CHAPTER 13
Writing the Fees Slot
I have a very good friend who played the stock market, timed it well, and made lots of money—more money than most of us will ever see in our lifetimes. He bought a grand house (more like a castle), purchased hundreds of rare books, and assembled a rather significant art collection. By any stretch of the imagination, my friend is rich.1
Nevertheless, although he has two cars, the one driven more often is at least 10 years old, the air-conditioning works only sporadically, and the car will never attract the attention of a good thief. Although he serves fine wines and eats well, he uses coupons at the grocery store and reuses paper napkins at meals. His frugality reminds me of other multimillionaires who reduce their utility costs by turning down their thermostats in the winter and living in dimly lit homes.
My friend is like many potential clients, many of your potential clients. What they are willing to spend does not necessarily accord with how much they have. They are not cheap: They might buy a $10,000 rare book. But they are selective: Why buy or use a new napkin when an old one will do? One purchase is an investment (and a wealth of aesthetic pleasure); the other is a cost.
As your potential client, I sense (intellectually, at least) that your professional services are an investment; emotionally, I view your fees as a cost. Your challenge is to determine a price—a pricing strategy, really—considering the value of your proposed services. And this strategy must be as thoughtful, defensible, and well suited to our situation as all the other elements of your proposal. If this strategy is successful, I will view your services not as a commodity but as part of a rich relationship in which we both win. This chapter discusses what you should consider in developing a pricing strategy that will lead to the rich relationship we both desire.
Pricing Considerations After Initial Contact
After our first meeting, possibly even after our first phone conversation, well before you’ve done all the work to prepare a comprehensive proposal presentation and/or document, you will probably have some preliminary indicators concerning the potential project and the order-of-magnitude fees you believe you might propose. You will have some guidance about how best to proceed if you answer three major questions related to benefits, your contact at the prospect’s firm, and your chances of winning.2
Are Our Likely Benefits Significant Enough to Warrant Your Services?
I discussed benefits and value in Chapter 12. A quick-and-dirty return-on-investment calculation comparing my organization’s order-of-magnitude benefits to your order-of-magnitude fees should yield a multiple of at least 5:1 to 10:1 over the first three years or so after implementation. The logic the other decision makers and I use when purchasing consulting services, especially in implementation projects, is similar to our logic when we consider capital expenditures. Investment, returns, payback periods, and multiples are concepts we use and are comfortable discussing with those willing to compare potential benefits to consulting fees/costs.
We also know that the results of your services may not be as easy to quantify as is purchasing a piece of equipment, especially if ours is an insight and/or planning project. However, you can work with us to make reasonable estimates of the subsequent impact of your work, using whatever measures are agreed to: costs, market share, competitive position, and so on. When you work with us in this way, you are employing a measurable-results orientation. Just as important, when you discuss both tangible and intangible potential benefits with us, you implicitly suggest your and your firm’s qualifications. As you relate our particular situation to that of other clients you have served in situations similar to ours, your stories and examples indicate that you have experience and expertise that could be valuable to us. Providing specific references and real-life stories further reinforces the potential value of your services.
What might you do if our overriding question or potential benefits are unclear? Consider a front-end diagnostic to assess the current situation in more detail. This diagnostic gets your foot in the door and gives you and your firm an opportunity to show us how good you are. It also provides you with a higher degree of certainty about the potential benefits, the potential value, of your services. We appreciate consultants who can support their estimates of the potential impact of their efforts.
Is Your Contact at an Organizational Level High Enough to Make or Influence a Decision to Engage You?
You need to be talking to people high enough in my organization to make, or convince others to make, a decision to hire you. If you begin your selling process at a level too low, at worst, you will have little chance of turning your proposed project into real work; at best, you will need to spend significant time and effort to sell upward. If you have a reasonable chance to win, full speed ahead. If not, consider declining to bid with dignity. In either case, file the contact’s name and look for ways to build stronger personal relationships, at the right level, while also recognizing that good people get promoted to (or move to another company in) decision-making positions.
