In the service business, in the bottom line, it is all about fees.
Knowing your clients is the most important factor when it comes to determining the type of fees. There are some key questions you should ask yourself. How big of a problem are you solving for them? How did they pay for the service you provide until now? And, most importantly – how much do they trust you?
Your end goal should be to maximize the percentage of accepted propositions you send. Yet, it should be accompanied by an adequate profitability level.
That is why it’s important to predict the client’s reaction to the suggested fee type. Only then can you choose the right one.
1. Hourly-based consulting fees
Whichever way of forming prices you use with your clients, at the end of the day it all comes down to time. Each service company is really selling its time. Everyone in business knows how important that resource is.
That is why hourly billing is the most direct way to determine fees from the consultant’s perspective.
Pros of hourly-based fees
- They enable better profit management on projects. In other words, the price of a working hour is clearly defined, as well as how much you charge for it.
- If transparent, this is the most honest method, as you are selling your time
- They allow you to weigh each team member’s work. You can track how profitable each team member is, as they all have their labor and billing rates
Cons of hourly-based fees
- Clients can be sensitive to this method of determining fees
- The lack of trust on the client’s side. They may question if you are tracking your hours fairly
- The clients can’t determine how much work you can do in an hour. Hence, they can wonder whether you’re working efficiently or not
- The client doesn’t have a fixed project budget. Simply put, they have a lack of control over their expenses
- You may be able to fix a client’s important and large problem in 5 hours. In such cases, they are prepared to pay more than your hourly fees
- In the long run, hourly-based rates can be costly. That’s why they’re unsustainable for the client
Tips for maximizing revenues based on hourly billing
This way of determining fees isn’t something some clients are used to. In this case, you will have to conduct a client analysis. You should check whether specific clients are ready to accept the fee you determine this way. A client can indicate that they don’t prefer hourly billing.
In this case, it’s best to avoid this method of determining fees. You can increase the probability of getting the job by using a fixed fee, for example.
The key aspect of determining this type of fee is building trust with the client.
It is simpler to introduce this billing method with the clients you have been working with for a long time. They will have proof you are fair and transparent.
Transparency is one of the main trust factors. Thus, it is important to use time tracking software.
This way, you’ll be able to show the client who has worked for them. They’ll be able to see which tasks they had to do too. Finally, the number of billable hours invested in the project will be clearly defined.
Time tracking has a lot of advantages. One of them is reducing the drawbacks of this type of fee determination. For example, you can always track hours per project, billable, and non-billable. Then you can show the client what you’ve been working on. Time tracking systems increase the transparency of your work.
Additionally, you can create special accounts for your clients. This way they can track project hours as well.
Our final suggestion is to use this type of fee for ad-hoc projects. Those are the projects you don’t expect to repeat. Ongoing payment based on hourly rates can be expensive for the client in the long run.
The Knowledge Paradox
’’When I started my consulting business one inquiry on tax optimization took me 10 hours to complete. I used to charge those jobs $100 per hour. Hence, my total fee would be $1000. After 5 years of experience in the field, I’ve obtained a lot of knowledge.
Now I can do the same job in two hours. Does that mean I should charge $200 for it? It is a total paradox that I should charge less due to the fact that with time I managed to learn and work faster.
That is why I always account for the scope of the problem I’m solving for the client. That is the primary factor in determining my fees.’’
Specific vs. Blended hourly rates
Your rates can be structured on the account of your consultants’ different positions. Are the clients hiring a partner or a manager, a senior or a junior? On the other hand, you can simply offer a blended rate as the expected weighted average hourly fee.
If you’re determining fees based on employee seniority, you’ll be able to accurately allocate the income of each team member. This will allow you to assess each employee’s performance more efficiently.
2. Hourly billing with cup
This method is the same as the previous, with one difference. Namely, in this case, the client receives an assessment of the hours of engagement. Hence, they’re able to project their expenses. For example, we will state that an engagement will take 30 to 40 hours.
This way, the cup fee with the hourly rate of $100 is $4000 at maximum.
This way we are keeping control over our profitability. Yet, er are also giving the client the chance to have a sense of control over their expenses.
However, this method of determining fees can lead to project profitability disturbance.
