During the past several months, we’ve examined preferred methods of charging clients by asking what works best for consultants and their clients. We recently posted the results of a survey conducted late last year by the Information Technology Services Marketing Association (ITSMA). The survey results suggested that nonspecific, bundled, or "black box" pricing doesn't give customers the ability to comparison shop.
In a discussion related to the article, TechRepublic member Lee Padron said that his firm had "moved away from hourly charges after 20 years of pricing that way."
"We've done it because hourly pricing forces the client and us to focus on the wrong thing: hours. We try to bill as much as we can. The client wants us to do the opposite," said Padron, CEO of International Computer Systems (ICS).
In the article, Rich Staples, ITSMA's vice president of sales and marketing, told us that clients want to understand the details behind the consultant’s price. He urged consultants to provide potential clients with detailed breakouts of their fees and services. He also said the survey suggested that buyers assess services using one or all of the five following methods:
- Evaluating the business value that the service provides based on projections of increased revenue, improved profitability, and new business opportunities
- Comparing the price to the cost of doing it themselves
- Comparing the price to a competitor’s services
- Evaluating the cost as a percentage of product list price
- Converting the price to an hourly rate
So, given the choice, which pricing strategy seems to offer the most benefit to both you and your clients? How do you structure your pricing? Join the discussion and post your comments below.
What are the most common pricing schemes?
Here’s a quick rundown of some of the most common pricing schemes, as suggested by TechRepublic columnist and IT consultant Rick Freedman. In a previous article, he outlined seven common pricing strategies. Which sounds most like what you do?
- Time and materials: Consultants quote a price-per-hour for the resources they apply to the job and a materials list for the products and consumables they’ll need, and the client pays for however much time and materials we expend to deliver the scope of work.
- Retainer: Consultants agree to be available for some set number of hours per month at an agreed-upon rate and to do whatever IT work the client asks of them within that time period.
- "Not to exceed" price: Consultants present the client with a budget for the scope of work, typically with a low-end, middle, and high-end estimate, and agree that, even if they exceed the estimate, the client doesn't pay more than the "Not to exceed" price.
- Fixed price: This is a guaranteed price at which the consultants agree to deliver the complete scope of work.
- Phased pricing: The consultants provide an estimate or a fixed price for a specific phase of the project only—such as the requirements definition phase—and agree to provide subsequent bids for the remaining phases once they are more clearly defined.
- Performance-based pricing: This is pricing in which the consultant can earn premium compensation based on the achievement of preset goals such as functionality, timeliness, or quality.
- Equity pricing: Many startups are short on cash but long on options or warrants that represent equity ownership of the company. Some Internet consultants will now negotiate for a piece of the client's company in lieu of cash payment.