As you know, many projects are won years earlier because of personal relationships that have been established and nurtured over time. Your initial contacts provide many opportunities for you to lay the groundwork for a pricing strategy. This foreplay helps build relationships and expectations for a longer-term win-win situation.
What Is the Likelihood of Your Winning This Project?
If you feel uneasy about our situation, believing that you might not have a reasonable chance to win, you could choose to continue cautiously or even politely terminate your efforts, especially if you cannot answer in the affirmative the questions in Figure 13.1. You could say to us, for example: “The people we need to do great work for you are not currently available. Please keep us in mind as your needs evolve, and good luck in this project.”
Declining to bid, gracefully, can be perceived favorably. Let me assure you that not many consultants turn down potential work. (By the way, why are your best people almost always available? If they’re so good, shouldn’t they be gainfully engaged on projects for other clients?) The position you don’t want to be in is termed “column fodder,” where you are placed among one or another columns of sure losers on the consultant-evaluation matrix. When you’re column fodder, this can be said: “Sure, boss, we considered more than one consultant, but we stayed with our current one.” And this happens: You never had a fair chance of winning.
What is the likelihood of your winning this project?
• Given our level of urgency, will you have the right staff available?
• Do you have the necessary tools and information to answer our overriding question(s)?
• Do you have the necessary industry/functional expertise?
• Can you differentiate yourself sufficiently from the competition?
• Is our budget realistic for the project we are considering?
• Given the likely evaluation criteria, does our buying committee perceive you as capable?
FIGURE 13.1 Questions to determine your likelihood of winning
Pricing Considerations After In-Depth Analysis
Now let’s assume that, based on our initial contact, you’ve decided to continue discussions with us and to prepare a proposal. This situation suggests that the potential impact on our organization is (or could be) significant and that we appear willing to consider an investment in your services to achieve this impact, this desired result, this value for me and my organization. Let’s also assume that given all the information you’ve collected so far, you are talking to people at a high enough level in our organization and that you believe you have a reasonable chance to win.
You now need a pricing strategy to determine the fees you will quote us. Of course, the easiest and most direct way is to price on the basis of time and material. Here, you would quote a total fee based on you or your team’s estimated billable hours multiplied by your team members’ respective per-diem billing rates.
Summing up costs for the entire team and adding expenses yields the amount you would receive for the entire project or for a specified period. Now, you know as well as I do that this “rate-based” price is not really a pricing strategy, but some potential clients might accept it. Typically, we dislike time and material pricing, especially if it’s not capped, because it is far too open-ended, allowing you to continue working without any agreed-on end point. We like end points and deliverables. We like results—especially those that can be measured.
Accordingly, you often will need to develop a pricing strategy more sophisticated and tailored than time and material, a strategy that you can defend and that can serve as the starting point for negotiation. Elements of this strategy could include at least seven other considerations:
Our return on our consulting investment
The strategic value of this opportunity to you
The potential risk to you and your firm
The relative capability of you and other consultants to answer our question(s) on this project
Your and your competitors’ relationship with our buying committee
The desirability of this project to you for internal or tactical reasons
Your pricing history with us
Some of these considerations will tend to increase your fees above a rate-based price; others will tend to decrease them. Let’s discuss each consideration in turn.
Our Return on Our Consulting Investment
Putting yourself into our shoes is almost certain to be a compelling orientation for us. To do this, you would compare our total costs—your proposed consulting fees and expenses—with our likely returns, our value received, our benefits from using your firm’s services on this project. “What will be our likely return on our consulting investment?” is the question you would answer, as well as the subordinate questions in Figure 13.2.
As I discussed in Chapter 3, answering this question regarding measurable results is much easier and more direct if we’ve asked you for a project that includes implementation. In this instance, my company should start achieving measurable results during or immediately after the project because it includes your support in implementation. In this instance, you could argue that our returns, accumulated over three years, plus any one-time returns, could be compared to your consulting charges for achieving those benefits.
For example, if the project’s objective were to plan and implement a finished goods inventory reduction program and you estimate $100 million in carrying cost and one-time cost savings over three years, we might consider an investment in your services of $5 million to $10 million. This 10:1 to 20:1 return on investment might look favorable to us as a basis for selecting you. We like working with those who can define compelling and believable value propositions, especially if they can guarantee them.
