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What Is a Fair Price For a Consulting Fee?

June 13, 2012 | Comments: 0 | Views: 209

What is a Fair Price?

Let me start with the premise that if the consultant and client are both happy with the agreed price, then it probably was fair. Like any value decision fair pricing involves many computations but is determined by two or more people who will often use emotion to make the judgement about price not logic.

If you spend $X and get at least twice that value back into your business then the fee was very likely a good return on your investment.

How to determine a consulting fee

I will ignore the fact that many consultants set fees based on the perception of their branding quality and has little to do with the delivered outcomes.

I have talked to consultants that charged clients over $12,000 and failed to produce any noticeable outcomes, blaming the client for the failure to get returns. Personally I feel that this style of consulting can be improved more to ensure outcomes are possible.

Start with this method

To work out an average hourly fee for the consultant you could use this general process. Keep in mind you may find the new fee much more than what they offered you in the first place.

Select the key skill or knowledge you need

  1. If you need a qualification for this skill/knowledge divide the cost of the qualification by 5 to estimate value for that knowledge.
  2. Work out how long it would have taken you to complete that qualification in lost days away from your business. You will have an estimated total of 6-12 months of days lost for each qualification.
  3. If you need to have other skills, like advanced computer skills or equipment use, before you could have completed the previous qualification add this cost and time to the previous amounts.
  4. Now to include a value for their practical work experience. For the first two years it would have cost you approx $70,000 to employ them. Between 2-8 years of experience it would be over $200,000 of costs to train someone with this experience.

As you can see, what you are really paying for is the consultants commitment in time and formal training over many years so you can access part of that knowledge in a one or two hour session.

To get the same knowledge you would have devoted 2-4 years in study, worked in the industry 2-8 years before becoming a consultant.

So the question is what would you pay to employ someone with those qualities, $75,000 to $120,000 per year or more than $100 per hour.

That rate is based on them being an employee not running their own business with overheads. A general rule in business is you need three times the average hourly rate to meet costs of running a business bringing the fee to $300 -$450 per hour for a standard consultant.

Remember that your business and you will benefit from the consultants advice or help for many years to come after they have left. Their fee needs to consider the additional benefits you get every year and factor that it as well.

How consultants see the price is different

They value the service as fair based on the return your business gets from applying their knowledge. I have heard of one consultant getting paid over $1 million for one sentence that helped put the organisation in the number 1 position in its industry countrywide.

So the real question is "what is their knowledge and skills worth to fix your current problem?"

Around 5-10% of the revenue made or saved is an industry accepted fair price as they only get paid if their solution works, and you get more effort from the consultant as they really work hard to gain great outcomes for both of you.

Specialist consultants

Now we move into the fields of intangibles and consultants protecting their industry niche by limiting how many people have access to their specialised knowledge.

If only a handful of consultants have the knowledge or skills to fix your problem, you will have to pay what the market states. In these cases your fees will range from $2,500 per hour to $80,000.

Consider Google for example, only about 10% of its listed value is in physical assets the rest is intangible brand value.

There is no easy price formula to work out these fees, except to say "If both of you are happy with the outcomes, then the fee was fair."

Information supplied by Paul Baker

Over twenty years of business development & change management strategies successfully used in National organisations across Australia. The focus is on continuous improvement of business systems to stimulate growth through our principles of Initiate, Inspire, Innovate.

Customer-centric focus using our extensive experience in consumer behaviour and business process operations to find ways to help business owners manage their organisations.

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Source: EzineArticles
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