Why Everyone Loses When You Charge By The Hour - Becoming A Better Consultant
If you talk to any consultant or pick up any book to help you consult, they'll tell you the same thing.
You shouldn't charge hourly but rather by the project or, more importantly, by the project's value to the client.
After all, as most experienced consultants will point out, working hourly is a lose-lose.
You'll lose because you're limited on how much you can eventually make(you only have so many hours in the day)
The client loses because they might end up paying far more than they expected
But pricing per value or even fixed pricing is scary.
What if you price incorrectly?
What if you scare away a potential client?
What if, what if?
But as Sawyer put it above, you're also putting all the risk on the client, and as we'll discuss later, you're honestly not getting paid as much as you could.
In this article, I wanted to help you gain confidence in charging for value.
What Is Value
"Economists tell us that the 'price' of an object and its 'value' have little or nothing to do with one another. 'Value' is entirely subjective economic value, anyway while 'price' reflects whatever a buyer is willing to give up to get the object in question, and whatever the seller is willing to accept to give it up. - L. Neil Smith
Value is a tricky thing.
But here are at least a few pillars you can use to determine the value of a project.
Speed
Cost
Expertise
Quality
Risk reduction
Experience
Tangible outcomes
For example, perhaps a project doesn't have a specific price; it just needs to be done. One consultant offers the same service as another, but they have more experience and a better track record and are offering to do it 25% faster than another consultant who doesn't have all of that.
If the first consultant charges you 50% more, but you feel like you're reducing the risk and can get this project off your plate sooner. Isn't that worth it?
Now, the truth is you might answer yes or no to that last question. It comes down to what you value.
But it is reasonable to assume that you might.
If you're looking for a more formulaic approach, you could take Alan'Alan Weiss's formula from below.
Tangible Outcomes X Annualization
Intangible Outcomes X Emotional Impact
Peripheral Benefits + Improved Variables
___________________________________ = ROI
Fixed Value Based Fee
So, value isn't just about the actual price; it is more about what you perceive is essential.
Now that we've discussed value, let's discuss why most consultants don't feel comfortable charging by value.
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How Do You Not Get Screwed?
It's easy to read posts like the one below, and I think you should just jump into pricing by project or value.
But let's be honest. There are a few reasons consultants don't always feel confident about charging for project value.
Saying a project will be $50-100k can feel far larger than just saying you'll charge $250 an hour(but still end up at the same place)
You might be uncomfortable negotiating and talking through your values.
Many clients might view you in the light of a "contractor vs a consultant" meaning they'd expect you to charge by the hour.
You don't want to get screwed; what if the client demands you do even more work?
So how do you not get screwed?
Part of this is experience.
You'll have to have worked a few projects hourly, which is terrible not, and get a feel for how long projects take you(and what value they drive).
Next, is being very clear on what is considered out of scope for the project. Be very very clear on this!
In fact, in some of my SOWs, I include a clear in-scope section as well as an out-of-scope section, or a section where I clearly outline, "Hey, this current agreement does not cover XYZ".
I also might cover some similar points in an Assumptions section. This will both cover what won't be covered as well as what I expect needs to happen in order for me to be successful.
Having a clear in-scope, out-of-scope, and assumptions section makes it easier for me to feel confident in my final price.
I am pricing per the value that I believe I am driving and being clear about what I think the end transformation or outcomes will be based on that.
With all that said, here is how you can, I believe, also go from pricing hourly to pricing per value.
Next Steps
In order to get to a point where you feel confident about pricing by value. Here are some quick steps you can take.
Take on a few hourly-based projects
Keep them relatively small and well-defined
Track how long they take and understand where the “gotchas” are
Talk to your clients, understand why they are hiring you, and what problems you’re solving
Is there value beyond just getting the work done?
Note down any patterns in what you’re brought on to do
Are there higher-value components of the work you can focus on vs low-level keyboard work?
Write out 2-3 offerings you believe you could provide that are high-value and you’re uniquely positioned to provide. Note a price range you’d be willing to do the work for
Start creating content and marketing around said offerings
If you get prospects, then you can start testing out your offer and price
If they accept right away, you’re likely under-pricing
I have heard a rule of thumb, if you get 3-4 yes to a certain price and offer, you should increase your price
Eventually you’ll start to find projects and offerings you enjoy and can deliver high value on.
Double down on what works!
Upcoming Events!
Hello All!
Thanks for reading, I have some upcoming events I am very excited about! If you’re a member of the TFA, then you’ll get access to:
Data Engineering Consulting In Europe with Julien Hurault - April 5th
Going From Tech Lead To Data Strategy Advisor - Shachar Meir - April 23rd
From General Mills To Data Science Consultant - John Hogue - May 9th
Also I am talking with Suzanne Block to have her talk about PR and the role it plays for consultants as well as running her own business.
Past Newsletters You Might Want To Read!
How To Get Clients As A Consultant - Marketing Tips
The Solopreneur's Local Playbook: Building a Thriving Business in Your Community