Consulting Fee Structures: 5 Models Ranked From Worst to Best

[Music] hey it's Michael Persky from consulting success.com let's break down the different consulting fee structures that are available to you as a consultant and then really contrast and compare the the positives and negatives of each so a very common one is hourly let's put here positive and then put negative so hourly right a lot of consultants use hourly fees and that's really what like we're a lot he'll get started right the market place like that's kind of status quo for people know what's good about hourly fees because there isn't much a good abode right what's good about them though they're easy it's right it's pretty easy to figure out how much you want to make and then what you should be charging on an hourly basis right based on how many days you're gonna be working so on and so forth and to come with an hourly fee that makes sense for you the problem with an hourly fee there's a lot of problems right number one there's not a good way to work with a client on an hourly fee right because your interest aren't really aligned in the client situation they're not gonna want to bring you in and share new ideas with you as much or ask you to do something that might be beneficial for the project because they know that every time they ask you you're gonna be charging them more right like the clock is always ticking for you as the consultant it means you always have to be thinking about tracking your time and how many hours and you might find yourself actually wanting to slow the project down a little bit or take your time a bit more because the longer that it takes more time you spend out the more that you make so there's just not a good alignment between you and the client the other big problem is that there's a real ceiling right you can only make so much so put the ceiling and we'll say non-alignment right between you and the client you can only earn so much on hourly fees right you can't create more time in the day and so the only way to make more is to work more write more hours more money that's really create another job for yourself that's not creating much freedom and flexibility which is what most consultants want the next is is daily write a daily rate a lot of consultants a lot of consulting firms use a daily rate the positives again is that it's easy because essentially a daily rate is just your hourly rate times a number of hours per day gives you your daily rate and some consultants might use a daily rate of $1,000 $1,500 $2,000 $3,000 whatever the number is right as they get more experience and expertise and can deliver more volume results the problem though with the daily rate is the same as the problem with hourly that you can only earn more by working more days it's not you're working more hours you're working more days but again more days means more hours so there's a real ceiling for growth the only way around this is if you start working and bringing with other you know other consultants and then you're charging a lot at a certain daily rate and you're capturing the margin between what you're paying them and what the client is paying you but that requires obviously more resources you got to start managing other people and so if you don't want to do that then the daily rate is definitely not not a good one right a lot of consultants will use a daily rate because that's what firms you know buyers of consulting services many are used to paying based on a daily read or an hourly rate but just because many are used to it doesn't mean that it's the right approach for you to take in fact I would certainly suggest against it another model is retainers right and this was one that in my early days I really really liked as a consultant right using retainers because there's ongoing income coming it's not a one-time project and it provides a sense of stability right it makes you feel that things are going over a longer period of time and you go off to search for that next client as quickly and so that's definitely a good thing right it's what we could call stable income however if we're really honest about the situation it's only stable for as long as the client pays you after a certain period of time they may decide to stop and then it's not stable anymore but the real problem we if retainers is that what most consultants find is it as you continue working with the client over a longer period of time they start to treat you less like a consultant and more like an employee and you start to find your role within the organization becomes more challenging because you're your expertise isn't value to the same degree you end up either being asked to do a whole bunch of things that aren't really related to your core expertise or on the flip side you actually are almost asked to do nothing and so then you find that your value as a consultant in that organization is decreasing wear a retainer can still work very well as when you set it up as more of an advisory type of retainer as opposed to a work type of retainer meaning that you're providing is more of your knowledge your expertise your insight as opposed to going and doing work for many consultants in an advisory type of role a retainer can still be very profitable and the nice thing about retainer is not always if structured properly an advisory capacity is not tied to number of hours so we can say that the the positives is stable income the negatives is you kind of you know become almost like a we could say an employee or treated as an employee and without your value decreases over time this is what many consultants find and it's not a bad thing right you can work with a client for even months or years in some cases in a retainer model and have a lot of success with it but you will start feeling overtime but it's just the value is decreasing now another model is project right or another structure is is project based fees now project based fees is a really good direction and option for you to take the problem with project based fees is that most people do it wrong right most people when they think about a project based fee what they're really doing is just calculating the number of hours involved in that project and then you know creating a proposal around that and so projects are nice because you think of what you know a larger particularly a larger payment right and in your mind it is not hourly but what I continue to see a lot of consultants do is that their project based fees are actually just out again so if you're doing it on an hourly basis then it's there's still a cap right there's still kind of that ceiling now a slight variation on this is what I call ROI we'll say our Y based now our buy based fees are still projects where you go in and you take a client through either a specific phase or a stage of a project or you do the complete project for them and whether it's big or small the value and ROI based is that really it's based on the ROI and the value that you are providing to that client within that project so your compensation is not based solely on how many hours you spend working on that project but if you can spend ten hours and create a result that otherwise somebody might charge you know based on a lot more hours but you can receive that same level of compensation in much shorter period of time there's a great benefit not only to you but also to the client because they start to experience the result and the outcome they want much faster right in a much shorter period of time so the ROI based approach the the positive to it right is that you have there's a lot more leverage if you can create in 10 hours a result for a client is worth a million dollars you can find that there are many situations where you're you can charge ten thousand dollars fifty thousand dollars even in some cases more than that for a very short number of hours right so if you were to break down to an hourly fee would actually be there'd be almost no one other that would want to pay an or and as they shouldn't feel comfortable paying thousands and thousands and thousands of dollars per hour but if you do it based on ROI and value you're actually able to achieve that because you get the client to be focused on the real the value for them and ROI that they're going to see which then makes it a positive investment for them and an easier decision so the positive is leverage the positive is high high value the negative however of it is that some people see it as being difficult but it's only difficult when you don't know how to approach it if you know how to ask the right questions in a conversation if you know what to look for if you know how to structure your fees in a way that it aligns with ROI and aligns and supports value it's actually not difficult it can be pretty easy and simple the whole thing is you need to know how to do it right so look for resources or you can come to consulting success com we have a lot of resources that talk about how to actually structure your fees based on ROI and value this is work that we do want like on a very close one-to-one basis with our clients and our coaching programs there's a lot of resources that we have on the site that can guide you in this direction so there is no one best way I mean definitely I would highly recommend that most consultants go in this direction the retainer has certain certainly some merit to it in some situations but there is no right I mean if you're very happy working more hours and kind of you know being in a certain ceiling that's totally fine if that works for you but why would you do that when you can earn significantly more with a lot more leverage work few hours make a lot more money still make a real impact for your clients and enjoy the the freedom and flexibility that comes with it so this is a nice little break down hope that it helps reach out if you have some questions on it but this kind of covers the most common consulting fee structures and both positives and negatives of each 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Channel: Consulting Success

Views: 88,862

Keywords: consulting, pricing, value-based fees, value pricing, consulting business, consulting fee structures, pricing models, retainers, project-based fees, consulting success

Id: cddUqt8gPlA

Length: 10min 51sec (651 seconds)

Published: Thu May 24 2018