Pricing Professional Services for Profitability and Growth More than Calculating Your Rate Angela Watts, M.S., ABS/OD Anthony Moore, M.B.A., CPA

© Annapolis Professional Resources, Inc “Please! Have a seat!

© Annapolis Professional Resources, Inc Ever ask yourself …  How do I know if I’m charging too much or too little?  Do I charge the same fees for public and private clients?  What do I do when asked to submit a “fixed-fee” proposal when I’m not sure of all the details?  What do I do when asked: “Can you get the cost down?”

© Annapolis Professional Resources, Inc Session Objectives  Explore the role business concepts play in determining price  Learn some key points for pricing differentiation  Review some ways to effectively answer the question: “Is there a way to get the price down?”  Become familiar with a model for calculating the price of your services  Consider pricing as more than doing calculations

© Annapolis Professional Resources, Inc About APR  Started out as independent consultant Average contract $5,000  Studied the market, repositioned ourselves and adjusted pricing Typical contract $25K - $75K Contract values as high as $11M for multi-year indefinite delivery / indefinite quantity projects

© Annapolis Professional Resources, Inc BUSINESS CONCEPTS

© Annapolis Professional Resources, Inc Business Concepts: Goals  Personal Financial Goals Help to train your decisions on specific personal targets such as income, lifestyle, savings, investments, retirement  Business Goals and Objectives Help to train your decisions on specific business targets such as profitability and growth  Revenue Goals Help to train your marketing, sales and pricing decisions to achieve your revenue targets

© Annapolis Professional Resources, Inc Business Concepts: Pricing Factors  Pricing Factors Scope of work Volume of work Time frame Labor rates Other direct costs and indirect costs Type of contract (time and materials; fixed price; performance-based) Competitive or sole source bid Date of pricing and actual start time of the project

© Annapolis Professional Resources, Inc Business Concepts: The Market  What the “market will bear” is the maximum price you can charge for your service Know your minimum billing rate Do research about your competitors Determine how much your potential client has to spend

© Annapolis Professional Resources, Inc Pricing Differentiation “Pricing differentiation” helps one set realistic prices for a given market 2 types of differentiation: Type of client organization Type of contract

© Annapolis Professional Resources, Inc BUSINESS CONCEPTS PRICING DIFFERENTIATION

© Annapolis Professional Resources, Inc Pricing Differentiation: #1 - Type of Client Organization  Not-for-profit Grass roots Medium-size Major association (e.g. AARP, ADA, Red Cross)  Government Local, state, federal  Commercial Small business Medium to large corporations

© Annapolis Professional Resources, Inc Pricing Differentiation: #2 - Type of Contract  Time and materials Consultant paid for actual number of hours worked on the project, and actual cost of materials/expenses  Fixed price or fixed fee Consultant paid an agreed to “fixed dollar amount” for the entire scope of work, materials and expenses  Performance-based Consultant paid an agreed to dollar amount for satisfactory performance (often tiered by percentage of work achieved)

© Annapolis Professional Resources, Inc Does Your Pricing Reflect …  Project prep time  Project hours  Post project time  Project management time (“glue”)  Other direct costs (e.g. participant materials, travel, long distance phone calls, supplies, rentals)  Administrative/project support time (“glue”)  Partial days (remainder of day not billable)

© Annapolis Professional Resources, Inc Project Your Worth If you express “sticker shock” they will, too! Be confident about the worth of your services and don’t be afraid to display a market price tag. “I just wanted to get your reaction to that.”

© Annapolis Professional Resources, Inc Example  Retirement community project  Client’s initial request for services and presenting budget = $5,000  Amount of actual contract = $70,000 Sticker shock Education and consequences Value add (how service will improve their situation / help solve their problem)

© Annapolis Professional Resources, Inc BUSINESS CONCEPTS “CAN YOU GET THE PRICE DOWN?

© Annapolis Professional Resources, Inc “Can You Get the Price Down?” and Other FAQs  How do I know if I’m charging too much or too little?  Do I charge the same fees for public and private clients?  What do I do when asked to submit a “fixed-fee” proposal when I’m not sure of all the details?  What do I do when asked: “Can you get the price down?”

