How do you come up with pricing for your services? I graduated from one of the top 25 economic institutions in the world. I recall lectures about how to generate pricing models based on costs. The topics were challenging, thought-provoking, and in retrospect, a complete waste of time. The fact is that if you can quantify your value, your internal cost just doesn't matter. Here is a better strategy to establish a pricing model that is based on the value you're delivering to the client.
Given her expertise, we agreed that for the right client, she could expand their business by 10 to 30 percent annually. For a company currently doing $10 million per year, that would equate to $1 million to $3 million. Let's say her client was confident she could deliver those results. How much would that be worth to them? Answering that question provides a better way to establish her consulting fee. Does her insurance cost even enter into the calculation? Of course not.
Focus on Results and Value
For example, let's say you are an entrepreneur and another company threatens a lawsuit against your business. You need to hire a lawyer and here are the options you found:
Lawyer A says they can help you for $250 per hour.
Lawyer B says they can help you for $450 per hour.
Lawyer C says they can help you for $600 per hour.
Who would you pick? How many hours of their time would you like?
The answer is NONE. In fact, you don't want to buy hours. You just want the issue to go away.
In the same scenario, let's say that Lawyer C (the one with the most expensive hourly rate) says "I've reviewed the matter, and unless one of these two unlikely scenarios comes up in the first two days, I'll solve the whole matter for $5,000. If those other situations comes up, I'll know quickly, and we can jointly decide how to proceed." The other lawyers still give you an hourly rate. Perhaps Lawyer A has lower overhead than the others. Who cares? The Lawyer's hourly rate and their cost structure do not matter to you. You don't care how many hours they spend, you just want a solution to your problem.
Cost-Based Pricing Is The Vortex of Evil
In sharp contrast, the federal government and other organizations often award contracts on a cost-plus basis. This means that the contractor might earn 11 percent more than their total cost per hour worked. In this model, the contractor has a disincentive to be efficient or innovative. The more hours they spend doing the project, the more money they make. Why would you want to encourage that type of behavior?
Whatever you do, please avoid this vortex of evil at all costs. If you are already billing for hours, get creative to deliver value and results, not hours and bodies.