Consultants often struggle with setting fees for their own services and expertise. It is common to struggle with decisions about hourly billing versus fixed fees, premium pricing, bundling, discounting, and adjusting for scope creep.

After a long career as a pricing consultant, Hermann Simon wrote Confessions of the Pricing Man, How Price Affects Everything. In this book, he shares his experiences and insights that can help with the challenges of setting fees.

He begins by making clear that, whether we like it or not, adjusting our rates is the most effective way to generate higher profits. That leads to his next point, which is “never run a business in which you have no influence on the prices you charge.” This is a critical issue when choosing an industry niche or an area of specialization.

The Power of Raising Your Consulting Fees

Pricing power is the ability to raise rates. Simon says understanding how much pricing power we have is vital to managing a successful practice. He quotes famed investor Warren Buffet as saying, “the single most important business decision in evaluating a business is pricing power.”

Mr. Simon also makes it clear that we should not hesitate to raise our fees in accordance with the value we provide to generate more profit. It is not the business that earns an adequate profit that “rips off” society. Instead, it is the business that fails to produce profits that hurts in the long run.

However, Mr. Simon points out that too many people still believe that the best way to increase revenue quickly is to cut their rates. They eventually learn the hard way that discounting leads to price wars with devastating effects on profits.

In determining appropriate rates, the author says we should remember that the two most powerful intangible benefits people willingly pay for are convenience and peace of mind. So, while we produce documents full of words and numbers, we may really be helping clients reach more important priorities. Consider the value of that.

According to Simon, pricing is also a powerful communication tool. The price itself becomes the primary indicator of quality. In professional services, higher prices signal status and therefore offer the buyer an additional level of psychological comfort. Therefore, he recommends offering no discounts if you believe that your expertise is worth your rate.

How a Consultant’s Price Increase Can Lead to More Clients

Some specialized consultants are surprised to notice that the demand curve may have an upward (positive) slope. This means that a price increase can lead to more new clients. This is in part due to the way lower rates can prompt prospects to forego your firm due to concerns about quality. Many people act according to the motto “you get what you pay for” and steer clear of low-priced consultants for their important matters.

Simon describes multiple studies in which people were tested about their response to differences in pricing. In one test, study participants received a pain reliever in packages showing different prices. One group saw a tag with a high price, and the other group saw a low price. Without exception, the participants in the high-price group claimed that the pain reliever was very effective. In the low-priced group, only half of the participants made that claim. For all of them, however, the pills were vitamin C (a placebo).

The less prospects know about the quality of the services and expertise available to them, the more strongly they are influenced by pricing. However, this is not to encourage anyone to overcharge simply because they can get away with it.

The Magic of the Middle Price

Although higher prices may signal higher quality, not everyone buys at the top of the price range. Simon describes a concept that he refers to as the “magic of the middle.” This involves evaluating a price in relation to other prices. For example, a $10,000 fee quote can trigger widely different reactions, depending on whether it is the highest, lowest, or middle quote that a client receives. Believing that all else is equal, prospects may gravitate toward a price in the middle of the range. This concept has been found to apply in various scenarios. For example, in restaurants, tests showed that most guests ordered wines with prices near the middle of the ranges on the wine lists. For this reason, some restaurants will add a couple of very expensive wines to their wine lists. They may never sell those very expensive bottles, but by adding them to the list, their previously highest-priced wines move toward the middle of the price range and begin to sell more often. The very high-priced bottles become “anchors,” making others on the list appear to be more reasonably priced.

Simon’s theories also state that very high prices may scare off prospects who are concerned that they may spend more than necessary. They do not want to later feel that they wasted money by spending more than enough. On the other hand, the lowest prices may scare off prospects who are suspicious of the quality.

Despite our best efforts, some prospects see consulting services as a commodity. However, there is still some fee flexibility because consumers willingly pay a broad range of prices for commodities. To verify this, look at the wide range of prices on bottled water in a grocery store. Or notice the wide range of prices on soft drinks at a hotel. The prices vary dramatically depending on whether the drink is purchased from a vending machine in the hotel, through room service, in a gift shop, or in the hotel’s restaurant.

Consultants’ Fee-Setting Drives Profits

In closing, Simon reminds us to keep in mind that fee-setting is the most effective profit driver. For this reason, he believes that pricing should be in the forefront of a consultant’s thought processes.

The author of this post is Stephen Kirkland, CPA, CMC, CFF. Stephen currently serves as Treasurer on the IMC USA Board of Directors. He is a Certified Management Consultant and Expert Witness, providing compensation consulting and expert witness services to closely held businesses, professional service firms, and non-profits across the United States since 1995. For more information visit his website and connect with him on LinkedIn.