A solid pricing strategy is crucial for the survival and development of any business. Whether you are setting your price to maximize your margins or to compete and change your market share, pricing influences everything your business does.
Businesses exist to provide value to their customers. Customers decide what they consider to be good value: if your goods and services appear to be too expensive you lose customers. If your price is too low, you may attract the wrong type of customers and devalue your brand.
Pricing For Advisory Services
If you were in the manufacturing industry, determining the price of your product would be somewhat easier. You would add up the cost of making your product, packaging, and shipping it, personnel costs, and any other overheads and then add a profit margin.
Pricing for advisory services or consultancy work is not so straightforward. Large parts of your business are intangible, making it harder to determine the value of your work. Yet, pricing can boost your profits more than increasing your sales or trying to cut your costs. Your goal is to remain competitive in your target market without leaving money on the table.
The secret to successful pricing lies in value-based pricing rather than cost-plus pricing. This means setting your prices according to the perceived value your customer is receiving from your services.
Determining Perceived Value
Determining perceived value for your services starts with understanding your customers. Before setting your prices, define who your customers are and why they are buying from you.
The best way to get this information is to ask your customers directly. This may sound obvious, but it is based on an influential sales technique known as SPIN selling, which breaks questions into four types: situation, problem, implication, and need-payoff.
As an advisor, you start by finding out how your prospective customer arrived at their current situation. From there, further questions arise: which problem are you solving for them, and what are the implications of this problem being solved? How important is that solution to the survival of their business, for example?
These questions provide guidance for your conversation with the customer rather than a rigid framework. Another component of your perceived value is your brand. If you are looking to attract high-end clients, every interaction your prospects have with your brand needs to reflect that.
Solving Customer Problems
Once you have determined the type of solutions you are providing to your customers’ problems it is time to price them up. You now understand the issues your customer is facing and the difference your advice can make to them.
This difference is the basis of your price. There are several methods to help you price your services accordingly and retain transparency in your customer relationship.
Performance-based pricing means you are paid depending on the results of your work. This method allows for the closest connection between the difference your work is making to your customer’s bottom line and your reward.
It is the closest representation of value-based pricing for your services.
Hourly Or Project-based Rates
If you agree an hourly rate with your client, you bill the amount of time a certain task took to complete. Project-based billing means you agree a flat rate for the whole project before starting any work on it.
Whilst both seem straightforward, they have inherent problems. Charging by the hour might leave you as the advisor at a disadvantage. You may be able to complete certain tasks quickly now, but only because you spent years studying and honing your skills. By charging for the short time the task takes now, you may not be adequately rewarded.
Charging a fixed price for a project can work well if the scope of the project is well defined. Most projects, however, change as they progress. To ensure you are paid fairly, it is important to agree on a mechanism for renegotiation or top-up fees.
Variable Rates And Pricing Models
Should you choose one pricing model or consider different options? If you are starting out as a consultant or advisor, having one basic model can be easier. However, as your advisory business grows, and you aim to attract larger, higher-end clients and more complex projects you may need to reconsider.
Consider how your client works, which model suits the project best, and how much time and effort you expect to put towards it. You may also choose to offer different rates, depending on whether you are advising a commercial entity or a non-profit organization.
Avoid underestimating the time and effort involved in the project in question. If you are starting to work with a new client, you need to spend time conducting research and client analysis, as well as creating initial documentation and reports. Of course, you can choose not to charge for some of that time, but it may set the wrong tone for a high-value client relationship.
Retainers are another excellent way of pricing your services. In this case, your client pays a set monthly fee in advance to ensure your services are available as and when required.
Long-term Client Relationships
Now that you have chosen a pricing model and won your first clients, how do you keep them?
Establishing long-term client relationships creates a steady income for your business and is a great basis from which to grow. Depending on the services you deliver, a monthly report summarizing your work may be enough.
If not, consider setting up a dashboard where clients can easily see just how much you have contributed to their business at any given time. Dashboards also have the advantage of being accessible when it suits your customers, meaning they don’t have to wait until the end of the month to check in.
The Next Step
Pricing for advisory services can be tricky at the beginning.
Consider your day-to-day operational costs as well as others like annual subscriptions, rent, and utilities. Look at your competitors’ pricing, but don’t be deterred from choosing different rates. Above all, charge for the value you are adding to your customers’ lives and businesses.
With starting rates in place and initial clients secured, make sure you review income and outgoings after a few months and make changes necessary to help your business grow.