Hourly Billing
Whether it’s a one-time service or an ongoing retainer agreement, charging by the hour is the common way most service providers and professionals structure their fees. It’s the easiest method to price one’s work as most people get paid by the hour when it comes to standard employment, and it’s also the easiest to justify.
But hourly billing comes with enormous limitations.
For one, it disincentivizes you from becoming more efficient — after all, the faster you work, the less money you make. But clients know you can drag your feet on purpose to make more money. It can lead to a lack of trust and micromanagement on the part of the client as they want to ensure your billable hours are productive.
For another, it limits your ability to grow and scale as there are only 24 hours in a day. You can outsource some of your work, but this cuts into your margins and forces you to charge extra for their time. It places your billable hours under greater scrutiny, and you’ve unwillingly become both a people manager and a project manager — on top of doing what your expertise is supposed to deliver.
Early in my consulting career in the 90s, I knew I wanted to grow. So I didn’t bill by the hour but priced my work based on the time it took for me to complete tasks (and eventually, how much it cost me to outsource parts of it). I never tracked my time nor included hours as deliverables — I only used them for estimates. So deliverables were never based on actual time spent.
Not being sure of how much time that I, and any outsourced service providers, would take, it was easier to use a flat-fee billable process. Either way, my clients always knew what they were getting rather than hoping I wouldn’t drag my feet to pad my invoices.
This was a step in the right direction, but this had limitations, too.
Olympic Factor Pricing
First, let’s look at ongoing or recurring service fees, often called “retainers.” When most people think of them, they tend to think of the kind lawyers charge. They’re advances against future work. “Having a lawyer on retainer” is paying the lawyer a set amount, per month or so, to be able to get legal advice when needed.
After I completed a project, I sold optional retainer packages for ongoing advisory services such as coaching, support, or training. I didn’t bill by the hour but by groups of time-based deliverables, which were based on a certain number of sessions or reports.
I avoided billing by the hour or I’d be shooting myself in the foot. Why? Because if I were to outsource or use automation to become faster and more efficient, I would be losing money either way.
I wanted to grow my consultancy, and hourly billing would have placed a ceiling on my earning potential. (Later in my career, I switched from project-based pricing to value-based pricing, which I’ll return to later as this model is by far the best one.)
I sold both service packages and monthly retainers in the form of productized services. I categorized them into three tiers (similar to Bronze, Silver, and Gold, but named differently to fit my brand and practice). They were based on the number or scope of deliverables.
What I call “Olympic Factor Pricing,” which I wrote about in my book Power Positioning (1995), is giving clients the option to choose between three different tiers, depending on their needs. Each tier consists of an incremental number of deliverables.
Obviously, the “Gold” tier was the most pricey but contained more deliverables and more value. It’s what my friend Paul Myers calls “The THUD! Factor.” The bigger the book is (or in this case the stack of deliverables is), the louder the hypothetical sound it would make when dropped and hitting the ground.
Moreover, clients may choose a lower package if price is an issue. The higher price points also become anchors by adding higher perceived value through comparison, reduce unnecessary haggling, provide the client with more options, and allow the client to upgrade or downgrade (or the service provider to upsell or downsell) service packages over time.
I recommend Olympic Factor pricing as it communicates value to the potential client, reduces price shopping, and provides you with some leverage if they choose to negotiate with you.
You can apply this tiered pricing process with most pricing models. Speaking of which, let’s look at the three most common ones:
- Input-driven
- Output-driven
- Outcome-driven
Input-Driven Pricing
The first and most common approach is billing a client according to the input of work, such as by the hour or activity (i.e., the input of time or effort into a project or account). Common industry practice is to bill once the service is delivered or once a month.
Input-driven pricing is the most popular pricing method and the one most service providers use (e.g., bookkeepers, copywriters, designers, and so on). It’s also the one providers of professional services use to price their sessions or client-facing times — such as lawyers, therapists, and accountants (and yes, consultants, too).
In fact, lawyers typically charge monthly retainers to cover their time working on a case, including any court appearances and work by other staff such as paralegals who do most of the heavy lifting.
It’s the most common method because it’s easy to estimate and easy to justify to a client. But as mentioned earlier, time- and task-based billing is quite limiting. The next two are better alternatives.
Output-Driven Pricing
The second most common approach is pricing according to the output of work, such as for deliverables, for production work (such as commissioned projects), or in the form of productized services. Recurring flat-fee retainers in exchange for a number of recurring deliverables typically fall into that category, too.
Output-based pricing is often the go-to pricing method of larger practices and cross-functional teams, like agencies and professional service firms. It makes sense as the “output” delivered to the client may comprise of “inputs” from various people or sources.
In fact, solo professionals can greatly benefit from this pricing model, too. Using this method, the provider can automate or outsource parts of their deliverables, or find ways to be more efficient and agile — and therefore more profitable.
If a deliverable took less time, the provider still gets paid — regardless of how much time it took. Plus, the client still gets what they paid for, as long as deliverables meet expectations.
However, the provider may put in more time than anticipated too, so there’s a risk. There could be unexpected challenges, quality control issues, unforeseen increases in costs, and so on. It takes experience and expertise to be able to properly assess needs, scope projects, and estimate costs.
A safer approach is to start with an initial audit or roadmapping phase, which will reduce the risk. In fact, by selling and conducting an audit beforehand can also uncover potential surprises and assess ultimate costs if anything goes sideways or takes longer.
Moreover, offering these initial discovery phases or pre-assessment services as their own standalone service packages can become must-buy prerequisites to larger project-based proposals.
Outcome-Driven Pricing
The third approach is pricing according to the outcome of the work, such as based on the results the work produces or the impact it creates. It’s what most people call value-based pricing where the fee is relative to the estimated value gained or saved.