Namely, we have limited our time. However, the client can always have additional questions and go over our expected number of work hours. If we ask for an additional fee, in this case, the client can be discontented, or, in other words, disloyal. Hence, we may have to terminate collaboration with them. Otherwise, our accomplished hourly rate can go below the expected limit.
Due to all of this, this type of fee is very similar to fixed rates.
3. Consulting daily rates
This type of fee is typical for large projects. This includes multiple consultants included in a long-term project.
To determine this fee it is important to keep in mind how much a day of your consultant costs.
Then you can create a daily rate for each one based on the cost-plus method. That is why it’s important to accurately calculate the price of an hourly billing rate. Don’t forget that you need to include the overhead rate besides the pay rate into the daily cost rate.
All suggestions given for hourly-based billing are also applicable for daily rates.
4. Fixed project fee
This is the most common method of determining prices in the service and consulting industries. The clients show the least amount of resistance toward this type of price negotiation. However, this method is very risky for consultants. Especially so if they don’t have a profitability planning and control mechanism for each project.
Usually, these projects can reduce the company’s profit.
This is true due to the fact that things often „come up“ on a project. These things require additional time and resources you cannot charge for.
Pros of fixed consulting fees
- Greater probability of getting the job
- The client has control over their budget
- As a consultant, you can also improve the quality of your budget
Cons of fixed consulting fees
- The client can be demanding. They may ask for more detailed analyses of your claims
- Usually, it happens that many aspects remain unpaid for
- Non-billable hours
- You can never assess the time needed for a project accurately when forming the offer
- You need a good tracking tool. Otherwise, you won’t have the insight into a specific project’s profit
Tips for maximizing revenues based on hourly billing – fixed project fees?
Before determining the fixed fee you need to get an insight into the time you’ve spent on similar projects in the past. This should be done whether the job was for that specific client or someone else. This can give you a good indication of how much time you can expect to spend on the planned project.
Talk to the different members of your team. Ask them for an assessment of the time they’ll need. This is how you’ll increase the quality of the total assessment.
Assess the issues that can crop up during the project. These are the factors that require an unusual expenditure of time and other resources.
Limit the time of the engagement (note the next fee determination type).
You can create a procedure or a checklist of all factors that come into determining a fixed project fee.
5. Fixed project fee with limitation
Some engagements can allow you to limit the time or the number of services available for a fixed fee. For example, a fixed fee can be $5.000. This sum can include a maximum of 40 working hours and two meetings with the client.
You need to clearly define what goes into your engagement. More importantly, define what does not.
This way you’ll be preventing potential new questions after the project is finished. Be careful, as those additional questions can deteriorate the project’s profitability.
As you can imagine, this method requires accurate tracking of the time spent on a client.
6. Fixed project fee + hourly fee for exceeding hours
This method represents an upgrade to the previous one. For us, as consultants, it is important to charge for all the hours we spend. On the other hand, the client needs to have control over their budget. Hence, this method of determining fees can be a good compromise.
Realistically, you are estimating the number of hours needed for the project. At the same time, you are informing the client about hour consumption. This addition – an hourly fee for exceeding hours – represents a certain shield for new client questions.
So, the client will subconsciously bother you less. They want to be sure they won’t exceed the number of hours you’ve agreed upon and get additional expenses.
This way you’ll have the say over your profit. At the same time, the client has the possibility to control their expenses.
This method isn’t very common and widespread. Hence, its negative aspect is that it can seem strange to the clients.
7. Range fixed fees
This type is the same as the previous, with one difference. With this method, we give the client the range of hours within which we’ll operate. When the client sees the range they subconsciously ask themselves whether the consultant will charge for more hours.
They may also wonder why would the consultant invoice for a lower number of hours. After all, the client has already accepted the highest possible number.
We believe this method is extremely fair. It also requires a lot of trust from the client.
That is why we suggest you use this method with the clients you’ve already formed a collaboration with.
A retainer is a fixed fee for ongoing work usually paid on a monthly basis.
