Some years ago, my wife and I decided to remodel our outdated kitchen. Through referrals and research, we found a contractor and conveyed our vision to him so he could prepare a proposal.
The contractor understood what we wanted and contributed some great ideas. We worked well together and were excited about the project—until we got to the pricing discussions. That's when the contractor's interests diverged from ours; the tense negotiations about price strained the relationship with the contractor and nearly scotched the deal.
Consultants face a similar dilemma. Things will be humming along nicely as you exchange productive ideas with a client. But when you ultimately come to the subject of fees, the interests of the client and the consultant often head in opposite directions:
The Reality of Consulting Fees
|Clients Want...||Consultants Want...|
|Lower fees||Fair fees|
|Pay for performance||Pay for play|
|Guaranteed results||Guaranteed payment|
|Risk avoidance||Risk sharing|
Clients and consultants alike usually dread fee discussions. Here are six strategies to help you preserve your profit margins and your client relationships as you work through pricing discussions.
1. Begin with benefits
I once received a single-page proposal from a consultant that contained a one-paragraph project recap, a proposed fee, and a space for my signature of approval. I'm a big fan of short proposals, but this was one for the record book.
I asked how the consultant had derived the fee, and the only answer I could get was, "That's our fee for this type of work." The number—which was a big one—seemed arbitrary and I judged it to be unacceptable.
Instead of springing an unsubstantiated fee on a client, start every sales process by identifying the client's desired benefits, and then quantify them. It's hard work, but it pays off when you eventually get to a discussion of fees. With a credible estimate of benefits, the client has a powerful context to evaluate whether your proposed fee is a good deal.
Most of your competitors rely on the old standbys to justify fees, like their tools, references and illustrious history. Don't ignore these. But focus on how you'll help the client achieve the expected benefits of a project, and you'll leave competitors in the dust.
2. Know four reasons why
Clients roll their eyes when they talk about how consultants come up with their fees. To them, it's a black box. Address that by being prepared to give clients at least four good answers to the question, "How did you come up with the fee?"
Every project is unique in some way. Discuss those nuances and how each affects fees. Your fee will be driven by factors such as project complexity, duration, scope, expected value, team size and risk. Whatever strategy you use to develop a fee, even if it's a simple hourly rate, don't make it a mystery for clients.
3. Beware of ballpark estimates
Clients frequently ask consultants for "ballpark" fee estimates before all the project facts are on the table. From the client perspective, it's a legitimate question; and every consultant should expect to hear it.
The danger with ballpark estimates is that they tend to stick in clients' minds. More than one consultant has lost work because an off-the-cuff estimate was in the "wrong" ballpark. Tossing out fee estimates before you've grasped the nuances of a project can put you in a tough position once you've arrived at a proposed fee.
If your actual fee differs from your ballpark estimate—and it usually does—you have to begin the conversation about fees by explaining all the reasons why your ballpark number missed the mark, not why the fee is appropriate for the job at hand. And that's not the only problem.
Often, the client uses the ballpark number to seek preliminary approval for the project. So, if that number is off, before the project begins the client has to do some fast talking to explain to others why the preliminary budget is wrong.
Your prospective client will be frustrated if you stonewall the ballpark estimate question, but resist the pressure. Ask for some breathing room to create a fee estimate that's based on fact, not fiction. Create your estimate carefully, but quickly, and you and the client won't end up in a classic "lose-lose" situation.
4. Negotiate scope, not price
From the client's standpoint, settling on the price of professional services is like purchasing hand-me-downs at a neighborhood garage sale: Everything is negotiable.
If your client is pushing for a fee reduction, congratulate yourself. It's almost always a buying signal. Most often, the resistance means the client is satisfied with your proposal, and now the client's goal is to drive a good bargain.
Follow one simple rule: don't cut your fee without a commensurate reduction in project scope or some other element of the project. If your client wants to pay less, that's fine. Work with the client to find ways to complete the project at a reduced fee.
Some consultants complain that competitive pressures, like a lower-cost bidder, cause them to cut fees without a reduction in scope. The price-cutting consultant sends an unmistakable message to the client: don't trust the first number you see from the consultant.
Once you've compromised your position by offering a discount, expect discount requests on every future proposal you give to that client. The client has nothing to lose by asking for a discount. Before you reduce a project fee, make sure you're making a fair exchange.
5. Negotiate with the client, not with yourself
When a sale is imminent, it's easy for a consultant to get swept up in the moment. The consultant's thoughts drift to the ancillary benefits of serving a new client: selling follow-on work, developing new relationships, securing a reference client, improving industry visibility and gaining an opportunity to do new and different work.
As the consultant engages in an internal dialogue about these benefits, the stakes for closing the sale begin to rise. The consultant might think, "The potential for creating a stronger and more profitable practice in the future could ride on landing this project." This line of reasoning often leads a consultant to consider reducing fees in an effort to get the work.
Every project will present some non-project benefits. If you're lowering fees based on those expectations, you're negotiating the fee with yourself, instead of with your client. More often than not, you'll leave money on the table when you negotiate with yourself.
6. Don't price on futures
Some consultants reduce fees for the initial phase of a project in the misguided belief that such a gesture will set them up for winning future projects at higher rates. This strategy rarely works.
Most consultants find it nearly impossible to push rates to pre-discount levels simply because a new phase of a project is gearing up. If you want to try for higher rates, prepare for resistance. Once you establish a client's perception of your value, it's going to take more than a new project phase to change that perception.
Resist promises of future work, and let those consultants who "buy" work walk away with the non-profitable first phase. For most clients, subsequent project phases won't be awarded without competition, so stay close to your client contact. It's likely your time will come, and you won't have to make such a risky investment.