Determining your pricing strategy in response to your revenue goals. MODULE 4

4 Pricing has two core challenges: Over-pricing and under-pricing. In Module 4 we start by understanding how much revenue you need to make to meet costs, before defining how to charge for your Products & Services and how much profit to target.

Revenue Targets

Data to determine? How much revenue do you need - each month/qtr/year? How much capacity have you got to deliver? Therefore what do you need to charge to achieve your revenue targets within your capacity?

Pricing Models

Variable Fee - Time & Materials Type Variable Model T&M – Time & Materials Description You decide upon a day rate (typically billed in increments of less than 1 day) and you bill the client for the exact time that you work on their project Pros Useful in a scenario where a lot is unknown Little client resistance Cons You only get paid for what you work. You could end up with a project’s value to you being only a fraction of what is could have been, yet the value to the client remains the same! There is a tendency to under-record time and to underbill Can encourage the client to micro-manage Doesn’t always recognise the full value of your expertise When to use? In highly unknown scenarios Notes Price high to disincentivise when other options would be more suitable Minimum time increment should be no less than 0.5d

Fixed Fee – Based on Time Estimate Type Fixed Model Time-based Fixed Fee Description Based upon a standard day-rate, you estimate the effort that the project will require, then add some contingency – say 20%, then present the project as a fixed fee to the client. The client pays the agreed fee regardless of how much time you spend on the project. Pros Good profit opportunities Stops clock-watching by the client Gives you the freedom to work on multiple things, including your own business! Cons If you get your estimate wrong you will eat into your profits quickly You need to have strong governance in place, and caveats in your contract to cover for delays caused by the client When to use? When you have experience delivering the service, and you can be reasonably confident of the time it should take to complete Notes This is the easiest fee model to work out

Variable Fee – Based on Risk/Reward Type Variable Model Risk & Reward Description You have a base fee and then there is an agreed fee or percentage that you can charge on top based upon the outcomes that you deliver Pros Can be highly profitable Forces you think about value to the client front and centre Cons Difficult to get right and high risk Few clients are at this level of maturity and understanding May result in some pushback on the results achieved When to use? When you have reasonable certainty of the results that you can produce Notes This can be the most difficult fee model to work out, especially on longer projects. Not suitable to use with T&M

Fixed Fee – Based on Value Type Fixed Model Value-Based Fixed Fee Description Similar to a Time-Based fixed fee, only the fee you charge will be directly based upon the value of the results you deliver to the client. Where one client might pay $15k, you may charge the next client $30k as the project will have a greater return on investment to them Pros Can result in very high profit margins Will encourage you to find the right clients Can provide a lot of time freedom to work on other things Cons Requires strong credibility in your capability to deliver results Will result in fee disagreement if you fail to deliver Requires a lot of delivery expertise When to use? With mature clients and when you can be highly certain of the results Notes A rule of thumb would be to charge 10% of the value that you are going to create

Project types and fee fit T&M Time-Based Fixed Fee Value-Based Fixed Fee Risk/Reward Project ✓ Retainer/Recurring Revenue ✗ Product ?

Always add contingency to your fees It is not reasonable to expect to be at full capacity all of the time. Therefore, add contingency into your fees to cover the predicted gap: Estimate how much time in the year you’ll be at full capacity Add the remainder (out of 100%) to your target day rate i.e. if you assume you’ll be utilised 80% of your available time across a year, add 20% to your target fees i.e. 60% utilisation target (3 billable days per week) Assume at full capacity for 80% of the time (3 x 80% = 2.4 days) 100% - 80% = 20% Add 20% to all fixed fees

How to determine your minimum price Determine how much time of which resources will be required to support the engagement Price the project using the target day rates from each resource Add your contingency percentage Determine fee type: If T&M no further considerations If Value-Based Fixed Fee add the ‘value’ portion of the fee If Risk/Reward determine the minimum and maximum fees

Define your Products & Services Complete the following task: 4.1 Define your revenue targetsComplete your capacity planner to identify your target revenue, minimum day rate, and utilisation target