How to Use Value Based Pricing In Your Consulting Business

Arguably the most difficult part of developing your consulting offer is deciding what to charge.

Value-based pricing should be the goal of any consultant who wants to break free of the time-cost ceiling.

Types of Value Based Pricing

There are two main kinds of value-based pricing that consultants can use: value share (like commission), and value-capture fixed pricing.

1. Value Share

Value-share ties your pricing to the results you deliver. Clients agree to pay a portion of their ROI to you directly. This includes working on commission and no-win-no-fee arrangements.

Pros of value share pricing

• Potentially very lucrative
• Increases confidence in your ability to deliver
• Reduces barriers to purchase.

Cons of value share Pricing:

• Some types of consulting work are hard to accurately quantify returns
• Narrows focus to the financial benefits of your work, ignoring other ways you deliver value
• Reduces budget certainty for clients
• Reduces cashflow certainty for you
• Requires a clear project scope
• Increases risk of non-payment if results cannot be achieved
• Clients may be unfamiliar with this arrangement.

How to Price with Value-Share

Quantify the expected return on investment for your client. Then determine what percentage of the ROI your client is likely willing to invest to achieve this. 5-25% is a common range.

2. Value-Capture Fixed Pricing

Fixed pricing rewards productivity and creates certainty – but does require some precision and practice.

Pros of fixed pricing

• No compulsory time-tracking
• Clients focus on the results you’re delivering, not how much you charge
• Increases budget certainty for clients
• Increases cashflow certainty for you.

Cons of fixed pricing

• Requires a clear project scope
• Increases risk of undercharging, by underestimating how long a project will take.

How to calculate a fixed price with value capture:

Estimate the results your client can expect to achieve from your offer. Consider time, money and stress saved, as well as intangibles such as reliability, reputation, quality and customer experience.

Allocate a maximum of 10% of that value as your fee.

How to Use Value Based Pricing When Your Service Isn't a Direct Profit Driver

Value share has a cleaner relationship between price and result - but it requires a directly attributable financial return.

Value capture fixed pricing, on the other hand, requires a more in-depth approach to calculating your value. 

COC Example: Organisational Design

Here is a recent question from a Consultants of Choice member, who specialises in organisational design - and how I answered it:

"I believe I understand how value based pricing works, but I'm unsure how to calculate my value. 

The org design process I go through with teams creates a shared understanding of functions and workflow, ensures clear roles and responsibilities, and designs the structure to support strategic intent and operational requirements. 

I get great feedback and believe I provide a lot of value but I don't know how to put a dollar figure on it. 

I hate working under a time based model and am really keen to set things up after my current contract to move to a fixed price or value based model but I'm struggling to figure out how to price it."

The benefits of quantifying your service value

It's definitely harder to quantify your value when you're operating in what feels like a less tangible space - but this is actually a huge advantage.

Forcing yourself to quantify your value requires you to interrogate what you're bringing to the table, and will lead to better sales conversations, more compelling proposals, and increased conviction in your work.

How Consulting Brings Quantifiable Value to An Organisation

There are a few ways that work like consulting services brings quantifiable value to an organisation, which fall into the following broad categories:

• Cost avoidance (saving them from incurring costs)
• Cost savings (reducing wasted money and time)
• Financial gains (contributing directly to increased revenue)
• Productivity and time gains (contributing indirectly to increased profitability through more effective redirection of time)

To quantify your value, you will need to do some research to find statistics, case studies and examples that create a reference class for how your work delivers one or more of the above. 

Thankfully, there's lots of information out there that can help, which have often been done by big consulting firms like Deloitte and McKinsey who have big-budget, well-staffed thought leadership and research arms.

Quantifying the Value of Organisational Design

In the case of our COC member, who specialises in organisational design, here's how this might look.

"People are your biggest overhead. When you don't design your structure and environment for success, you lose a huge chunk of that investment, through:

• Wasted time
• Lack of coordination
• Inconsistent work quality
• Compliance risks
• Reputational damage
• Customer loss
• Low morale
• High staff turnover
• Poor performance and missed targets.

But if we get it right, we can reap significant benefits, such as:

• Increased efficiency
• Faster, better decisions
• Higher quality work
• Increased profits
• Better customer relationships
• Lower staff turnover
• Increased performance, productivity and effectiveness.

Let's zero in on decision-making.

Did you know that an average of 37% of our working time is spent making decisions? For executives, that figure is over 70% (McKinsey)

Would you also believe that more than half of that time is spent ineffectively? The direct cost of slow, uncoordinated decisions creates massive internal lag and drives down performance.

For an organisation of 100 people, these figures equate to lost working time of over 35,000 hours per year, and wasted labour costs of over $1.5M a year (on an average salary of $85,000 p.a.)

An improvement of just 10% will save you and your business hundreds of thousands of dollars and thousands of hours, before we even get started on the cost savings of reducing turnover, improving customer service, and freeing up space for creativity and innovation.

Investing in your organisational design is a no-brainer for organisations who are committed to creating successful, high-performing workplaces - and $25,000 on consulting services is money well spent."

Why this Works

We start by canvassing the big picture, pointing out that there are a range of ways this service adds value to an organisation.

Then, we zero in on just one part of that equation, and provide verifiable references that quantify the difference an improvement can make.

By giving concrete numbers (hours saved, money better spent) we bring credibility and weight to our argument, while also making the point that this is just one piece of the puzzle.

By the end, a consulting fee is pittance compared to the value generated.

How to Use This in Your Business

Research statistics, case studies and examples of how your type of service does one of our four quantifiable things (avoids costs, saves cost, saves time, increases productivity)

1. Spell all of those benefits out in a concise list
2. Zero in one of the benefits, using compelling and verifiable evidence
3. Give a hypothetical example (i.e. the 'organisation of 100 people' from above) that translates those statistics to concrete figures
4. Contrast the cost of your service to those concrete figures.

Good luck!