Last week on two separate list servers, as well as one Q&A website where I’m the resident “Sales & Marketing Expert,” I had the chance to respond to questions about fee-setting. (For some reason, it seems to be a hot topic right now.)

Anyway, I figured it would be a good idea to summarize the advice in those responses here, since one of my specialties is showing service professionals how to raise fees and increase income.

First, it’s very important that I say up front that I hate time-based billing for a host of reasons, the most prominent of which is that it sets an artificial limit on the amount of money you can make:

• There are only so many hours you can bill in a year.  

• There is only so much per hour you can charge in your industry.

Multiply the hours-per-year limit by the dollars-per-hour limit, and you’ll find the maximum amount one service professional can bill in a single year. I don’t care if it’s $500,000 – it’s still a limit, and I loathe limits.

To break free of these limits, you must stop billing based on time, and start billing based on the value that you bring to your clients’ businesses. However, the problem most people encounter when making this transition is setting the amount of the fee, which brings us back to the topic at hand.

Conceptually, to stop having problems setting your fees, you must stop thinking about the dollar amounts as “your fees,” because that’s an internally focused position that is, quite frankly, irrelevant to your customer. So, instead of figuring out “your fee” for a project, concentrate on figuring out the value you can bring to your prospect’s business, the dollar amount associated with that value and the time it will take for your prospect to recover his or her investment.

For example, a coaching client of mine (“Bob”), a consultant, recently told me about a conversation he had with a prospect (“Joe”). They were discussing changes Joe wanted made to a data-entry form that was slowing his operators.

We’ll pick up the conversation after they had covered all the specifics of the engagement, and right after Joe had asked about price:

Joe: Yeah. At least.

Joe: We have five operators who use it all day long.

Joe: I’d say at least 20 times each.

Joe: On average, I’d say $25,000.

Joe: Wow! I never added it up. I just knew it sucked.

Joe: Yeah.

Joe: We’ll probably be replacing the entire system in two or three years. So I guess until then.

Joe: I’d give you at least half the $25,000 in a heart-beat. Please tell me you have a wand in your pocket!

Bob went on to explain how he gets paid by the project, not by the hour, and how this gives him the incentive to “create the magic wands” in his industry.

As a result of walking his prospect through this analysis, Bob secured a $14,000 engagement that took him only four hours to complete (because Bob has lots of “magic wands” ;-).

And, since he had secured such a high fee in relation to his time spent, while he was at Joe’s office he also managed to fix a half-dozen other problems with the system, which made Joe and his staff even more ecstatic! (Needless to say, Bob is also at the top of Joe’s list for a consultant to oversee the replacement of his system in three years.)

Truths

So why have this type of conversation with your prospects? Well, to start, here are four “truths” about purchasing professional services that you can leverage, once your prospects understand the value of your involvement:

1. Most business executives will authorize a project if the associated costs can be recovered in one year, provided the capability that causes that return is repeatable and sustainable.  

2. There are very few executives who will sign on the dotted line before having done a return-on-investment (ROI) analysis.  

3. Executives can’t do an ROI analysis before meeting with you to discuss your involvement, because you are part of the equation.  

4. When meeting with your prospect, your competitors are focused on their own needs – “How do I close this deal?” “How much can I charge?” – which opens the door for you to be different and helpful.

So, you must be the professional that focuses on your prospect’s primary goal, which is to determine:

• Can the objective be met?  

• How can success be measured accurately?  

• What is the bottom-line dollar effect of meeting this objective?  

• Is this bottom-line dollar effect repeatable, and how long can it be sustained?

In your sales meeting, walk your prospect through an analysis of these issues, and extrapolate the dollar value of the increase or decrease over a 12-month period. Then in your proposal, have three options for consideration:

Option one accomplishes the minimum that the prospect wanted with the minimum number of features possible and is priced at the fees you would have quoted without doing the ROI analysis.

Option two accomplishes the maximum the prospect wanted with several additional service features, and is priced at 50 percent to 60 percent of the 12-month dollar amount you found during the ROI analysis.

Option three accomplishes significantly more than the prospect wanted, is packed with additional features and is priced at the 12-month ROI dollar amount.

(Note: In the very rare case that the fee for option two is less than the fee for option one, you shouldn’t be working for the prospect anyway, because you aren’t adding enough value.)

Executives think in terms of return on investment, and executives love doing business with people who think in those terms as well.

Never quote a fee until you’ve determined the exact value of your involvement and extrapolated that value over a 12-month period, and you’ll never again struggle to quote a fee. And as a bonus, you’ll increase your income in the process, because you’ll break the chains of time-based billing.

Have a great week!

Gill