To formulate such a value proposition, you need to know or to get to know our operations fairly well. The statement “Based on our past experience, we believe that an inventory reduction of 20 to 25 percent is achievable” is not a compelling argument unless you can demonstrate to me and my colleagues that this 20 to 25 percent range applies to our (unique) situation. “Round words” is the term we use to describe your estimates and statements that cannot be substantiated. I’m typically eager to learn about your firm’s efforts and results elsewhere, but I need specifics to believe that this level of opportunity/savings is achievable in my situation. Remember, in many cases, I’ve already tried to reduce inventory, and I am not likely to be impressed by potential savings that you scribble on the back of an envelope. Therefore, you may have to make an investment during the proposal process to learn more about our particular situation. Such an investment, of course, is often perceived favorably by me and my colleagues.
What multiple above your rate-based price is supportable, given my firm’s return on investment from this project?
• What measurable results can we expect for the first three years after implementation?
• What one-time impact (cost savings, market share increase, and so on) is is likely to be achieved?
• How do these returns compare with the investment we would incur from using your consulting services?
FIGURE 13.2 Pricing strategy related to ROI
In nonimplementation projects, those that involve only insight and/or planning, your task is even more challenging. Here I have not—or at least have not yet—asked for your assistance in implementation, and so our achieving savings or capitalizing on opportunities is well beyond your direct control. Here, too, however, you can use a measurable-results orientation to compare our potential benefits subsequent to the project. Obviously, the risks of our eventually achieving potential benefits are greater, and some of the benefits may be less tangible, but you can still make a compelling argument—if you take the time to learn about our operations, the current situation, and the desired result. We’ve had some consultants lead our management team in interactive discussions of potential benefits that we could anticipate subsequent to implementation. Consultants put themselves in our shoes and addressed our potential opportunities and obstacles, based on their previous experience. In some of these situations, we’ve rewarded the consultants’ efforts by asking them to add an implementation phase to their offering.
The bottom line is this: If you are the only consultant that clearly understands our situation in detail, if you make a compelling case defining our likely return on our consulting investment, and if we believe that we can work with you and your team, your odds of winning increase significantly.
However, if several firms know our operations well, each makes a compelling case regarding our likely returns, and we believe that we could work with each . . . then what? Then you need to consider other pricing factors that could determine our ultimate selection of a consultant.
The Strategic Value of This Opportunity to You
If we are one of your target companies or a past client you would like to continue to work with, or if we pose an overriding question that would allow you to make an intellectual-capital breakthrough, or if our industry is a particularly desirable one to you, or if the potential fees are high, or if our proposed opportunity allows you to build desired geographic presence, our project becomes more desirable to you. If our organization and/or issue have high strategic value for you, you can reflect this situation in your fees—that is, you would modify them (in some cases, lower them) to increase your chances of winning. (See Figure 13.3.)
Just as my friend uses coupons and reuses paper napkins, we buy some projects on price, especially when two or more bidders are extremely close on the criteria we use to make our decision. Yes, I know that you have operating expenses, invest considerably to build and maintain intellectual capital, make significant investments in technology and technological tools, and expand the capability of your staff through professional development.
To what extent will winning this project help you meet your organization’s strategic objectives?
• To what extent do you want to work with my organization (for example, because you’ve targeted us or our industry)?
• To what extent is the overriding problem or opportunity to be addressed desirable (for example, because it will provide you with important intellectual capital or experience)?
• To what extent might the project favorably affect both organizations (for example, because it will provide substantial breakthroughs that could be well publicized)?
• To what extent does the project offer possibilities of future work with my organization?
• To what extent might the project (or potential project extensions) produce substantial fees over time?
• To what extent does the project offer you the opportunity to build a regional or country presence?