© Annapolis Professional Resources, Inc How do I know if I’m charging too much or too little?  Charging too much Can’t get any work at your billing rate Consistent rejection of your prices by prospective clients Doesn’t “feel” right to you Not confident about your own rate  Charging too little Cash flow issues (can’t cover expenses) No time to develop new business because working at too low a rate requires greater expenditure of hours to achieve revenue goal

© Annapolis Professional Resources, Inc Do I charge the same fees for public and private clients? It depends on various factors, such as … Your profit goal Type of contract Client’s budget Your current level of business activity (slow, steady, high)

© Annapolis Professional Resources, Inc What do I do when asked to submit a “fixed-fee” proposal when I’m not sure of all the details?  Identify all cost variables (e.g. time, direct and indirect costs)  Estimate the billable time by labor category (prep, project, post project)  Estimate other direct costs (ODCs) – any cost other than labor you will incur that’s directly associated with the project (e.g. materials, supplies, phone charges, rentals, printing copies, travel)  Note: Indirect costs are part of your billing rate (e.g. administrative support, utilities, office rent, insurance)

© Annapolis Professional Resources, Inc What do I do when asked: “Can you get the price down?”

© Annapolis Professional Resources, Inc Getting the Price Down Without Losing Your Shirt, House and Home  Reduce the scope of work; don’t reduce your rate  Consider the volume or amount of work being performed  Consider the level of service (i.e. basic vs. bells and whistles)  Routine type of business (lower start-up costs)

© Annapolis Professional Resources, Inc Getting the Price Down  Price the mix of labor categories and associated rates needed to perform the work  Charge the appropriate rate for the skill level of the labor provided  Knock off a give-away such as mileage reimbursement (unless the mileage is significant)  Give a discount to loyal customers / clients

© Annapolis Professional Resources, Inc BUSINESS CONCEPTS MODEL FOR CALCULATING PRICE

© Annapolis Professional Resources, Inc Model for Calculating Price Minimum billing rate for labor x hours + Other direct costs = Proposed Price (Least amount to charge)

© Annapolis Professional Resources, Inc Labor Pricing Essentials  Determine your annual personal budget needed to cover living expenses, tuition, savings, childcare, vacation, taxes, etc.  Determine your business indirect expenses (overhead) What do you need to operate your business? Ex: Supplies, travel, computer, office assistant  Estimate your annual billable hours Total working hours per year = 2080, less personal time, marketing, administrative hours

© Annapolis Professional Resources, Inc Model for Calculating Minimum Billing Rate for Labor 1. Calculate overhead rate (OH) 2. Calculate profit rate 3. Calculate hourly labor rate 4. Calculate minimum billing rate

© Annapolis Professional Resources, Inc #1 Calculate Overhead (OH) Rate = OH Rate Business indirect expenses Annual personal budget

© Annapolis Professional Resources, Inc #2 Calculate Profit Rate Profit is the desired amount which exceeds your personal annual budget. = Profit Rate Additional desired profit Annual personal budget

© Annapolis Professional Resources, Inc #3 Calculate Hourly Labor Rate = Hourly labor rate Annual personal budget Estimated billable hours

© Annapolis Professional Resources, Inc #4 Calculate Minimum Billing Rate Hourly Labor Rate x (1+ OH Rate + Profit Rate) = Minimum Billing Rate

© Annapolis Professional Resources, Inc Example – Solo Practitioner $215/hr (minimum billing rate for labor) x 65 hrs = $13,975 + $8,450 (other direct costs) = $22,425 (Proposed Price) (Least amount to charge) For details and a model for calculating your minimum billing rate, please refer to the spreadsheet included with this webinar.

© Annapolis Professional Resources, Inc Pricing is About More Than Calculating Your Rate  Lack of focus  Inexperience  Lack of information  Fear and anxiety  Desperation  Haste or delay  Doubt

© Annapolis Professional Resources, Inc BUSINESS CONCEPTS MORE THAN CALCULATING YOUR RATE

© Annapolis Professional Resources, Inc More Than Just Your Rate Market Calculations Numbers crunching You Experience Feelings Confidence $ Type of client Client budget Timing Competitors Volume of work

© Annapolis Professional Resources, Inc Questions?

© Annapolis Professional Resources, Inc Ph Fax Thank You!