If you want to be a consultant and run your own firm, you need to have a good sense of your revenue model. There are many to choose from. Pick the right one and be very profitable. Pick the wrong one and you’ll be working like a dog for a tiny paycheck.
Your revenue model explains how you make money. You need to determine how to charge for the services you’re offering and what services you’ll charge for.
Consultants use three primary revenue models: fee-for-service, project-based, and per-unit. There’s a big difference between a fee-for-service consulting model, a project-based model, and per-unit pricing models.
Fee-for-service gets you an hourly rate. You charge a specified amount of money for each hour or each day of services rendered. The upside of this model is you get paid for your time so if the project expands, you get paid more money. This is especially attractive in situations where there might be scope creep on your project.
The downside to this model is there’s pretty much a cap on what you can charge per hour. You get no benefit from being more efficient.
If you’re going to work on projects with a poorly-defined scope or if there’s no predictable amount of work you’ll be doing, consider using a fee-for-service model.
For project-based revenue models, there’s a one-time fee for the entire project. The upside of this model is if you’re more efficient, you’re more profitable. The downside is if the scope of that project creeps, your economics on that project could be terrible.
For example, if I have a very clear expectation that a project will take six weeks to complete and will require four days of effort per week, I can take my daily rate and multiply it by 24. I may even build in a 10% hedge to that rate. That would be the project-based cost I would charge the client. If I work efficiently and it only takes me five weeks instead of six, it’s a much more profitable project because I can now use that open sixth week for other client work. If, however, I didn’t estimate well and I let the scope of the project expand to seven weeks, I’m still only getting paid for the six weeks since it was a project-based quote.
Use a project-based pricing approach when you have a very clear sense of project scope and you don’t believe there’s much risk of scope creep.
For unit-based pricing models, you get paid per unit of output. Whatever work you do, you get paid for every work unit you give the client. Whether it’s an analysis, an industry report, a blog post, or a website, each unit of work costs the client the same amount. The more units they order, the more money you make.
For example, I run a leadership training firm where we provide classroom training to large corporations. We charge on a per participant basis. For every additional person in the classroom, we make more money. This enables us to do value-based pricing, which can help exceed the hourly rate we might otherwise charge. Plus, we get paid for doing more work, and there’s benefits to being more efficient.
Use a unit-based pricing approach when you know the fixed cost of a unit of work and there’s a likelihood that a client will buy multiple units.
Other Sources of Revenue
There are additional consulting revenue opportunities that can add to your top line. There are things like content licensing fees where you can give your clients the right to use your work for a one-time, or even an ongoing licensing fee. That can be good passive income but it carries intellectual property theft risk, and it can make some of your core services irrelevant or even cannibalize your revenue. We have one client where we license some of our coursework to the client. We charged an annual fee and it was great getting that money sitting at home, charging the license fee. But, the client was conducting a lot of classes. If we hadn’t licensed that content to the client, there’s a possibility we could have conducted those classes instead. We needed to understand that trade-off.
You may also earn revenue from referral fees. You can get these fees by directing work to other consulting firms, or to some of your clients. Referral fees can be good passive income, but they can be hard to track. You won’t always necessarily know when an introduction you made resulted in someone earning money from it. You have to rely on the party you referred the work to for the provision of that information.
You can also make money from ancillary material sales. Products like books, subscriptions to your content, or webinars can be attractive sources of additional revenue. These products can also be costly to manage because you have to think through the logistics of running those material sales. Those logistics can distract you from selling your more profitable core services.
For example, we have a lot of authors on my team. Our publishers always want us to “push the books” and sell more copies of them as often as possible. As authors, we make like a dollar per copy of book that we sell. Yay. A cheeseburger or ¼ of a latte. Now, it’s worth it for us to put effort behind selling books. It gets our work out there and can help build credibility and boost sales of core programs. But the time we invest in selling books and managing inventory is taking time away from selling our more profitable classroom work. There’s an opportunity cost to those book selling efforts. We have to carefully balance the time and effort we spend on selling books to ensure we’re not doing so to the detriment of selling our primary services.
Define Your Revenue Model Deliberately
If you want to run a successful consulting firm, clearly define your revenue model from the start. Be willing to adjust it based on how your business performs. Be open to new revenue sources but understand the opportunity cost that comes from pursuing them. The better a sense you have of how you make money, the higher the likelihood that your economics are going to be favorable.
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