FIGURE 13.3 Pricing strategy related to strategic value
I also know that your billing rates are often many multiples of your salaries, that your offices are often lavish, that the cars you park in our lot are often more expensive than my own and my colleagues’, and that your firm makes very nice profits. So I know that you make a good deal of money when you sell projects at full billing rates (assuming that you complete the projects successfully and within budget).
So you can choose to reduce your fees when a project has important strategic value to your firm. You can make an investment; you can accept lower profit margins. You can even tell me that a particular project should cost $X at normal billing rates but that you have reduced this price to $Y because of strategic reasons. (We consider the same thing when we sell our products.) In many cases, lower fees will break ties between consultants.
The Potential Risk to You and Your Firm
While strategic value is a factor that could cause you to consider reducing your fees, potential risk is one that could suggest that you do the opposite. (See Figure 13.4.) If my company’s current financial situation or credit rating is questionable, you might want to put protective terms in your proposal offering, or even increase your fees to protect your firm. Similarly, if my issue/question is one that is not very clear to you—that is, the baseline logic and/or benefits are difficult to define—you might want to reflect that condition by increasing your fees or even declining to bid. If the project becomes a disaster, no pricing level, no matter how high, will protect your firm’s reputation.
You could regret not conducting an overall risk assessment, especially if answering our overriding question might result in negative publicity or if our desire for a quick return on our investment results in a “pay as you go” arrangement that will be difficult for you to produce. You also should think long and hard about your pricing strategy and about whether to pursue an opportunity when the project’s issue is not a top-management priority.
Previously, I mentioned the risk of your selling too low in the organization. Now, I’m talking about a different situation, one in which individuals are at an appropriate organizational level and have the budgetary authority to hire you but do not place a high priority on the issue to be addressed by the project, especially if the project’s results will not help our organization achieve its strategic direction. If my firm’s management does not believe the issue is important, you could very well sell a project that was doomed to fail.
In this situation, you could choose to increase your fees, hoping to convince management of the issue’s importance. Or you could increase your fees dramatically so that I am more likely to decline your bid. In this instance, you are using your pricing strategy to encourage me to say “No” so that you yourself are not declining to bid. If I say “Yes,” you will have a built-in cushion to offset the risks.
How risky is the proposed project?
• Do I and my colleagues fully understand what we need to do to ensure a successful project?
• Do you, I, and my colleagues agree on the benefits that will accrue?
• Is this project a top priority for me and my firm’s top management?
• Do I and my colleagues desire a quick return so that the project can be “pay as you go”?
• Are my firm’s financial profile and credit in good standing?
• Might this project be seen as a conflict of interest by your other clients?
• Could this project generate negative publicity for you?
FIGURE 13.4 Pricing strategy related to risk
The Relative Capability of You and Other Consultants to Answer Our Question(s) in This Project
You’ll note that the questions in Figure 13.5 are really the same questions I suggested you ask when you were trying to qualify the lead. Once the lead has been qualified, you need to ask them again, answering in greater detail.
Have you ever hired a roofing contractor? I’d pay almost anything to have the job done right. Price is seldom the primary factor for critical work where my risk associated with a poor job is significant. I want (and have found) a roofer who is never the lowest bidder, but he does outstanding work. Before he begins the work, he thoroughly inspects the roof (just as you might do a preproposal diagnostic), suggests the appropriate materials (seldom the least expensive) to complete the job well, and takes a holistic view of our home. In fact, he suggests that our house is “talking to him” through its cracks, spots, and coloration. Although he’s one of the weirdest guys I’ve ever met, he knows his trade, his results are consistently excellent, and he stands behind his work.
As a client, I sometimes compare consultants the way I compare roofers. If one consulting firm has significantly more expertise related to our industry and/or our issue, that firm has a leg up. If one firm has proprietary tools and methodologies that suggest a better final product, that firm has a big advantage. If one firm has the right team available or can achieve measurable results substantially faster than others can, that firm is advantaged. If your firm has capabilities that others lack, we will pay a premium.
How does your capability compare with the competition’s?
• How urgent is my need to begin the project?
• How quickly can you assemble the right staff?
• How capable are you, relative to the competition, of achieving the project’s objective(s)?
