How to Avoid Overpricing Your Consulting Project
Project pricing is like a balloon in a room made of nails. I’m not sure why such a room would exist or how you would get the balloon in there, but go with me on this one. On the pricing floor are the rusty nails that cheapen you and let the air out of your credibility or win you projects you can’t afford to deliver. But you’re probably more worried about the needle-sharp nails on the ceiling.
David A. Fields http://www.davidafields.com/how-to-avoid-overpricing-your-consulting-project/? March 30th, 2016
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As your pricing balloon drifts higher, it imputes higher value and gives you space to deliver client delight while maintaining a high margin. But a millimetr etoo high and the balloon pops, making you scream in fright. Or maybe that scream was frustration over losing the project.
How do you position your balloon just a hair below the upper nails? With one, simple question.
I’m assuming that during your discovery process (a.k.a. the Context Discussion) you’re already asking your prospect about her budget for the project. Occasionally your prospect will tell you, but more often she won’t. Either way, there’s a follow-up question that will help you position your balloon.
I suppose you could just ask, “What’s the budget ceiling?” but I don’t. I employ a slightly less direct question. My follow up question is:
“At what price do you have a heart attack?”
Yes, I literally use those words. I’ve settled on the “heart attack” language for two obvious reasons and one hidden, but more powerful, benefit. The obvious reasons are:
1) it often garners information I need to win the project; and,
2) it’s funny, in a grim way. Prospects always laugh when I ask, which builds rapport.
The more subtle benefit of the heart attack language is it changes the reference price.
Let’s say the prospect wouldn’t give you a budget when you asked, but silently she’s hoping your project comes in below $75,000. You ask what price would give her a heart attack and she laughs, thinks for a moment and chortles, “A heart attack? If this came back at six figures, probably my boss and I would both have heart attacks!”
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In that brief moment of thinking, your client just told herself in a very real, visceral way, “I would survive as long as the project fees are under $100,000.” And just like that, you have another 30% of room for your project.
While other consultants would have punctured their chances at $80,000, you can float a higher-value project with a $98,000 price tag and still win it.
· David Discenza March 30, 2016 at 8:10 am - Reply
David, I have used this with varying degrees of success. I find it helpful to say “I’m not looking for a hard dollar figure.
“If I went above 6 figures, would that cause you to clutch your chest?”.
Sometimes it works, other times the client just doesn’t want to reveal the budget. In those cases I give them a range of options but make it clear that as the cost of my service decreases, the amount of work they’ll need to do to bring the project to a successful conclusion increases. Either way, they will pay for the work.
· David A. Fields March 30, 2016 at 9:22 am – Reply: Excellent variation, David, and you make a couple of good points:
o in some cases a client may not be able to give you a fixed number
o There are times when you want to set the reference price, not leave it up to the client.
I’ve often used a combination of:
o setting an “insanely” high reference price
o then following up with the heart attack question.
For instance, I might say:
o “I’m pretty sure we can get this done for under a million dollars.”
o Then I’ll pose the heart attack question.
· David A. Fields March 30, 2016 at 9:32 am - Reply
If the discussion is tense and my prospect’s disposition is unwelcoming, I won’t use the heart attack question until I’ve improved the tenor of the conversation.
· Dan Janal March 30, 2016 at 9:20 am - What do you do when the prospect honestly doesn’t have a clue about the budget? For example, I propose a new marketing tactic for them, one they hadn’t thought of, so they couldn’t possibly think of a number. How can I set the stage and manage their expectations?
· David A. Fields March 30, 2016 at 9:45 am - Reply
o First, when you establish the value of your work during the Context Discussion it puts a rough order of magnitude in the client’s mind. If the client estimates your tactic will deliver $10 million incremental profit, they’re going to be more open to a high fee than if they estimate it will only deliver $100k.
o Also, during the Parameters portion of the Context Discussion if you’re sensing there might be a budget concern, you can float a trial balloon and see whether that hits the sharp nails on the ceiling.
o Finally, be aware of your likely competitive set. What alternatives to working with you is the prospect considering and what do they cost? If they mentioned that they’re interested in your Facebook ad service, but they also were thinking of running a small, direct mail campaign, you could ask what they were thinking they would invest in the mail campaign. That becomes the anchor that you need to either sail around or find a way to move.
