How do we charge for the value of our services?

From an early age, we learned that “time is money,” an insight we gained, among other ways, through Uncle Scrooge in Donald Duck. Many industries charge by the hour, but pricing varies depending on expertise, the assignment, and the business model.

Variable hourly rates

I was recently at the Din Bil car repair shop in Stockholm for a diagnostic check. The service advisor informed me that my car had a higher hourly rate – despite it being a small, simple Fiat Panda, one of the easiest cars to work on. My protests didn’t help, so I had to reluctantly pay the higher price. This showed that some industries charge more depending on the type of work involved.

Similarly, an accounting consultant might charge different hourly rates for the same assignment depending on whether the task involves payroll or ongoing bookkeeping.

Another well-known model is that more experienced consultants charge higher rates. Senior consultants work faster and more efficiently, but few clients are willing to pay significantly more for their expertise. This is especially evident in the IT industry. While senior consultants do have higher hourly rates, these rates are not proportional to the extra value they bring through more efficient solutions and shorter time spent.

Getting paid fairly for one’s expertise is a challenge for many consultants

Government agencies and authorities are examples of clients who often actively limit the number of experts in their tenders. The intention is good; they want to reduce costs. However, the problem is that a “standard consultant” might need two days to solve a task that an experienced expert could complete in two hours – and with better results.

This confirms the old saying: “You can’t pay little and get a lot.”

Charging for value

Success fee

Many consulting firms, such as those offering sales training, dream of charging based on the value they create, often referred to as a success fee. However, it is often difficult to objectively measure exactly what the consultant’s efforts have contributed.

For example, a sales training program may have contributed to an 11% increase in sales. But when it comes time to pay the consultant’s bonus, the client begins to question what really led to the increase. In addition to investing in the sales training, the client company may have simultaneously increased its marketing efforts, become more aggressive with pricing, and benefited from general market growth.

The question is therefore justified: Was it really the sales training that caused the increase in sales?

Performance-based pricing

Some industries find it easier to establish clear results-based fees.

• In the manufacturing industry, a faster production process can be directly linked to a consultant’s contribution.
• Tax advisors can take a percentage of the savings they create.
• In the U.S. legal system, many lawyers work on a results-based compensation model, where they can take, for example, 25-40 percent of the compensation awarded to their clients.

It might seem like a lot for a lawyer to take nearly half of the settlement, but if no settlement is reached, the lawyer gets nothing – despite possibly having led a costly legal process for several years.

Fixed prices – a way to charge for value

A few years ago, I worked with two different IT companies in the ERP sector, both operating in the exact same market segment and offering similar services. Despite this, they chose completely different strategies to increase their profitability.

Company A used fixed prices but lost money because, over the course of the project, customers wanted to make additions and adjustments—something that the company’s consultants carried out without charging for it. This was a classic case of scope creep. Often, it involved hundreds of additional hours that couldn’t be invoiced. The company then switched to time-based billing and went from operating at a loss to becoming profitable.

Company B did the opposite and transitioned from time-based billing to fixed prices by packaging their solutions and services. This turned out to be a profitable strategy. Company B’s consultants were skilled at staying within the scope and avoided over-delivering—something that is common in IT projects and drains profitability more than most management teams realize.

Many consulting firms today use fixed pricing by packaging their services, but not all achieve profitability in their projects. Success requires that everyone, from salespeople to consultants, practices sound business acumen. This means maintaining a healthy balance between the customer’s interests and the company’s own goals.

Success Factors in Fixed-Price Projects

Working with fixed-price projects can be challenging, but with the right approach, it can also be a profitable and smooth business. Below, I’ve listed some key success factors to keep in mind when setting fixed prices or packaging services.

1. Close Collaboration Between Sales and Consultants
   The consultant needs to be deeply involved in estimating the time required.
   Avoid selling projects with unrealistic timeframes.
   
2. Quality Assurance of the Proposal
   Let a team that hasn’t been involved in the sales process review the calculations.
   Avoid basing estimates on “best-case scenarios.” Factor in reality.
   
3. Clear Contracts and Boundaries
   Ensure that the client understands what is included and what is not.
   What the client chooses to exclude can be packaged as priced options.
   
4. Consultants Well-versed in the Agreement
   All involved consultants should know exactly what is included in the delivery.
   No additions or changes should be made for free.
   Avoid “guessing.” It can lead to free additional work and reduced profitability.
   
5. Demonstrating Success to the Client
   Help the client see the results of the project:

• How much time have they saved?
• Which tasks have been eliminated?
• Who at the client’s organization needs to know what the investment has delivered?
  Prepare presentation materials that show the success the client can use internally.

6. Clear Invoicing
   No client wants to receive an invoice with a lump sum and no explanation.
   Specify the different tasks in the invoice.
   Don’t report hours, but explain the methodological work that has been carried out.

By following these principles, you increase the chances of your fixed-price projects being successful – both for you and your clients.

Summary

Many consulting firms have significant untapped potential in their internal business acumen. They don’t need to sell more or improve the quality of their deliveries. The easiest path to increased profitability is to get better at charging for the value they create. Often, consulting firms are careless with time reporting, work for free, overdeliver, give away their time, and fail to package shorter efforts effectively. Instead of allowing pricing to be determined by the client’s willingness to pay and perceived value, they focus solely on the hours spent. By shifting their mindset and optimizing their business practices, consulting firms can quickly improve their profitability without the need to chase more projects.