- Setting prices is tricky.
You have to ensure you make enough money
when you're delivering services
to cover the times you're not making any money
because you're selling
or you're doing administrative work
and you're not on a project.
Your pricing model must make sense,
whether it's project-based or fee for service.
The model should be consistent across clients,
comparable to competitive offerings,
and have flexibility to offer discounts or promotions.
With a fee for service model,
that's where you're getting paid on an hourly
or daily basis.
This is a good model if you're not sure
how long a project is going to take.
If scope grows, so does revenue.
The downside is, you're at fixed rate.
You can only bill for eight hours a day.
A lot of people come to me and ask,
how do I set my hourly rate?
I learned a great formula a long time ago.
Somebody told me when I was in corporate
that I should take my total cash compensation,
so it was my salary plus my bonus,
multiply that number by three,
then divide that number by 250,
that's the number of work days in a year,
then divide that by eight,
the number of hours in a day.
That was my hourly rate.
I asked, why should I multiply it by three?
That's a really big number.
She said to me, "You got to remember,
"you're not going to get paid
"when you're on vacation.
"You're not going to get paid
"when you're selling your services
"or doing administrative work.
"That makes sure that your hourly rate is high enough
"that you can make a living."
You can have a project-based pricing model.
You can charge a flat fee
for a specified amount of work.
This is a good model if you know
how long the project will take
because there's more possible profit that way.
This is a bad model if scope creeps
or if you made a bad effort estimate
at the beginning of the project.
You can use an item-based fee.
That's where you can charge per class, per report,
per analysis, per website,
per unit of whatever it is you do for the client.
The more you sell, the more you make,
but with this pricing model,
you can be commoditized.
It's easy for your client to compare your rate
for the analysis versus competitive offerings.
You can charge a license fee.
If you have intellectual property,
you can sell a license for clients to use it.
You can set that property license
for a specified period of time
and even say where they can use it
and where they can't.
This can be really high-margin work
and it can be recurring,
but it can make your higher price services irrelevant.
My firm sells training services.
I've had client situations
where we've licensed our training content
to the client and said,
you can teach your people for a year,
you have to pay use this much money
for the license to that content.
It was great, I was sitting at home
collecting a license fee.
What I wasn't doing was out
there teaching their participants.
I was giving up that classroom revenue
to get that license fee.
It was really important to price
that trade-off appropriately.
You can have a retainer-based pricing model.
That's where you charge a fixed fee
for a specified time period.
No matter how much or little the client uses you,
the fee doesn't change.
This can be really profitable
if they don't use you a lot,
but it can get you in trouble.
I had one instructor on my team
who wanted to charge the client a retainer fee.
The notion was, charge them a fee
and they could call him as much
as they wanted in a given month.
He said, "This is going to be really profitable
"because they're barely going to call us."
I said, "Yeah, it'll be profitable,
"but we're going to have a problem down the road."
When the client adds up
how much they paid us in retainers
and then they ask that pointed question of
how many of our people called you
to take advantage of this retainer?
And we have to tell them only one
or two people called,
we're going to look pretty bad in that situation.
Think through your retainer model
because there are client service implications.
You also have to think through a retainer in terms
of how much work you're going to have to do.
It'd be great if people are calling you.
It's horrible when they're calling you too much.
I know one executive coach
who puts a cap on his retainer.
He says the retainer fee is this much
and that gets you up to eight hours per month
of my time.
If you want to exceed that,
then you're going to pay more.
Pricing is one of the most important elements
of your business.
Get it right and you can be really profitable,
get it wrong and you're going to do too much work
for not a lot of money.
You can also create contentious relationships
with your clients if you have a bad pricing model.
Go out and study other firms in your field.
See how they price their services.
Modify your pricing based on your business model
and how you're differentiated from those competitors.
The better you think through your pricing model,
the more successful you're going to be
in terms of building good client relationships
where they feel like they're getting value
for the money they're paying you,
and the more profitable your business is going
to be in the long run.