• Do you have the proper level of industry and functional expertise?
• What is the quality of your proprietary tools for this project?
• Compared to the competition, how do I and my colleagues perceive your firm’s capabilities?
FIGURE 13.5 Pricing strategy related to your competition
Your and Your Competitors’ Relationship with Our Buying Committee
Remember when we discussed (in Chapter 6) the five different buying roles played by management on our consultant-selection committee? As regards pricing, these different roles intersect with various human considerations—the intangible, touchy-feely, between-the-lines elements of our organization. Obviously, if you have strong relationships with our buying committee or have done high-quality work for us, you will be in an advantageous position. Conversely, if you are relatively unknown to our buying committee or have not worked for us before, you will be disadvantaged compared with competitors with whom we have established relationships. As you know, the quality of relationships often supersedes and trumps all the logical elements of a proposal opportunity.
The quality and intensity of these relationships could well influence your pricing, as suggested in Figure 13.6. If you and your firm are known to us, you could suggest that we should have a higher degree of confidence in your actually achieving the desired results you propose, and that confidence could justify a premium price. Conversely, if we haven’t had a chance to gain confidence in you and your firm, you might reduce your price to get your foot in the door. As is the case with my trusted roofer, price will not bridge a large perceived gap in capability. But it certainly is important when two or more consultants are viewed as comparable.
How do your relationships with me and my colleagues compare to your competitors’ relationships?
• How experienced is the buying committee in working with consultants?
• How strong is your relationship with me and others on the selection committee?
• At what organizational level is the economic buyer?
• How involved will top management be in the project?
• How experienced are we in working with you and/or your firm?
• If you have consulted previously with us, how well was your work received?
• How competitive is this proposal situation?
• How strong are the competition’s relationships with the selection committee and with others in my firm?
FIGURE 13.6 Pricing strategy related to your relationship with the buyers
Your relationship with the economic buyer is singularly important, and so is that buyer’s organizational level. Since the economic buyer is concerned with the bottom line and the overall impact on the organization, an economic buyer higher in the organization will be more likely to consider, and fund, larger projects, while lower-level buyers will lack the authority to approve such projects. For lower-level buyers, your strategy could be to break the project into smaller, lower-cost pieces or phases or to attempt to persuade the economic buyer to elevate the proposed project to a higher organizational level. You should be aware, however, that this “elevation” strategy often triggers a new and different economic buyer if your project’s proposed fees exceed the original buyer’s financial authority.
The Desirability of This Project to You for Internal or Tactical Reasons
Previously, I mentioned some of the strategic reasons that might increase your desire to win a project—for example, you might want to work for a specific prospect or on a specific issue. Tactical or internal issues also can influence your pricing strategy, often resulting in your lowering your fees because of the benefits that could accrue to you and your firm from performing the proposed project. (See Figure 13.7.) If you have unassigned staff available, the project provides an opportunity to use them. You also might view the project as an opportunity to educate your proposed team members about a key business issue or industry. Or your staff could have an opportunity to work in a desirable location—where they reside, for example, instead of Timbuktu.
To what extent will winning this project help meet your firm’s internal objectives, providing you the opportunity to:
• use available staff?
• train available staff?
• meet the individual development needs of members of the assigned project team?
• work in a desirable location?
• meet other potential clients?
• gain valuable publicity?
FIGURE 13.7 Pricing strategy related to potential benefits to your firm
In addition to potential benefits related to the professional or personal development of your staff, you may view our proposed project as an opportunity to meet other potential clients. Marketing, benchmarking, and multiclient studies often have such advantages. Similarly, certain projects might provide an opportunity for valuable publicity in markets or geographies important to you. For any number of reasons, the opportunity to build relationships or gain publicity with key personnel in an industry, geographic area, or functional area may be important to your firm. And if it is, you might choose to reflect this benefit to you in a reduced price for us.
Your Pricing History with Us
People and organizations constantly calibrate their interactions with each other. As a potential client, we are no different. If you have already worked for us, your pricing history (even in another unit or division) may act as a precedent, setting expectations for the proposed project’s pricing. (See Figure 13.8.) Moreover, we speak to our colleagues at other firms, and if you have discounted your work for them, you might have to justify why you are not providing a similar discount to us.