· Bryce Avery March 30, 2016 at 9:49 am - When bidding a government project, where they tell you the budget is X, is there a “sweet spot” as a percentage of X that generally promises the best chance of getting the job ? It would seem that 0.5X should be effective if you can do it for that price, but most government people seem to expect that if you don’t propose at least 0.8X, you must have no idea what you’re doing.
In my experience, government projects are pretty different and it depends on whether you’re dealing with Federal, state or municipal governments. Some recent research I did for a consulting firm that works with municipalities suggested that you can be about 10-15% above your competition if you’re perceived as the best provider. You’re absolutely right that a low price conveys low quality and as long as you’re not dealing with the feds, shooting low rarely does you any favours.
· Paul A Halas, Jr., VA, CMC Halas & Associates March 30, 2016 at 10:28 am - My business has to do with determining the market value of a given business. We offer a sliding scale of fees which are charged, reflecting the amount of effort and features which are included in a given project.
David A. Fields March 30, 2016 at 10:49 am – Reply:
Sounds like an interesting business, Paul. Have you considered charging based on the value you’re providing rather than the amount of effort? For example, determining the market value of a $1 billion-ish organization to set shadow stock prices for its employees is worth much more than determining the market value of a $1 million-ish acquisition target and, effort aside, opens the door for a more valuable project for you and your client.
Thank you for sharing your particular situation.
· Arthi March 30, 2016 at 10:48 am - Client is interested in getting them up to speed on a new job for which they do not have the exact skill set or background. I have a pretty good sense of what they will need in the way of deliverables and to see progress and value.I can either:
o offer an hourly rate
o or a set price for two month engagement and the client can ask me whatever they want.
David A. Fields March 30, 2016 at 10:56 am – Reply:
Unless the project is commodity outsource work, an hourly rate is not doing yourself or your client any favours. Your comment suggests they are seeking advice (a loosely bounded project) rather than specific outcomes and deliverables (a tightly bounded project:
o The former is best structured as a stipend, where you’ll be paid a regular, periodic fee, in return for access to you
o The latter is best structured as some variation of a value-based fee–either fixed or partially fixed and partially success-based.
· Joe Frisbie March 30, 2016 at 11:50 am - What if your solution to their problem involves physical infrastructure changes that can only be nailed down from information obtained after the commitment? I can obtain most about 85% site information from Google Earth or Maps or other sources. Other vital information can only be obtain in “The Meeting” inputted into software and finalized after the commitment.
David A. Fields March 30, 2016 at 12:39 pm – Reply:
There are three scenarios to consider:
o When the effort involved isn’t clear up front, there’s unlikely to be huge swings in effort, and the value to the client won’t really change regardless of the level of effort. In this case I don’t worry about it because I’m setting fees based on value, not effort, and my margins are high enough to support swings in effort one way or another.
o When the effort involved isn’t clear up front and there could be major swings in what’s required to deliver the project. In this case, I split the project into phases and use phase I to assess the back-end requirements, then determine the fees based on value while ensuring it’s still profitable.
o When the value of the project isn’t clear up front, regardless of the effort required. In this case I sell an assessment project first to determine the value of the project.
Jaime Campbell March 30, 2016 at 4:21 pm - Since our core deliverable is financial clarity, many of our clients aren’t able to name a budget. Depending on the engagement, we have a look at their books first, and are able to get an idea ourselves if the information isn’t too mangled.
But for prospective clients for whom it doesn’t make sense for us to look at the books, I wonder if the heart attack technique would be a highly effective way to verbally wrap up the value calculation at the end of the Context Discussion – when we plug in the ROI figure to divide the risk-adjusted value by ROI to get to the price.
I do say that the other purpose for the calculation is to mutually determine whether this engagement is even worth it for them, and I share a story or two of when it came out too low so the client saved money and heartache. However, who knows if that really lands or if they just focus on the fees.
David A. Fields March 30, 2016 at 9:51 pm – Reply:
If you do, try the heart attack question as a wrap up of the value calculation.