That is what I hear most often: “My potential clients calculate their target price for my services like this: How many hours / days will he / she need, multiplied by a certain hourly rate that one has heard from friends in c-level positions, equals expected execution costs, plus profit margin, equals price. As most prospective clients have initially no idea about the number of hours needed to finish the job (they know WHEN the result has to be there) they start optimizing their costs by negotiating the hourly rate. This is your profit-limiter number one!
In case you want to get to a satisfactory level of income (fast) or in case you must you’re your business, there are only three ways to grow a business, most probably you have heard this already:
- Increase the number of customers
- Increase the average transaction value per customer
- Increase the number of transactions per customer
Increasing the number of customers is about your marketing and sales process & impact. Increasing the number of transactions is – in my case – trying to get add-on orders from customers. These orders have the beauty of being mostly free of marketing costs.
Thirdly, lets focus on the transaction value per customer. That’s probably the most interesting. In the meantime know that my costs and profit margins are actually of no interest to anybody. The prospective customer only wants to see a price in relation to his or her benefit in order to satisfy his or her reasoning. That’s why I call benefit-based pricing as a key to customer satisfaction and your profitability.
What is the meaning of benefit-based pricing? If you can change your client’s strategy in a way that increases his or her profit by an amount of 115.300 annually in just one hour – based on your experience and knowledge – would you charge just one hour? Would you really do that?
There are two alternatives to this scenario for consultants
- Calculate and charge flat rate for the completion of the assignment with the expected results.
Your risk: the effort can’t explode beyond the planned scope. In your proposal, the calculated expected financial effect (result) is shown first, the remuneration last.
- Another option is to share the future result (“success fee”) and to charge a fee in case the project is cancelled (“cancellation fee”). It you are brave, you can offer a guarantee: “no remuneration without success.”