Chapter 7: From Hourly to Value-Based Pricing
Pricing is where most consultants leave money on the table. The goal is to find "a price where we both thank each other at the end."
What You'll Learn
- The natural pricing evolution for consultants
- Why minimum engagements matter more than hourly rates
- The retainer model that works
- The philosophy behind value-based pricing
The Pricing Evolution
Most consultants follow this progression:
Stage 1: Hourly Rates
- Start around $150-170/hour
- Quickly move to $250/hour
- Easy to understand and sell
- But: caps your income at available hours
Stage 2: Retainers with Minimums
- Move to monthly retainers ($5K, then $7K, then $12K/month)
- Set minimum engagement levels
- More predictable income
- But: still somewhat tied to time
Stage 3: Value-Based Pricing
- Price based on outcomes, not hours
- Project-based engagements
- Minimum engagements of $25K-$100K+
- Income decoupled from time spent
The Key Insight
This evolution is about more than raising rates. It's a shift in how you communicate and capture value.
The Power of Minimum Engagements
Even when charging hourly, have a minimum engagement level.
"I charge about $200-300 an hour, but I have a minimum engagement of about $20,000. Does that make sense for you?"
Why Minimums Work
| Benefit | Explanation |
|---|---|
| Filters small projects | Only serious clients engage |
| Communicates scale | Shows the level of work you're looking for |
| Sets expectations | No one expects a $20K engagement to be trivial |
| Increases average deal | People often match your minimum |
How to Raise Your Minimum
- Start at $7,000-10,000
- Every time someone says yes, increase by $1,000-2,000
- If 5 people say yes in a row, jump to the next level ($12K, then $15K, etc.)
- If you're getting 80%+ acceptance, your minimum is too low
Current Market Rates (AI Consulting)
| Engagement Type | Range |
|---|---|
| Advisory retainer | $8,000-25,000/month |
| Implementation project | $25,000-100,000 |
| Strategic engagement | $50,000-200,000 |
| Enterprise program | $100,000+ |
The Retainer Model That Works
The retainer approach that consistently succeeds:
Structure
Fixed recurring commitment. A weekly meeting with leadership (e.g., 4 hours/month synchronous)
Unlimited asynchronous access. "I don't want you to feel like your engineers have to think twice every time they ask a question. My job is to help."
Pair programming as needed. "Within reason, I'll jump on calls to work through problems"
Why "Unlimited" Works
People rarely abuse "unlimited" access. They're too busy with their own work. You'll often be the one reaching out:
"Hey, I'm still here. Should we meet this week?"
The psychological benefit of "unlimited" far exceeds the actual usage.
Sample Retainer Tiers
| Tier | Price | Includes |
|---|---|---|
| Advisory | $8K-12K/month | Weekly meeting, async Slack, email support |
| Comprehensive | $15K-25K/month | Above + pair programming, team training |
| Strategic | $30K-50K/month | Above + executive sessions, hiring support |
Value-Based Pricing Philosophy
"I would rather work for free or work for a lot of money."
The in-between is dangerous. If you anchor at a certain hourly rate, you're just fighting for incremental increases.
The Key Question
Instead of "How much is my time worth?", ask:
"What is it going to cost them to NOT solve this problem?"
If inaction costs them millions in delayed revenue, your fee is the cost of certainty.
Anchoring to Real Value
"How many engineers do you have? What do you pay them? If they learned this well, how much better would they be? You think twice as good? So how much would you pay to double the effectiveness of your payroll?"
Now you're anchoring to real value, not your time.
Example Calculation
| Factor | Value |
|---|---|
| Engineering team | 10 people |
| Average salary | $200K |
| Total payroll | $2M/year |
| 20% efficiency gain | $400K value |
| Your fee | $40K (10% of created value) |
When clients see the math, $40K becomes a bargain.
Building in Risk Mitigation
For risky or uncertain projects, build in guarantees:
Refund Options
- "If this doesn't work, I'll give you half back"
- "We'll do 2 months at this rate. If you don't cancel, it rolls into the 6-month contract"
Why Refunds Build Trust
"Refunds last year: ~$80,000 to clients where things didn't work out. The relationships stayed strong. It's just business—we recognize when things don't work out."
Refunds as a Feature
A part of being able to charge more is you can actually take on that risk. Higher fees allow you to occasionally refund money while still maintaining a profitable business.
When to Offer Refunds
| Situation | Refund Approach |
|---|---|
| Uncertain scope | "30-day satisfaction guarantee" |
| New client relationship | "50% refund if not meeting expectations" |
| High-risk project | "Pro-rated refund if we can't achieve X" |
| Client not committed | "Happy to refund if this isn't priority" |
Payment Structures That Work
Based on extensive testing:
Standard Structure
- 50% upfront
- 50% after 45 days (for 90-day project)
- Alternative: 15% discount for full upfront payment (most clients choose this)
For Early-Stage Startups
- Fixed multi-month engagements rather than monthly retainers
- Example: $25,000 for 5-month project
- If delays occur, offer to extend engagement rather than refund
Success-Based Options
- Base fee plus success bonus tied to milestones
- Lower initial investment with larger payment upon achieving key objectives
- Aligns your compensation with client success
Transitioning Existing Clients
When transitioning from hourly to value-based with existing clients:
1. Use Significant Events as Triggers
- Team growth or expansion
- Scope changes or new requirements
- Successful milestones that demonstrate your value
2. Guide Clients to Articulate Value
Ask: "How have I helped you recently? What value do you think you've gotten?"
Listen for specific outcomes they mention that go beyond your hourly contributions.
3. Reframe the Relationship
"It sounds like my work has helped you [achieve specific outcome]. Would it make sense to restructure our engagement to focus on delivering more of these results?"
4. Present New Engagement Model
- Offer a package that includes what you've been doing plus additional value
- Structure it around outcomes rather than hours
- Frame it as an evolution of the relationship, not a radical change
Action Items
-
Set your minimum. If you don't have one, set a minimum engagement level today. Start at $7K-10K if you're new.
-
Calculate your value. For your last 3 clients, calculate what problem you solved was worth to them. How does your fee compare?
-
Design your retainer. Create a 3-tier retainer structure with clear differentiators.
-
Prepare transition language. Write scripts for transitioning existing hourly clients to value-based engagements.
-
Define your refund policy. Decide what guarantees you're willing to offer and document them.
Key Takeaways
- The pricing evolution goes: hourly → retainers with minimums → value-based
- Minimum engagements filter clients and communicate the scale of work you do
- "Unlimited" async access rarely gets abused—it's a psychological benefit
- Anchor pricing to business value, not your time: "What does NOT solving this cost?"
- Build in refunds and guarantees—they increase trust and justify higher fees
- Transition existing clients using milestone moments and value articulation