We can estimate your billing rates, or at least your blended average daily billing rates, so if your pricing is different for this proposed project, you may need to explain why. If your price is higher, you need to explain, for example, that the project requires a greater percentage of senior people. If your price is lower, you should tell us, for example, not only that you are making an investment but that you are doing so for specific reasons. As a result, you can avoid being constrained when you price future projects.
What historical factors could influence your ability to price this project?
• How have you priced other projects, for other prospects, that addressed this project’s overriding problem or opportunity?
• How have you priced other projects for us? For example:
--rate-based
--success fee
--contingency
--retainer
FIGURE 13.8 Pricing strategy related to your pricing precedents
A Bit of a Summary, and More
In the Introduction, I wrote, “Writing always involves choice, decisions among options, and the more options you consider, the better your chance of selecting the most appropriate one for a given situation.” Substitute “pricing” for “writing,” and the advice is equally apt. In this chapter, I’ve discussed seven considerations that can influence your determination of fees:
1. Our return on our consulting investment
2. The strategic value of this opportunity to you
3. The potential risk to you and your firm
4. The relative capability of you and other consultants to answer our question(s) in this project
5. Your and your competitors’ relationship with our buying committee
6. The desirability of this project to you for internal or tactical reasons
7. Your pricing history with us
These pricing considerations could make the difference between your winning or finishing second. Remember: What worked well in one situation will not necessarily work well in another. Even if the questions or industry issues are identical. Even if the perceived benefits are comparable. Determining the right price is as strategic an activity as any other element of your proposed offering.
Given all the logical and psychological information you’ve learned about us, your competitors for this project, and your own strategic and tactical objectives, how should you price a particular proposal opportunity? You certainly know by now that I can’t answer that question specifically. But I can suggest a range of pricing options you could consider.
Rate-Based Pricing. The options start with a rate-based price developed by summing up your proposed team members’ individual fees based on their planned billing days. Let’s equate this rate-based price to a 1.0 on the potential-pricing scale.
Investment Pricing (Discounting). Because of the strategic value of this opportunity to your firm or the desirability of this project for internal or tactical reasons, you could choose to reduce your rate-based price by discounting your rates (e.g., 0.9 or 0.8 times your rate base) or by investing or even giving away your services—for example, in a diagnostic (e.g., 0.9 to 0 times the rate base).
Return-on-Investment Pricing (Contingency or Success Fee). Or you could choose to change your price (most likely by increasing it) by adopting a return-based arrangement. Using return-on-investment (ROI) pricing, your fees could be a percentage, over some number of years, of my organization’s increased savings or sales or whatever measurable result is defined in your proposal. In this case, your fees probably will be some multiple of a rate-based price (e.g., 1.5 to 3.0+), though they are certainly contingent on our actually achieving the results you promise. With ROI pricing, of course, you should be very careful about how our actual achieved results are measured. You might even want to involve your and our legal people and get their buy-in to the arrangement. To paraphrase Robert Frost, “Good fences [and agreed-to accounting procedures] make good neighbors.” But by all means, worry more about scoring than scorekeeping.
One final word: Don’t be offended by questions we might ask about how your pricing was determined. When we ask a serious question, we appreciate an honest answer. (Always remember that our questions might be a test of your ability to interact with us.) We might ask about your daily billing rates, expenses, terms of payments, and guarantees. We know that purchasing qualified professional services is expensive. We know that we wouldn’t have solicited your help if we believed we could complete the project successfully ourselves. So we believe (we hope) that outside help will be beneficial. But as an outsider, you must be viewed as someone we can trust and work with well during the project and, quite possibly, beyond. Your goal is an ongoing, long-term, mutually beneficial relationship. So is ours. Use your pricing strategy as another opportunity to build a stronger relationship with us. With this relationship and your great project work, we receive the benefits of a successful project; you receive a fair return for conducting it, as well as the opportunity for continuing work.
Together, we both win.