Pros of retainers
- Providing certain income security
- Providing better resource and budget control
- Gret basis for up-selling and cross-selling
- Enabling you to get to know your clients. This way you can create better relationships with them
Cons of retainers
- Once you set the price the clients can object to increases in prices due to the increase in the volume of work
- You need to keep track of time to calculate true profitability on the client basis
Tips for maximizing revenues based on retainers
- Include the possibility of a fee increase in your offers and contracts
- Specify that you will be tracking project time. Add that if the number of hours exceeds X the price will increase
- Include the possibility of price correction due to a potential increase in retail prices
- Increase transparency. Add an appendix that shows hours per project to the invoices
- Discover your client’s other problems. Then give them an offer for other services
- Track client satisfaction through questionnaires
Retainer means long-term cooperation. Thus, it is especially important to understand
- Client risks (business and financial)
- Key management characteristics
- Client transactions
- Client’s business ethics
- Plans and intentions
9. Success fees
A success fee is applicable if you need to make a complex transaction that has a measurable worth. Some examples include advising with property sales, mergers and acquisitions, providing funds, etc.
Pros of success consulting fees
- The fees are usually very high. Sectors within large consulting companies are multiple times as profitable as sectors with fixed fees – EY, McKinsey, etc.
- Clients usually consider this a fair payment method. To put it simply, they will rather pay more after the problem is solved than pay less for an attempt at solving it
Cons od success consulting fees
- High risk when charging
- If a client makes a mistake the deal can fall through. Consequently, so can your fee. In other words, there is a lack of control problem
Tips for maximizing revenues based on retainers – Success fees?
Is the probability of solving the client’s problem or transaction relatively high? In that case, you should use a success fee as a payment method.
We recommend combining success fees with other fee types. That is, it is too risky to make the success fee the primary or only way to realize the fees. For example, you can use the historic trends and make the ratio of fixed and success fees 60/40
Pay attention to the resources and expenses you use in the projects where you charge the success fee. We suggest using this fee in cases when there aren’t large resource expenses. Otherwise, a great amount of effort and funds can be spent in vain, and losses irreparable.
To avoid any misunderstandings, it is important to accurately define what is considered a success. In other words, define when the conditions have been fulfilled.
10. Variable fees (fixed fee + success fee)
Practically, this is a combination of fixed fees and success fees.
The advantage of this way of determining fees is that you can make sure you’re never at loss. Your fixed fee will make sure you can cover the expenses (and a part of the profit). Additionally, in the case you succeed, you can get great benefits.
On the other hand, once a client pays for something, they subconsciously give themself the right to ask questions and waste your time. Hence, many consultants, even though it may seem like a paradox, avoid fixed fees with projects like this.
Basic factors to keep in mind
Whichever fee type you prefer, we suggest looking at the following questions before determining the fee.
- What are the scopes of the problem you are solving? What is the risk you are reducing? How big is the optimization we are making through our services?
- What are the client’s pain indicators?
- How complex are the client transactions that represent your engagement?
- How complex is the client’s work? Does that affect your engagement?
- Do we know the decision-makers? What is your relationship with them?
- Does the service bring the client added value and how important is it for them?
- Do they need the service urgently?
- What are their alternatives if they don’t hire you? Who is their other option?
- What is the minimum price you wouldn’t accept?
- What would the competitors’ price be? Check in with your contacts.
- How many hours will we need? What is your standard hourly billing rate?
- How suitable is the client to create long-term collaboration and cross-selling?
Internal analyses before determining fees
Most consulting firms don’t have mechanisms to track key performance indicators. These KPIs can be an important basis for fee determination. They are:
- Time utilization (total billable hours divided by total hours)
- Historical billing rate (total fees divided by total billable hours)
- Competitors’ billable hourly rates
- The percentage of concluded contracts compared to the number of sent offers by the type of fee
If you have goal performances, the fee determination policy should be defined in a way that helps you achieve said performances.
In the end, before you determine the type of fee and the fee itself, you will need to:
- Make sure that the client understands the specific service they are receiving. They need to know what falls in the scope of our work and what doesn’t. Inform them when your work is done, and what could be the objective of an additional engagement
- Make sure that you understand the scope of your work. Inform your team of the specific service you will be providing, and understand whether you have the internal capacities to provide high-quality services in due time
- Make sure that you keep records of time across multiple clients, projects, and tasks
- Make sure to provide the client with a list of tasks you’ve performed. The tasks themselves should also contain the time they took to complete
The better your relationship with your client is, the more you’ll be able to use the advantages of these types of fees. Since you are working in the time of digitalization, keep in mind that the quality and transparency can be significantly increased by using different consultant tools related to project and productivity management, time tracking, and others.
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