This model is by far the most beneficial of the three.
There are countless ways to gauge value, but the price is usually not contingent on producing the result or on the specific results to achieve. It’s only an estimate as a basis for calculating the price.
It’s not for speculative work either, although it can be. In the case of the lawyer mentioned earlier, for example, their retainer can be applied against (or later deducted from) a percentage of any monies awarded by the courts if the lawyer wins the case.
Nevertheless, if the value is something you can easily forecast or quantify, then pricing should be relatively easy. But if it’s unique, situation-dependent, or unpredictable, then conducting an assessment or a roadmapping phase beforehand (as mentioned previously) can provide an appropriate value determination.
Vague or Subjective Value
You might be asking at this point: “What if the outcome is something subjective, unquantifiable, or immeasurable?” Every result has some kind of value, whether directly or indirectly. The answer is simple but it’s not always easy to find.
It requires some probative questioning.
For example, a question to ask is, what would such an outcome mean to your client? There are plenty of ways to assess what “value” is or what it means for the client. Whether it’s:
- The monetary value that such a result directly achieves;
- The indirect value it brings (e.g., savings in time and effort);
- The cascading, collateral, or compounding value it creates;
- Or the value from reducing or eliminating costs.
A friend of mine is a cost-efficiency consultant. Clients typically hire her to audit their procurement processes, identify purchasing inefficiencies, and implement streamlined buying workflows. She also renegotiates vendor contracts, sources more economical alternatives, and eliminates redundancies in the supply chain.
She would find hundreds of thousands of dollars in savings. After an initial audit phase, she had a pretty good idea of how much money she would be able to save her client. So her fee was based on a percentage of the total estimated savings she would generate.
What if you’re a life coach and the result you provide is improving the quality of your client’s life? The question then becomes, what would “improving quality of life” specifically mean to the client?
For example, if it’s time management, how much more money can they make if they had more time? How much money would they save by eliminating lower priority tasks? What about the increase in productivity as a result of having less stress and anxiety?
Whether it’s vague or subjective, it takes some probing to uncover the value of your work. For some, it may be obvious. For others, it may be hidden somewhere in the client’s answers. But in either case, even when the results are direct and measurable, don’t forget the many knock-on effects that such results provide.
To illustrate, let’s use the cost optimization consultant mentioned earlier. An example outcome is reducing a company’s operational costs by 15% within six months. As a result, the client company saves $150,000 on a $1,000,000 annual operational budget. This result is a quantifiable $150,000 in savings.
But she doesn’t stop there.
By probing further, she can uncover some of their priorities. For example, an extra $150,000 may allow the company to reinvest into growth initiatives, such as hiring new talent. They may increase their marketing budgets and thus improve their sales. The extra savings might make the company more attractive and improve investor confidence due to improved financial health.
In short, saving $150,000 doesn’t just improve the bottom line. It creates opportunities for long-term growth, competitiveness, and resilience. More often than not, these spillover effects all have a price tag, thus adding value to the result you provide.
Which Pricing Model is Best?
Ultimately, input-based pricing is best for individual freelancers and service providers, such as writers, designers, aestheticians, personal trainers, and the like, when starting out. After all, it’s the way most individuals get paid working in regular jobs. It’s also easier to justify and prove to your clients.
Output-based pricing is typically best for groups, agencies, and firms. The moment others are involved in the delivery of a service, things can get complicated and unwieldy — otherwise, any hired personnel involved are equally susceptible to micromanagement and have their input of time scrutinized.
Independent professionals often choose output-based pricing, too, as it offers them the ability to easily productize their offerings and package them. This also allows them to offer their clients options through tiered “Olympic Factor” pricing, without the need to meticulously track their time or efforts.
However, outcome-based pricing is best.
Outcome-based pricing is appealing for both solo professionals and service organizations who want to grow and scale. It’s particularly desirable for growth-minded entrepreneurial consultants, coaches, experts, and advisors, as the value is based on their expertise.
There are countless ways to price using this model just as there are countless ways to gauge value. However, this requires experience, confidence, and substantial value creation to offset the consultant’s costs and justify the client’s price. Often, it can be perceived value, such as through specialization (be it horizontal or vertical).
Also, depending on the context and turnaround time, a consultant may price a larger project by breaking the total fee down into monthly instalments over the estimated delivery time, or use a graduated approach where the fee increases each time a milestone is met.
Don’t Undervalue Yourself
One of my favourite quotes goes:
“Know your worth, then add tax.”
Your prices are, to borrow an SEO term, a reflection of your E-A-T, i.e., your expertise, authoritativeness, and trustworthiness in your ability to deliver what you promise. And as a mentor said to me early in my career, perceived value is more powerful than value itself.
Arguably, if you’re just starting out and have little to no experience, input- and output-based pricing may be best until you get a sense of how much time it takes to complete a task and deliver your work. They’re easy models to follow and carry very little risk.
But keep in mind that they can become prohibitive and even more expensive over time, particularly in terms of opportunity costs. Plus, they can also seriously undermine your perceived value and hamper your ability to improve, become more efficient, and grow.
Think of it this way: every hour you’re billing for is an hour you’re taking away from completing a deliverable for a client who would have paid you gladly for the value of the deliverable, which may equal to many hours worth of time, whether you did them or not.
But if you’re an established consultant, you’ve had some success, and you want more freedom, time, and the ability to scale, consider outcome-based pricing. After all, compared to the value of your work, your fee should be a mere drop in the bucket for your client.
If you’re a six-figure consultant and you dream of becoming a seven- or eight-figure consultant, the most achievable way of getting there is to use outcome-driven pricing.
