Understanding The Value Proposition.
One of the biggest challenges for independent business consultants is to get potential clients to recognize the value of what they can deliver – the value proposition. More often than not, the potential client is focusing on cost and not value. So how can we move the needle so that the value of what we deliver can be recognized?
The answer is – it depends on a number of different factors. For example, I was recently engaged by a new client to help him to overcome some licensing challenges in his business. Without a license, his business was not permitted to continue trading. I happened to have experience in his industry and was able to quickly get over the problems he encountered and his licensing issue was resolved. So how do you put a value on what I delivered?
Well, you could take the view that it took about 10 hours of work and a reasonable hourly rate is $400, thus making a possible billable charge of $4,000. On the other hand, you could take the view that the business would have ceased trading without my timely intervention. This would have involved lost business and costs of over half a million dollars. So what should I have charged for the assignment?
Should we charge for our time or should we charge for the value delivered? In my view, it should be based on the value delivered. Daily or hourly rates are not wise in our business as it undermines the value we create and it encourages potential clients to try and negotiate discounts. If you also factor in the opportunity cost of doing one assignment rather than choosing a different one, there are financial implications for your consulting practice when you discount. It also devalues what you have to offer.
Many of us will be familiar with the story of the householder who had a non-functioning heating system during the depths of winter. A heating engineer was called and came to visit the house to fix the problem. After an inspection of the heating system, the engineer told the householder that it would cost $500 to fix the problem. Although the householder considered the price to be a little bit steep, he readily agreed to pay the $500 to get the heating up and running immediately. The heating engineer went down into the basement, followed by the householder. He removed a hammer from his toolkit and went to a particular pipe and hit it a single blow. The heating system immediately restarted.
The heating engineer then packed up his tools and handed an invoice to the householder for $500. The householder refused to pay it because in his view, the engineer had spent less than 15 minutes in the house and he considered the fee to be exorbitant. The engineer explained that his callout charge was just $50. The balance of his fee was for knowing which pipe to hit with the hammer.
In the consulting business, we ought to be charging for knowing which pipe to hit with the hammer. What we deliver involves a lifetime of knowledge and experience, which were not cheap to acquire. We also bring a vast network of professionals that we have worked with before, and which we can help to deploy on appropriate projects with the sure knowledge of the difference that they can make for our clients. In my view, an hourly rate will simply not reward us adequately for what we bring to an assignment.
This does not mean that we should gouge clients either. I believe that most people have an inherent sense of fairness and that there is a true economic price or cost for most things. It is just a matter of demonstrating the value to potential clients at the outset and delivering upon the promise.
In deciding what to charge for an assignment, we will also take a view on whether the assignment is transactional in nature or whether it is likely to be relationship driven. In this instance, we are looking at the lifetime value of the potential client. This can work in one of two ways. If the assignment is a one-time project and there is no potential upside, you may choose to charge a little bit above your standard rate. If there is the potential of multiple assignments or an ongoing advisory role, you may choose to discount your standard rate to win the initial business as well as the ongoing relationship.
The challenge for consultants will always be in crafting and delivering the value proposition in a way that makes sense for the potential client. If delivered properly, the closing will be done by the client rather than by the consultant.